Now that I plan to quit my job and pursue my own business, it’s time to look into how I should handle my current 401k account once I leave the company. As I don’t have a huge 401k account balance, the penalty if I don’t do anything will be relatively small but this doesn’t mean I should neglect this. After all, managing our finances successfully means making sure that we take care of all the little things so let’s explore what I can do with my 401k.
Options, Options, Options
Roll the Money into a New 401k
If you are changing jobs, you can always roll the money into the 401k plan at the new job. This is generally a good approach if your new employer has a good fund selection. This will also make managing your assets a little easier because you will potentially have fewer accounts. In my situation however, I am going out on my own so this is not really an option.
Get Cash Now
I can elect to have the plan administrator write me a check for my entire 401k amount. In fact, this is the most popular option in the United States. Unfortunately, this is also the worst possible option. If I choose to cash out my 401k balance, not only will 20% of the entire account be deducted for tax purposes, 10% more is due as a penalty come tax time next April. I also lose all the tax deferral benefits of the amount that I already have in the account, so cashing out is actually a terrible idea.
Leave My 401k Plan at My Current Employer
There’s always the option of leaving the 401k plan at my current employer. This is not a very good way of handling my 401k because I can never add funds to the 401k account. My current 401k plan doesn’t have great investment options either, so I’m not considering this option.
Turn it into an IRA
So, that leaves us to the final option of rolling over my funds into a IRA account. If I do this, I would ask my plan administrator to transfer the funds to my new IRA plan and I would never have to handle the money.
This way, there are no taxes due and no penalties incurred. If I choose a decent place to set up the IRA, I should also gain access to a much wider selection of investments.
Normally, this won’t happen but even if the plan administrator mails me the check, I still don’t need to worry as long as the check is made out to the new plan and not to me. Once I receive the check, I can just have the contact for the new plan get the funds deposited into my account.
One Caution
If I forget to talk to the plan administrator about my 401k plan and a check for the account balance minus 20% upfront penalty is mailed to me, there is still a way to not get penalized. The government allows a 60 day window from the time I receive the check to find a new home for my 401k balance. I just need to be careful not to deposit the check to my own account but instead come up with the 20% penalty with my own money and add that to the new plan. As long as the ending balance of my 401k plan and the opening balance of the new plan is the same, the government will give me a tax credit for the 20% they withheld when the check was mailed to me.
What I Think I Will Do With My 401k
Since I cannot change my 401k plan directly into a Roth IRA account, I will probably move money from my 401k into an traditional IRA. I will then do a Roth IRA conversion at a later date.
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{ read the comments below or add one }
my retirement fund only has 500 in it and I am quitting my job. my new job does not have a retirement fund what can I do with this.
i have had several jobs in the past and have signed on for 401k, its been alot of years back to remember them all, i thought you can find your funds threw your social security number, can somebody please help me
I took out a loan from my 401k and they starting taking out monthly payments for about a month. Then I was laid off, i left the with still owing a huge amount of money back. When i finally closed out my account i was charged the penalty tax but they never took out the money that I owe. All wanted was my balance and not the money that I owe. What should i do?
I thought that everyone who used advisors were high net worth and that nobody would talk (let alone help) to me if I had under 100K. I coworker of mine recommended Keith Steidle and I gave him a call. He was so down to earth and helpful back when I was starting out. Now that I am married with kids, he is still our advisor and the accounts have performed very well with his assistance. I suggest rolling your assets out and using a professional to help!
Hi, i started a new job and i have 401k from old job. The new job says in order to join the plan.
“you must have completed 6 months of employment prior to an enrollment date” and “you must have worked 500hours”.
What are my choices in a case like this?
It’s actually quite standard to not let employees get into the 401k plan until they’ve met some type of longevity requirement.
In your case, you might want to move your assets to a IRA first. I prefer to have all my retirement savings in IRA anyway but before you make the transfer, ask the plan administrator if there are any special rules for rolling assets over from IRA to 401k and 401k to 401k first because not everybody will allow all types of transfers.
