When you leave an employer, you are likely to have several options. You may

  • Stay invested in your previous employer’s plan if your balance meets plan’s minimum
  • Invest your assets in the new employer’s plan
  • Take your distribution in cash. Before taking cash think long and hard about penalties and taxes.
  • Roll over assets to an IRA.

While making choices

  • Look at the whole picture of your current plan.
  • Understand all the requirements of a new plan.
  • Be aware of any financial penalties in taking a cash distribution.

If you do a direct rollover

  • You will have no exposure to taxes or penalties.
  • Assets can potentially grow tax deferred.
  • Consider only a new IRA that offers diversified choices.

By the number
The IRS requires an employer to withhold 20% federal tax from the money when an employee takes a 401(K) distribution in cash.

Most importantly consider your age. There is one benefit of leaving your 401(K) with a former employer and that is if you are close to retirement age but no 59.5 years and you need a distribution, many 401(K) plans allow for distributions at age 55 years without the IRA 10% penalty you would face after a rollover.

The information presented is general in nature and should not be considered legal or tax advice. You should consult your legal or tax advisor for information concerning you own specific tax situation.