After you leave your job, there are several options for your 401(k). You may be able to leave your account where it is. Alternatively, you may roll over the money from the old 401(k) into a new account with your new employer, or roll it into an individual retirement account (IRA), but you must first see when you are eligible to participate in the new plan.

You can also take some or all of the money out, but there are serious tax consequences to that. Make sure to understand the particulars of the options available to you before deciding which route to take.

• What Happens to a 401(k) After You Leave Your Job?
• How do I Transfer my 401k from a Previous Job?
• How long do I have to Rollover my 401k from a Previous Employer?
• Why you Should not Roll Over Your 401(k) to an IRA
• What are the Thing you Should Know about your 401k when Changing Jobs?

What Happens to a 401(k) After You Leave Your Job?

When it comes to your 401k, when you leave your job there are different options available to you. We will talk about some of them below.

Leave It With Your Former Employer

If you have more than $5,000 invested in your 401(k), most plans allow you to leave it where it is after you separate from your employer. “If it is under $1,000, the company can force out the money by issuing you a check,” says Bonnie Yam, CFA, CFP, CLU, ChFC, RICP, EA, CVA, CEPA, Pension Maxima Investment Advisory Inc., Scarsdale, N.Y. “If it is between $1,000 and $5,000, the company must help you set up an IRA to host the money if they are forcing you out.”

Read Also: Should you Convert your Traditional IRA or 401(k) to a Roth IRA?

If you have a substantial amount saved and like your plan portfolio, leaving your 401(k) with a previous employer may be a good idea. If you are likely to forget about the account or are not particularly impressed with the plan’s investment options or fees, consider some of your other options.

“When you leave your job and you have a 401(k) plan which is administered by your employer, you have the default option of doing nothing and continuing to manage the money as you had been doing previously,” says Steven Jon Kaplan, CEO, True Contrarian Investments LLC, Kearny, N.J. “However, this is usually not a good idea, because these plans have very limited choices as compared with the IRA offerings available with most brokers.”

Roll It Over to Your New Employer

If you’ve switched jobs, see if your new employer offers a 401(k) and when you are eligible to participate. Many employers require new employees to put in a certain number of days of service before they can enroll in a retirement savings plan.

Once you are enrolled in a plan with your new employer, it’s simple to rollover your old 401(k). You can elect to have the administrator of the old plan deposit the contents of your account directly into the new plan by simply filling out some paperwork. This is called a direct transfer, made from custodian to custodian, and it saves you any risk of owing taxes or missing a deadline.

Alternatively, you can elect to have the balance of your old account distributed to you in the form of a check. However, you must deposit the funds into your new 401(k) within 60 days to avoid paying income tax on the entire balance. Make sure your new 401(k) account is active and ready to receive contributions before you liquidate your old account.

“Consolidating old 401(k) accounts into a current employer’s 401(k) program makes sense if your current employer’s 401(k) is well structured and cost-effective, and it gives you one less thing to keep track of,” says Stephen J. Taddie, managing partner, Stellar Capital Management LLC, Phoenix, Ariz. “Keeping things simple for you now also makes things simple for your heirs should they need to step in to take care of your affairs later.”

One other point if you’re close to retirement age: Money in the 401(k) of your current employer is not subject to required minimum distributions (RMD). Money in other 401(k) plans and traditional IRAs is subject to RMDs.

Roll It Over Into an IRA

If you’re not moving to a new employer, or your new employer doesn’t offer a retirement plan, you still have a good option. You can roll your old 401(k) into an IRA.

You’ll be opening the account on your own, through the financial institution of your choice. The possibilities are pretty much limitless. That is, you’re no longer restricted to the options made available by an employer.

“The biggest advantage of rolling a 401(k) into an IRA is the freedom to invest how you want, where you want, and in what you want,” says John J. Riley, AIF, founder and chief investment strategist for Cornerstone Investment Services, Providence, R.I. “There are few limits on an IRA rollover.”