Over 61 years young lady. Out of work due to health problems. I’m thinking to withdraw all my $100.000 from ex-employer 401k plan, to pay the tax on then ( ouch!), and with the rest ( $60-70.v000) to buy a rental duplex in my area, Erie. I already have another rental property and I am very happy with the outcome (very easy to rent in the area and with good tenants screening, it worked.)
My reasoning ( I may be wrong):
If I would keep the money in 401k plan( with no matching contribution from my company plus the market surprises, which can diminish anytime my savings… ), I should withdraw 4% ( $400/month), by general wisdom from most financial advisers.
But cashing my money and investing in a rental duplex, my monthly cash flow could be min. $1000 ( after taxes and maintenance expense)….. Any opinions???
A portion of my 401k with my former employer contains pretax contributions and a the remainder is after tax. When i complete a rollover to an IRA is it necessary, or best to open two separate accounts for tax purposes (i.e. a roth and a traditional)? Thanks for your response in advance.
I will be leaving my job in the summer to join a graduate school in the Fall. I have my 401k for a little over five years. Which is the best way to roll over my 401k fund? Thanks in advance.
I changed emplyer and couldnt roll my 401K over but as soon as I got the check I put it back into my exisiting 401K plan, but my questions is.. since I’ve already filed my taxes do I need to amend my taxes as I need to report the 1099-R the employer sent me? how do I not get penalized by the IRS?
Hi, I have my 401k for a little over two years.I am planning on moving out of state which means i will quit my job. I have no clue what to do with my 401k and how long I have to decide. Can you help?
I terminated a factory jobs back in 1997 to join the military. How do i find out if my 401k has money in it i was paying into it but honestly forgot. Please advise.
I would start calling the investment firm that your account was held at if you can find the account statements from the 90s. Otherwise, contact the factory and try to find the 401k/HR administrator to locate your account.
I had a loan out of my 401k and i quit my job and went to work at another company. I called fidelity to roll over my 401k from my previous employer to principal which is with my new employer. When i was talking to Fidelity they told me that since i had a 15,000$ loan out of my 401k i could take up to 99% of that amount and pay it to the IRS so i took that option and now people are telling me that they have never heard of anyone being able to do that. Did i get scammed?
Im going to be quiting my factory job . To fast past in two weeks. I have 401k over 100,000 . and i have a mortage of 45,000. should i pay off my mortage and save 35,000. in interest from my 401k then but the rest in a roth or ira account. because i will always have a roof over my head.and no mortage paymt and just pay the pentealy on 45,000 in taxes?
My last day with my employer was Nov. 9. I am down to two options for my 401k balance.
1. Keep with my old employer (per directions…do nothing). If I choose this, will I pass a certain deadline or opportunity to roll to another IRA or Plan if I change my mind.
Leaning toward-
2. Rollover to a Traditional IRA for more choices- I have read that the Rollover IRA may be rolled to my next employer’s 401K at any time so long as I do not contribute to the balance while between jobs. Is this true?
What’s the waiting period before your able to withdrawal your 401k funds after separating from an employer? I left my old job two weeks ago and Charles Schwab still doesn’t show a term date.. They keep changing their information with each failed attempt to disburse my funds. First, they indicated they would get a term date on the last day of my employers contribution to the account. Then it takes up to 30 days, now after my 3rd failed attempt and almost a month after leaving the company…. They still don’t have a term date and once they do, it will take another 15 days to have my funds transferred to another account… Does this sound right???
I have found that most of the holdup is actually due to the HR department because they have to at least notify Charles Schwab about you leaving the company first. Once they start processing your account though, there shouldn’t be anymore delays, especially if you are moving money from a 401k to an IRA from the same company.
Full time blogging? Only 3 years at Walmart? If you only worked there 3 years you’re not even vested enough to get your money when you quit. I don’t think I would call blogging much more than a high school phase some people have a hard time getting out of because they get attention that way. How about just keeping a job and saving. Its only 40 hours of your week can you not find time to “blog” with all your free time?
For those reading this and thinking about blogging as a career, there are lots of people who fail but a good deal many who succeed in this field too. Like every occupation or industry, many people fail and some thrive.
