What Are Your 401k Options When Changing Jobs?

When changing jobs, understanding your options for a previous employer’s 401k plan is important. Several paths exist for your funds, depending on your account balance and personal circumstances.

Leaving your 401k with your previous employer

One option for your 401k balance is to leave it within your former employer’s plan. This is often possible if your account balance exceeds a certain threshold. Many plans permit this when the vested balance is above $5,000. If your vested balance is below a specific amount, typically under $1,000, your former employer might automatically cash out the account or roll it into an Individual Retirement Account (IRA) of their choosing.

To manage your account effectively if you choose this path, you should gather specific information from your former plan administrator. This includes how to access account statements, contact details, and information regarding the available investment options within the plan. You should also inquire about any administrative fees that may apply.

No direct action is required if your balance meets the plan’s minimum threshold, as the account generally remains in place by default. You can continue to monitor your account through online portals or mailed statements. Should you wish to make changes to your investment allocations, you would do so through these same channels, adhering to the plan’s specific procedures.

Transferring your 401k to a new employer’s plan

Moving your 401k funds to your new employer’s retirement plan is another option, which can be accomplished through two primary methods: a direct rollover or an indirect rollover. A direct rollover involves the funds moving directly from your old plan administrator to your new plan administrator, without the money passing through your hands. This method helps avoid potential tax complications.

An indirect rollover means you receive a check for your 401k balance, and you are then responsible for depositing it into your new employer’s plan. If you choose an indirect rollover, your previous plan administrator is required to withhold 20% of the distribution for federal income taxes. You then have 60 days from the date you receive the funds to deposit the full amount, including the 20% that was withheld, into your new 401k plan. Failing to deposit the full amount within this 60-day window can result in the untransferred portion being considered a taxable distribution, and potentially subject to additional penalties if you are under age 59½.

Before initiating either type of transfer, collect specific information from both your old and new 401k plans. From your previous plan, obtain your account number, contact information for the plan administrator, and any specific forms or instructions required to request a direct rollover. You also need to confirm that your new employer’s plan accepts rollovers and gather their contact information for rollover inquiries, along with any specific forms or requirements they have for receiving incoming funds.

For a direct rollover, contact your previous 401k plan administrator and inform them of your intent to roll over funds. You will complete any necessary rollover request forms and provide the new plan’s details for the transfer. The funds are then sent directly between the plan custodians. If you are performing an indirect rollover, after receiving the check (minus the 20% withholding), you must deposit the entire original distribution amount into your new 401k plan within the 60-day deadline. This often means using other funds to cover the amount that was initially withheld for taxes.

Rolling over your 401k to an Individual Retirement Account

Another option for your 401k funds is to roll them over into an Individual Retirement Account (IRA). When considering an IRA rollover, you will need to decide between a Traditional IRA and a Roth IRA. If you roll over pre-tax funds from your 401k into a Roth IRA, the converted amount is considered taxable income in the year of the conversion. This means you will owe income taxes on the amount converted, which could potentially push you into a higher tax bracket for that year.

To prepare for an IRA rollover, gather specific details from your former 401k plan, including your account number, contact information for the plan administrator, and forms for requesting a direct rollover to an IRA. Simultaneously, open a new Traditional or Roth IRA account with a financial institution, such as a bank or brokerage firm, and understand their requirements for receiving rollover funds.

For a direct rollover to an IRA, instruct your previous 401k plan administrator to send the funds directly to your new IRA custodian. This involves completing necessary forms and providing your new IRA account details. For an indirect rollover to an IRA, you will receive a check for your 401k balance, minus the mandatory 20% federal tax withholding. You then have 60 days to deposit the entire original distribution amount, including the withheld portion, into your new IRA to avoid taxes and penalties. You would need to use other funds to make up the amount that was withheld to complete the full rollover.

Withdrawing your 401k balance

Withdrawing your 401k balance, often referred to as “cashing out,” provides immediate access to your funds but comes with financial implications. The amount you withdraw is subject to ordinary income tax, meaning it’s added to your income for the year and taxed at your marginal income tax rate.

In addition to income taxes, if you are under age 59½, you will generally incur an early withdrawal penalty, typically 10% of the withdrawn amount. While some exceptions exist, they are specific. The plan administrator is usually required to withhold 20% of your distribution for federal income taxes, which reduces the immediate payout you receive.

To initiate a withdrawal, contact your former 401k plan administrator and complete any required distribution forms. After your request is processed, you will receive a check for the distribution amount, minus any applicable taxes and withholdings. You will also receive IRS Form 1099-R, which reports the distribution amount and any taxes withheld, for your tax reporting purposes.