“One item you might want to consider is that in some states, such as California if you are in the middle of a lawsuit or think there is the potential for a future claim against you, you may want to leave your money in a 401(k) instead of rolling it into an IRA,” says financial advisor Jarrett B. Topel, CFP, Topel & DiStasi Wealth Management, Berkeley, Calif. 

“There is more creditor protection in California with 401(k)s than there is with IRAs. In other words, it is harder for creditors/plaintiffs to get at the money in your 401(k) than it is to get at the money in your IRA.”

Take Distributions

You can begin taking qualified distributions from any 401(k), old or new, after age 59½. That is, you can start taking some money out without paying a 10% tax penalty for early withdrawal.

If you’re retiring, it might be the right time to start drawing on your savings for your monthly income.

If you have a traditional 401(k), you must pay income tax at your ordinary rate on any distributions you take. If you have a designated Roth account, any distributions you take after age 59½ are tax-free as long as you have held the account for at least five years. If you do not meet the five-year requirement, only the earnings portion of your distributions is subject to taxation.

If you retire before age 55 or switch jobs before age 59½, you may still take distributions from your 401(k). However, you will be required to pay a 10% penalty tax, in addition to income tax, on the taxable portion of your distribution, which may be all of it. The 10% penalty does not apply to those who retire after age 55 but before age 59½.

Once you reach age 72, you are required to begin taking required minimum distributions from your 401(k). Your RMD amount is dictated by your expected life span and your account balance. The IRS has a handy worksheet to help you calculate the amount you must withdraw.

Cash It Out

Of course, you can just take the cash and run. While there is nothing stopping you from liquidating an old 401(k) and taking a lump-sum distribution, most financial advisors caution strongly against it. It reduces your retirement savings unnecessarily, and on top of that, you will be taxed on the entire amount.

If you have a large sum in an old account, the tax burden of a full withdrawal may not be worth the windfall. Plus, you’ll probably be subject to the 10% early withdrawal penalty.²

“Other than having to pay regular income taxes and a tax penalty of 10% before age 55 (not small considerations), few people consider the time value of (in this case, tax-deferred) money already saved,” says Jane B. Nowak, CFP, financial planner, SouthBridge Advisors, Atlanta, Ga. “By taking a full withdrawal, they’re creating the need ‘to start all over’ saving for retirement. Generally, it’s a much better idea to leave the money to grow tax-deferred in a retirement account and not take a withdrawal.”

Perhaps Riley sums up best what you might want to do with the money in a former employer’s 401(k) plan: “One really has to look at all the pros and cons before deciding what to do with 401(k) money.”

How do I Transfer my 401k from a Previous Job?

If you are about to change jobs, here’s what you need to know about rolling over your funds into a new employer’s 401(k) plan and the ins and outs of other options.

If you have at least $5,000 in your account most companies allow you to roll it over. But accounts of less than $5,000 can be rolled out of the plan by the company if a former employee does not respond to a notification letter within 30 days.

For amounts under $1,000, federal regulations now allow companies to send you a check, triggering federal taxes and state taxes if applicable, and a 10% early withdrawal penalty if you are under age 59½. In either scenario, taxes and a potential penalty can be avoided if you roll over the funds into another retirement plan with 60 days.

How 401(k) Rollovers Work

If you decide to roll over an old account, contact the 401(k) administrator at your new company for a new account address, such as “ABC 401(k) Plan FBO (for the benefit of) Your Name,” provide this to your old employer, and the money will be transferred directly from your old plan to the new or sent by check to you (made out to the new account address), which you will give to your new company’s 401(k) administrator.

This is called a direct rollover. It’s simple and transfers the entire balance without taxes or penalty. Another, even simpler option is to perform a direct trustee-to-trustee transfer. The majority of the process is completed electronically between plan administrators, taking much of the burden off of your shoulders.

A somewhat riskier method, Ford says, is the indirect or 60-day rollover in which you request from your old employer that a check be sent to you made out to your name.