If you are some guy named Sam Walton, even working at Walmart made you rich. It’s how you make of your opportunities, as practically every industry CAN BE lucrative with the right approach.
Think your decisions through but don’t be discourage simply because some people believe blogging is merely an attention grabber.
I recently left my job and made the big mistake of cashing out my pension. I am within the 60 day window to rollover and have set up an IRA at my credit union. All I have to do is transfer the funds. My problem is I cannot come up with the 20% and 10% to equal the full amount. Should I still rollover the portion that I am able and treat the 20% and 10% as a distribution? or should I just spend it since I already paid the tax…I prefer to do an indirect rollover.
As far as I know, you actually cannot roll less than the full amount of your 401k over. I could definitely be wrong but once you cash out, you cannot put it back in.
If I mistaken what you said, then you should definitely try to roll over the full amount. Even if you cash out, you should try to save that amount since it was originally your retirement money. Spending it should always be the last option.
I once worked in a different state for several months, how do I find information about that?
Which state you worked at shouldn’t make a difference. Talk to your previous employer to see how you can get your account back. You should also be able to find information on how to contact the company that handles your plan by looking at your past account statements which were mailed to you quarterly.
My 401k plan is lingering. Every time I have changed jobs I have never done anything about my 401k. What can I do now or how should I go about this situation? Can you please help?
No problem. You are asking around to get ideas on whether your strategy makes sense. That’s exactly what you should be doing.
Just make sure you understand what you are getting into and know when it is and isn’t a good investment in the future.
MoneyNing,
I know you posted this quite a while ago now, but I just found it. I am thinking of entering the blogging world myself, so kudos to you.
Like others, I have changed jobs too, and retirement packages are not being offered to me at this time. However, I am considering taking the “cash out” option for a couple of reasons.
1) While everyone complains about realizing the taxes, none have ever been paid on this money so far. While it would be great to keep it that way, many people can make more money by taking the cash some and investing it elsewhere.
2) Which leads me to this… I am considering taking the money to purchase an investment property. With the downpayment money, and the current market, i believe it is the wiser choice.
What do you think?
Congrats on taking the plunge 🙂
Investment properties are just like any other investments, some are good deals and some aren’t so really look into the numbers.
I’d say that you are going to find it tough to have a good enough return to compensate for the 10% penalty right off the bat + income taxes you need to pay yearly on your earnings from the property.
Instead, why don’t you send it to a IRA and just invest in a REIT? They offer similar returns (if not better) than investment properties, no headache and you don’t have to take penalties.
Simply put, it’s because I am into seller financing. I am being offered a 3% loan for up to 40 years, whatever works for me. I own a main home through Bank of America, and closed in late January of 2011 on my first seller financed deal. Got in for only 1,000 down and he financed the rest at 7% in that particular case.
I understand what you are saying, but I also think there are some great investments around right now. Further, I do have a Roth IRA, so I diversify with stocks as well. My income tax would be 28% anyway, so had I not contributed that money vs taking it now, I’m really only losing 2%. combine that with the 75% my company was matching, and I can’t see the loss.
Can you?
I’m unclear about the whole seller financing situation so I cannot comment on that. Just be sure to know that you are paying 10% penalty on your whole withdraw. So if you have $100,000 saved up in your company 401k, you have to pay $10,000 right off the bat, plus 28% of $100,000 (it could be $90,000 but either case, it’s a huge chunk).
What you are left with is more like $60k, and it would take YEARS of gains to get it back to $100k. Obviously, you will have to pay taxes on that $100k when you finally need to withdraw it but depending on income in your later years, it might be a better deal.
All I’m saying is to run the numbers. If you take the money out, how much does the value of your income property (or rent depending on your strategy) need to appreciate for taking out the money to be in your favor? You need to run scenarios so you know exactly how you are benefiting to give you more confidence as opposed to the vague reasons that you are coming up with to convince yourself to take the plunge.
Well, I’m looking into it so we will see. I thought i read above that it was 20% and 10%… now its 38% total? That is crazy, but remember, NO taxes have been paid on this money yet, and many people can not wait until old age to touch it these days.
