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

A 401(k) plan is a feature of many employer compensation packages, allowing you to divert a portion of your pretax earnings into a dedicated retirement savings account. These funds are invested, providing an opportunity for growth over time. When your employment with a company ends, the funds you have accumulated in your 401(k) remain yours. You are then faced with a decision regarding the future of this account.

Available Options for Your Old 401(k)

Upon separating from an employer, you are presented with four primary pathways for managing the funds in your 401(k) account. The first option is to leave the money within your former employer’s plan, where the funds will remain invested as they were, subject to the plan’s rules and investment options.

A second choice is to move the funds to your new employer’s 401(k) plan, assuming the new plan accepts rollovers. This action consolidates your retirement savings into a single account, which can simplify management of your investments.

The third option involves rolling the funds into an Individual Retirement Account (IRA). An IRA is a personal retirement account that you open independently of any employer, giving you direct control over your investment choices.

Finally, you have the option to cash out the account balance. This involves receiving the total vested amount as a direct payment, but this choice has significant financial consequences compared to the other options.

Key Factors in Your Decision

Leaving your funds in a previous employer’s plan means you will be subject to that plan’s specific administrative fees and investment lineup, which is often more limited. Be aware that if your vested balance is below $7,000, the plan administrator may force you out of the plan. Balances under $1,000 may be cashed out, while funds between $1,000 and $7,000 may be automatically rolled into an IRA.

Transferring your balance to a new employer’s 401(k) offers the benefit of consolidating your retirement assets in one place. A notable feature of 401(k) plans is the ability to take out a loan against your balance, a feature not available with IRAs. However, your investment choices and the fees you pay will be determined by the new plan’s structure.

Opting for a rollover to an IRA provides the widest array of investment choices, including individual stocks, bonds, exchange-traded funds (ETFs), and mutual funds. This gives you greater control over your retirement portfolio and the ability to select low-cost investment options. You are also in control of the account fees, as you can choose the financial institution that holds your IRA.

Cashing out your 401(k) balance has immediate and substantial tax implications. Your former employer is required by federal law to withhold 20% of the distribution for taxes. The entire amount you withdraw is treated as ordinary income for the year, which could push you into a higher tax bracket.

If you are under the age of 59½, you will also face an additional 10% early withdrawal penalty on the distribution. For example, on a $50,000 cash-out, you would immediately lose $10,000 to mandatory withholding and potentially another $5,000 to the early withdrawal penalty, in addition to the income tax owed.

Information Needed to Initiate a Rollover

To begin the rollover process, you must gather specific information. You will need the contact details for your old 401(k) plan administrator, your account number from the old plan, and personal identification details like your Social Security number.

You must also have the account information for the destination account, whether it’s your new 401(k) or a newly opened IRA. This includes the new account number and the receiving institution’s name and address. This information is needed to complete the plan’s distribution or rollover forms.

When completing these forms, you must understand the difference between a direct and an indirect rollover. A direct rollover is a trustee-to-trustee transfer where the funds are sent directly from your old plan to your new account without you ever taking possession of them.

An indirect rollover involves the old plan sending you a check made out in your name. If you choose an indirect rollover, the plan is required to withhold 20% for federal taxes. You have only 60 days to deposit the full original amount (including the withheld 20%) into a new retirement account to avoid taxes and penalties.

The Rollover and Cash Out Process

Once you have gathered all necessary information and completed the required forms, the next step is to submit your request. Most plan administrators accept completed forms via mail or a secure online portal. Following the submission instructions precisely will help avoid delays.

After submitting your rollover paperwork, there is a processing period of 7 to 14 business days, during which the old plan administrator will liquidate the assets and transfer the funds. You can monitor the status by checking your old account online or by calling the administrator. Confirm with the new institution that the funds have been received.

The procedure for cashing out your account is similar. You will submit a distribution form, but instead of providing new account information, you will select a payment method like a check or direct deposit. The amount you receive will be the net total after the mandatory 20% federal tax withholding has been deducted.