This manual method has the drawback of a mandatory tax withholding—the company assumes you are cashing out the account and is required to withhold 20% of the funds for federal taxes. This means that a $100,000 401(k) nest egg becomes a check for just $80,000 even if your clear intent is to move the money into another plan.

You then have 60 days to deposit the remainder (or make up the difference) in your new company’s 401(k) plan to avoid taxes on the entire amount, and possibly a 10% early withdrawal penalty. Even so, that withheld $20,000 has to be reported on your tax return and could push you into a higher tax bracket. All 401(k) distributions must be reported on the recipient’s tax return, anyway. The old plan administrator should issue you a Form 1099-R.

For example, you request a full distribution from your 401(k), which has a balance of $55,000. Using a direct rollover, $55,000 transfers from your plan at your old job to the one at your new job. If the payment is made to you in the indirect rollover, $11,000 is withheld for federal taxes, and you receive a check for $44,000.

For this distribution to be completely tax deferred, you must deposit the $44,000 from the 401(k) and $11,000 from another source into a qualifying plan within 60 days.

Rollover Exceptions

There are a few exceptions where parts of the 401(k) may not be eligible for rollovers. These include:

•  Required minimum distributions (RMDs)
•  Loans treated as a distribution
•  Hardship distributions
•  Distributions of excess contributions and related earnings
•  A distribution that is one of a series of substantially equal periodic payments
•  Withdrawals electing out of automatic contribution arrangements
•  Distributions to pay for accident, health, or life insurance
•  Dividends on employer securities
•  S corporation allocations treated as deemed distributions

Roll 401(k) into an IRA

For those who would prefer not to rely on their new company’s 401(k) plan’s investment offerings, rolling over a 401(k) to an IRA is another option.

Again, rollovers can be direct, direct trustee-to-trustee transfers, or indirect, with the distribution paid to the account owner. Rollovers can be direct trustee-to-trustee transfers, or indirect, with the distribution paid to the account owner. But either way, once you start the process, it has to happen within 60 days

Ford generally favors rolling the money over into the new company’s 401(k) plan, though: “For most investors, the 401(k) plan is simpler because the plan is already set up for you; safer because the federal government monitors 401(k) plans carefully; less expensive, because costs are spread over many plan participants; and provides better returns, because plan investments are typically reviewed for their performance by an investment advisor and a company 401(k) investment committee.”

Before deciding what to do with your old 401(k) understand the options available to you first. The biggest pitfall to avoid is triggering taxes and a potential withdrawal penalty by not paying attention to the 60-day rule. The next most common problem is neglecting an old account. By following the above steps, neither will happen to you.

How long do I have to Rollover my 401k from a Previous Employer?

If you have more than $5,000 in your former employer’s 401(k), you generally won’t be forced to roll over your 401(k), according to the IRS. If a distribution is made directly to you from your retirement plan, you have 60 days from “the date you receive” a retirement plan distribution to roll it over into another plan or an IRA, according to the IRS.

But if you have more than $5,000 in a 401(k) at your previous employer – and you’re not rolling it over to your new employer’s plan or to an IRA – there generally isn’t a time limit on making this decision.

Below are some steps that will quicken the rollover.

1. Decide where you want the money to go

Choose a brokerage or bank that you want to roll over your money to.

Bankrate has done the homework for you with its Brokerage Reviews. These reviews will help you compare key areas that should factor into your decision. You’ll find information on minimum balance requirements, investment offerings, customer service options and ratings in multiple categories.

If you already have an IRA, you may be able to consolidate this money.

2. Decide what kind of account you want

Start by deciding whether you’re going to be a self-directed investor – making your own investment choices – or whether you’ll have an adviser making the choices for you.

You’ll also decide whether you want the money to be rolled into an IRA and whether you want the money invested in stocks, mutual funds, exchange-traded funds (ETFs) or other investment options.

If the funds are going to be deposited in an IRA bank account, you’ll want to compare IRA savings accounts and IRA CDs to find the best fit for you. If you’re under 59 1/2 years old, traditional IRAs are meant for withdrawing money after you reach this age. Generally, you’ll incur a 10 percent penalty when making an early withdrawal.

