No matter the reason for leaving a company, you need to decide what to do with your employer-sponsored retirement plan within 60 days of leaving. If you miss this deadline, you risk the plan being automatically distributed to you or moved to another retirement account. You have several options for your 401(k) plan, and we’ll go over them below.
Keep the Money Where It Is
First, your company should be clear about whether you can keep the funds where they currently are—in your former employer’s plan. Some employers approve this if you have at least a $5,000 balance. You might choose this option simply because you are familiar with the investment options, or because the fees are lower than your new employer’s plan.
Choose a Plan-to-Plan Rollover Option
Many employers offer a plan-to-plan rollover into their 401(k) or other qualified retirement plans. This move doesn’t acquire any tax consequences or penalties. As long as you like the investment options in the new plan, this rollover option can be an obvious choice to keep your savings momentum.
Keep in mind that if you move the money as a withdrawal from the old plan and deposit it to a new plan, rather than choosing the rollover option, your employer may withhold 20% of the sum for taxes. It is your responsibility to report this amount on your taxes for the year the distribution was made.
Roll the Money Over Into an IRA
A direct rollover into an IRA does not incur tax consequences or penalties, and there is an abundance of investment options to choose from—including stocks, bonds, mutual funds, and ETFs. If you typically move jobs intermittently, moving the money into a rollover IRA might be a good option. This way all of your 401(k)s and retirement plans can have one home.
One drawback to this option is that you will no longer be making automatic contributions, so that might curb your savings drive. However, rollover IRAs are commonly flexible, so moving your assets into a future employer’s plan might be an option.
Use the Money
Using the money for personal expenses is an option by taking a lump-sum distribution, but it will cost you. You will owe income taxes on it, and for workers under age 59 ½, you will likely pay a further 10% penalty. Depending on your tax bracket and state and local taxes, you could lose a significant amount of your retirement stash.
Employer Distribution
If your 401(k) balance is less than $1,000, your employer could release the funds via a lump-sum distribution, whether or not you requested it. If this happens and you are within 60 days of terminating your old plan, immediately roll the money into a new employer’s plan or a rollover IRA.
If your balance is more than $1,000 but less than $5,000, your plan administrator is required to move the funds into an IRA unless you specifically request another type of distribution.
In general, according to the Internal Revenue Service (IRS), if your savings is less than $5,000, your employer is permitted to distribute the funds from the plan without your authorization. You should be able to claim on your tax return any taxes or penalties your previous employer triggered when the distribution was made, but it might help to discuss this situation with a tax professional before you file.
