What Can You Do With a 401(k) From a Previous Employer?

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If you have left an employer that provided a 401k plan, some or all of the money in your 401k account is yours. Your 401k money will be part of the asset base to support your income needs in retirement. Base your choice of what to do with the 401k money on your employment plans and financial goals.

Leave It Alone

A simple option is to leave your 401k money where it is -- that is, in the 401k plan of your former employer. If the value of your account is greater than $5,000, the money can remain in the plan after you leave for an almost indefinite period. The money can stay with the former employer until you decide to move it elsewhere or start taking withdrawals in retirement. You will continue to receive quarterly statements from the 401k administrator. This option makes sense if you are not sure what to do or you like the investment options the plan offers. Check your copy of the 401k plan documentation for any restrictions on leaving your money in the plan.

Rollover to New Employer

If you have a new employer who offers a 401k plan, you can elect to roll your existing 401k assets into the new 401k. Most 401k plans will allow this. Check with the plan administrator concerning the required paperwork and when you are eligible to participate in the plan and perform a rollover. The benefit of this choice is that you can keep all your retirement plan savings together, rather than having several plans to monitor.

Direct Rollover to IRA

Another choice is to transfer your 401k assets into an individual retirement account (IRA). This process is referred to as a trustee-to-trustee transfer or direct IRA rollover. You first open an IRA, then contact the 401k administrator for the direct rollover form. Submit the form with the information about the new IRA and the money will be transferred directly to the IRA administrator. This choice allows you to control the investment choices for your retirement funds. The IRA can be established with any company that administers IRAs, such as mutual fund companies, stock brokerage firms or banks.

Cash It Out

The options listed above allow your 401k money to remain tax-deferred and continue to grow tax-deferred. You may also elect to cash out the 401k plan from your previous employer and pay income tax on the amount. If you do cash out your account, the employer is required to withhold 20 percent of the proceeds and send it to the IRS. You will receive a 1099 for the money you received, and you must include the amount in your taxable income for the year. If you are under age 59 1/2, you will pay regular income taxes on the withdrawn 401k money plus a 10 percent penalty on the amount withdrawn.