An IRA CD may be a good option for money that needs to be saved at a fixed rate, and can’t be exposed to the volatility of investments, such as stocks or exchange-traded funds (ETFs).

It also may be a good place for money that you want to be protected by either the Federal Deposit Insurance Corp. (FDIC) or at a National Credit Union Administration (NCUA) credit union. Always make sure that your IRA savings accounts or CDs are backed by the FDIC and deposits are within the insurance limits.

Your age – how far you are from retirement – and risk tolerance are going to factor in your decision as well.

3. Contact the right institution to open your account

If the 401(k) company is sending a check, your IRA institution may request that the check be written in a certain way and they might require that the check contains your IRA account number on it.

Follow your IRA institution’s instructions carefully to avoid complications. Your 401(k) institution may be able to wire the funds to the IRA institution. So check there to see what your options are for rolling your 401(k) into an IRA. And whether there are any fees for using this option.

4. See what the procedure is to begin the rollover process

After setting up the IRA, you are probably going to be asked to contact your 401(k) administrator.

In a direct IRA rollover, the funds are sent straight from your 401(k) into an IRA without you touching the funds. It is important that you specify a direct rollover so that you don’t have the check made payable to you — triggering a mandatory 20 percent withholding for taxes.

5. Remember the 60-day rule

You have 60 days from the date you receive your retirement plan distribution to get it deposited into a qualified account; otherwise, it will be a taxable event.

Your 401(k) institution may send a paper check to you, to the institution where you are opening your IRA, or the money may be rolled over digitally via wire transfer.

If taxes are withheld from the distribution, you’ll need to use other funds in order to roll over the full amount.

Why you Should not Roll Over Your 401(k) to an IRA

Let’s take a look at five of those situations and the rationale for keeping your 401(k)—or, if you’re a public or nonprofit employee, your 403(b) or 457 plan—in place at your now-former employer’s plan.

1. Greater Buying Power

Company 401(k)s can purchase funds at institutional pricing rates, which is not usually true for IRAs.

Think of it as a kind of corporate discount: Because they’re investing for hundreds of thousands, “most 401(k), 403(b), and 457 plans have significant buying power—much more than the individual [retirement account],” says Wayne Bogosian, president of the PFE Group and co-author of “The Complete Idiot’s Guide to 401(k) Plans.” That can save you significant money on fees, leaving more to appreciate in your account.

2. Tax Savings

If your 401(k) plan includes company stock that’s greatly appreciated, you could save a lot on taxes if you transfer that stock to a regular brokerage account. You will have to pay taxes on the shares taken out of your 401(k), at your current bracket’s rate, but the tax is based on your original purchase price—you won’t pay for any gain on that stock until you actually sell it (and then you’ll pay at the capital gains tax rate, which is lower than the income tax rate). This is known as net unrealized appreciation (NUA).

“NUAs is a tremendous opportunity for individuals with appreciated company stock in their 401(k),” says investment advisor representative Jonathan Swanburg of Tri-Star Advisors in Houston, Texas.

Let’s suppose, for example, the company stock was bought for $10,000 and is currently worth $50,000 on the market. Your tax bill for transferring the stock to the brokerage firm will be based on the $10,000 purchase price. You won’t be taxed on any of the gains until you sell it.

In contrast, if you rolled over that stock into an IRA, it would eventually be taxed at your ordinary-income tax rate (when you have to sell the stock to start taking your mandatory IRA distributions).

There are, however, cautions. Below are two:

• Make sure the holdings in your 401(k) are actual stock shares; some 401(k)s set up a fund that mimics the corporate stock’s performance.
• Make sure the transfer of these holdings doesn’t put such a sizable bump in your income that you get pushed into a higher tax bracket—and end up owing the Internal Revenue Service much more than you otherwise would come next April.

