What to Do With a 401k From an Old Job?

Individuals often find themselves with a 401(k) account from a previous job when transitioning between employers. Making an informed decision about an old 401(k) is important for maintaining the long-term growth and tax-advantaged status of retirement assets. Understanding the available choices for these funds is a crucial step in managing one’s financial future effectively.

Keeping Your Account with Your Former Employer

One option for a 401(k) from a previous job is to leave the funds within the former employer’s plan. This approach might be appealing for its simplicity. However, certain conditions can impact this choice, particularly the account balance. If the balance is below a specific threshold, the former employer’s plan administrator may have the right to automatically distribute the funds, often by rolling them into an Individual Retirement Account (IRA).

Before deciding to keep funds in place, contact the former employer’s plan administrator. Inquire about whether the plan permits former employees to retain their accounts and if there are any specific fees associated with doing so. Understanding the available investment options and their associated costs is also a necessary step. While funds can continue to grow tax-deferred, the ability to contribute new money to the account ceases, and withdrawal options may be more limited than with other retirement vehicles.

It is important to keep contact information updated with the plan administrator. This ensures that all statements, disclosures, and important notifications about the account are received. Staying informed about the account’s performance and any potential changes to the plan’s rules or investment offerings helps in ongoing management.

Transferring to a New Employer’s Plan

Another option for funds in a previous employer’s 401(k) is to transfer them into a new employer’s 401(k) plan. This process, known as a direct rollover, allows for the consolidation of retirement savings. Confirm that the new employer’s plan accepts incoming rollovers, as not all plans do.

To initiate this transfer, gather specific information from both the old and new plan administrators. The former 401(k) provider will need details about the new plan, such as its name and address. Conversely, the new plan administrator will require account and plan details from the old 401(k). Both plans may have specific forms that need to be completed, often requiring account numbers and plan names.

Once all necessary forms are completed, submit them to the respective plan administrators. In a direct rollover, the funds are transferred directly from the old plan to the new plan, meaning the money does not pass through the account holder’s hands. This method helps avoid potential tax withholding and penalties that can occur if the funds are distributed to the individual. After the transfer, confirm that the funds have been accurately deposited and allocated according to the chosen investment options within the new plan.

Transferring to an Individual Retirement Account

Transferring an old 401(k) into an Individual Retirement Account (IRA) is a common choice, offering greater control and investment flexibility. There are two primary types of IRAs relevant for rollovers: a Traditional IRA and a Roth IRA. A Traditional IRA generally holds pre-tax contributions and earnings, meaning withdrawals in retirement are taxed as ordinary income, similar to a traditional 401(k). A Roth IRA, conversely, is funded with after-tax dollars, allowing for tax-free withdrawals in retirement. If rolling over a traditional 401(k) into a Roth IRA, the converted amount will be subject to income tax in the year of conversion.

To begin, an IRA account must be opened with a financial institution. This involves completing an application and providing personal identification details. Once the IRA is established, initiate the rollover from the old 401(k) plan by contacting the former 401(k) administrator and providing the new IRA account details, including the account number and the financial institution’s name. Specific rollover forms from the old 401(k) provider will need to be completed, ensuring all requested information is accurate.

There are two methods for transferring funds: a direct rollover and an indirect rollover. A direct rollover, where the funds move directly from the old 401(k) to the new IRA custodian, is preferred because it avoids immediate tax implications and withholding. In contrast, an indirect rollover involves the funds being paid directly to the account holder, who then has 60 days to deposit the full amount into an IRA. If this 60-day deadline is missed, the distribution becomes taxable and may be subject to a 10% early withdrawal penalty if the individual is under age 59½. With an indirect rollover, the plan administrator is required to withhold 20% of the distribution for federal income tax, requiring additional funds from other sources to roll over the full original amount.

Taking a Cash Distribution

Taking a cash distribution from an old 401(k) involves directly withdrawing the funds rather than transferring them to another retirement account. To request a cash distribution, contact the former 401(k) plan administrator and complete their specific distribution request forms.

Upon distribution, federal law mandates a 20% withholding for federal income tax from the taxable amount. Depending on the state, additional state income tax withholding may also apply. For individuals under age 59½, an additional 10% early withdrawal penalty applies to the distributed amount, unless a specific IRS exception is met.

After the distribution, the former 401(k) plan provider will issue a Form 1099-R by January 31 of the following year. This form reports the gross distribution amount, the taxable portion, and any federal or state income tax withheld. This information must be reported on the individual’s income tax return for the year the distribution was received.