“If, on the other hand, a plan participant holds depreciated company stock that she plans to hold until the price goes higher, she should consider selling her shares and repurchasing them shortly thereafter,” Swanburg adds. “Inside a 401(k), the wash-sale rule doesn’t apply and this resets the cost basis, increasing the potential for taking advantage of the NUA down the road.”

What are the Thing you Should Know about your 401k when Changing Jobs?

If you’re leaving an employer, here are eight things you need to know about moving your 401(k).

1. Take out a 401(k) loan? It’s due now

Did you borrow any money from your 401(k)? If you’re leaving the company, voluntarily or otherwise, it’s now due in full. “I think that many people forget that if they have a loan outstanding, it has to be paid,” says Wayne Bogosian, president of the PFE Group and co-author of “The Complete Idiot’s Guide to 401(k) Plans.”

Fail to repay it and the loan amount will count as income, plus you’ll pay an additional penalty equal to 10 percent of the sum you borrowed if you’re younger than age 59 1/2, he says.

However, sometimes, especially in the case of layoffs, “employers will take it upon themselves to initiate a change in the plan to make available post-employment repayment,” says Bogosian.

Here’s how it works. You can keep making regular payments as an ex-employee, just as you were doing as an employee. And since it’s a loan that you’re repaying, it doesn’t trigger any penalties or count toward income, he says.

You haven’t heard about this feature from your former employer? “I would not be at all shy to ask,” says Bogosian. “There is nothing wrong with asking, ‘Can I pay back the loan post-employment?’ Plans can be amended to do this.”

2. IRA rollover isn’t your only option

Rolling 401(k) money into an IRA may not be your best choice, according to some experts. In an IRA, you may have to manage the money yourself or build a portfolio, and that can be daunting for employees who are not familiar with the financial markets.

When you leave your employer, you have several options with your 401(k):

• Leave the account where it is.
• Move the money to your new company’s plan.
• Roll it into a traditional or Roth IRA.
• Take a lump-sum distribution (cash it out).
• If you have company stock, move the stock to a brokerage account while putting the rest into another retirement account.

The truly smart move for you depends on your own individual circumstances and goals. And employees need to consider many options:

• The account balance
• Whether it’s a traditional 401(k) or a Roth
• Whether you have company stock (and want to keep it or buy more)
• Whether you fear collection actions, because workplace plans are federally protected from creditors
• Whether you want to take a penalty-free withdrawal between ages 55 and 59 ½
• Quality of your new company’s retirement plan

“Do your own homework,” says Bogosian. “This is one area where generalizing can get you into trouble.”

Too many times, advisers “don’t know what they don’t know,” says Ed Slott, an IRA expert and author of “The Retirement Savings Time Bomb and How to Defuse It.”

So get several opinions along with doing your own research.

3. You may be able to leave your 401(k) alone for a bit

Changing jobs is stressful, even in the best of circumstances. If you’ve lost a job and are scrambling for re-employment, you’re likely focused on that. But eventually you will need to figure out what to do with your 401(k).

Chances are, you probably don’t have to move that money right away. If your balance is $5,000 or more, you can leave the money right where it is, Bogosian says. But be careful if it’s less than that: The company could cash it out and send you a check or roll your balance over to an IRA, he says. Check the rules and, where possible, “don’t do anything for the first six months.”

On your first day at the new job, sign up for the company 401(k) plan, even if your new employer has an automatic opt-in, says Bogosian.

With many company plans, automatic opt-in doesn’t kick in for one to three months. So if you rely on that, rather than taking the initiative, you can miss 30 to 90 days of contributions and matching funds, he says.

After six months, you’ve got a handle on the job, know you’re going to stay and have had experience with your new plan. So you’re now in a strong position to compare your last 401(k) plan with this new one, including the diversity of the investments and the costs.

4. Compare plan costs

In the not-so-distant past, comparing the cost you pay for investments through one company’s plan with similar offerings in a brokerage firm’s IRA or another company’s 401(k) was difficult.

Now fees and costs have to be disclosed, which means you can compare apples-to-apples. As you compare the plan costs, ask for the participant fee disclosure for each plan, he says. That document will reveal all the fees — both obvious and obscure — associated with each plan.

Then look at what you’ve invested in and what you want to invest in, to help evaluate costs.

5. Keep tabs on the old 401(k)

If you decide to leave an account with an old company, keep up with both the account and the company.

“People change jobs a lot more than they used to,” says Peggy Cabaniss, co-founder of HC Financial Advisors in Lafayette, California, and a past chair of the National Association of Personal Financial Advisors. “So it’s easy to have this string of accounts out there in never-never land.”

Cabaniss recalls one client who left an account behind after a job change. Fifteen years later, the company had gone bankrupt. While the account was protected and the money still intact, getting the required company officials and fund custodians to sign off on moving it was a protracted paperwork nightmare, she says.

“When people leave this stuff behind, the biggest problem is that it’s not consolidated or watched,” says Cabaniss.

If you do leave an account with a former employer, keep reading your statements, keep up with the paperwork related to your account and keep an eye on the company’s performance.

6. Follow the money

If you decide to move the money, do it carefully. First, if you haven’t already, establish the new accounts where you want to move your money.

Next, contact the current account custodian and fill out the required paperwork, says Cabaniss. After that, contact your account’s custodian-to-be and fill out their paperwork, she says.

Then keep an eye on the process and make sure the money ends up at its new home, and on time, Cabaniss says. You have 60 days to re-deposit the money into a new retirement account before it’s labeled a “cash out” and you’re hit with tax liabilities and possibly penalties.

Cabaniss says she has witnessed a number of possible scenarios:

• The check arrives on time to the new custodian. Your job is to make sure it’s deposited into the right account within the required 60-day period.
• The check is sent to you — made out to you or the new custodian. Don’t cash it — get it quickly to the new custodian.
• The check is sent to the wrong address or your old address. Get it re-routed by the deadline.

Remember to follow up until your money is safely in its new home. Then get — and save — the written proof.

7. HR doesn’t work for you

The human resources department at your former, soon-to-be-ex or new employer doesn’t work for you, says Slott. “They work for the company.”

And they have to cover a lot of ground on a lot of different issues for a lot of other employees.

If you’re not comfortable with following the money yourself, hire an expert to handle it for you. But beware, even experts can get it wrong.

“It’s a specialized field,” Slott says. That’s when it can pay to have someone who has a lot of experience and training in this particular aspect of retirement planning, Slott recommends. “Most of the money is lost on the way out of the account,” meaning that if the transfer is not handled correctly, you could lose a chunk of it.

Look for an adviser with plenty of experience, training and references in this particular part of the process, he says.

8. Cashing out is popular, but not so smart

Intellectually, consumers know that cashing out retirement accounts isn’t a smart move. But plenty of people do it anyway.

In 2017, Retirement Clearinghouse reported that more than 30 percent of workers cashed out their 401(k) plans when they changed jobs. The average amount liquidated was “nearly $16,000,” says one Fidelity Investments survey.

And the less you make, the more likely you might be to raid your own retirement fund, another Fidelity study revealed. Half of workers who made $20,000 to $30,000 cashed out their accounts when they changed jobs, as opposed to 43 percent of those making $30,000 to $40,000 and 36 percent of those making $40,000 to $50,000, according to the study.

Read Also: How Much Do You Need to Put in Your 401(k)?

By comparison, workers who made $100,000 or more cashed out 13 percent of the time.

But if that $16,000 stays in a retirement account earning 7 percent annually, in 40 years it would increase to nearly $240,000. That can mean the difference between eating canned or fresh vegetables in retirement.

Finally

Finally, whether you roll over your 401(k) to an IRA, move it to your new employer’s plan or let it stay with your old employer, the important point is to keep that money set aside for retirement. By keeping it in those specialized retirement accounts, you’ll enjoy a tax advantage and roll up more money for retirement.

In addition, while your account balance might not seem like a lot, time can work its magic on all amounts of money. “Regardless of the amount, keep it to its intended purpose,” says Bogosian.