Further, I get tired of hearing how it makes sense because ,”later in life your income will be less”. I sure hope not. I plan on having a wonderful retirement (yes, plan being the key), and will surely be taking in considerably more by 2050 than I am today.
I appreciate your responses, and I hope you understand my sentiment here. Retirement savings is very important, but I wouldn’t put all my eggs in one basket.
Thanks.
Try transferring to a self directed IRA that can buy the investment property for you with no hit on taxes. Be aware that you need professional help to do so – find a qualified intermediary to do this. Free advice may be the worst so pay professionals for this info. This is a great website for discussion but when proceeding with such a big decision, seek local professional help. Good luck. Love your spirit!
I am planning on leaving my job in a few months and would like to know if I can transfer my 401k into my husbands or if I need to put it some where else?
In 2009 I was laid off from my job and I have a 401k rollover to roth IRA without my knowledge about the AGI limit of $100,000. We earned more than the AGI limit, what will happen to my ROTH IRA rollover. Do I just need to roll over it again to traditional IRA or just to withdraw it, to solve the problem. Also I did not include yet that amount on our annual income tax and want to include it this year, could I do that.
Please help.
I worked for Walmart in Aiken, S.C in 1988 and moved to another state in 1991.i never heard anything about my 401k, Could you please tell me who I can contact to see if I still have money sitting some where i can use.
Howdy,
I am 21 years old and worked at wal mart for 3 years. I just quit to begin my new job with the USPS. I am very dumb when it comes to this 401k and stocks and shares and stuff. I basically invested because that was the advise of my grandfather. He is no longer able to give me advise so could someone please advise me on what i should do with my 401k from walmart and also what will happen to my shares/stocks?
You can roll the Walmart 401k $$ to USPS’ Thrift Savings Plan (Federal Government’s 401k). If you own shares, you may want to keep these and not redeem for $$. However, you need to look at the Terms & Conditions: whether the shares are definitely yours (you choose to redeem/keep) or if they’re employment based, where you would be required to redeem.
I came to US for work and contributed some money to 401k. But I am planning to go back to my home country (India) permanently. How can I withdraw my 401k money with in the next couple of years, of course I want to have it with less penalty. Any advise? If I withdraw while I am in India in small amounts, can I avoid the income tax (as I will not have any US income once I go back to India).
I am confused about what to do. I currently pay into a pension, which i can’t rollover a 401(k) from a previous employer. The 401(k) is small, do I cash it out and accept the penalties or roll it over to IRA? Please help…
Retiring soon what do I do with 401k? age 69…regular IRA ?
What are my options ? as far as taxes and penalty?
I will be 70 in Jan. I have money in regular ira account. What will be my taxes,and my pentaly for withdrawl.
Hi there,
My husband just moved to a larger/better employer and left his last employer on good terms. Not only does he have 401k left at the other employer but he is also fully invested in their ESOP plan. When he inquires about rolling over or withdrawal of either, he is told by his former employer’s HR dept that he can not do anything with them until the beginning of the year. Is that correct? Is this a policy or procedure or IRS requirement? Does his past employer have the power to hold on to his 401k and his ESOP funds and/or disburse them at their own discretion?
The most disastrous financial mistake I ever made was to roll over my 401K to Fidelity Investments—-on the advice of an estate attorney. The advice given by Fidelity expert adviser, when the market was topping, resulted in great losses for me.
Hi,
I just wanted to say “Thank You” for the information regarding leaving a job and what to do with a 401K. I am currently in that situation now where I have a 401K from a previous employer administered through Vanguard. I couldn’t determine if I should leave it there or roll it over. The information on your site has assisted me in moving toward the decision to roll it over to a traditional IRA with Vanguard. I would like to know how I should go about choosing the funds to invest it in with the IRA. (I hope I’m saying that correctly.)
I rolled over my 401K to Fidelity as my 401K was on their netbenefit site. I used myplaniq.com plan (search for Fidelity, you’ll find out) to invest in ETFs. The plan recommends most ishares ETFs that Fidelity does not charge a trading fee.
Being pretty happy so far. Would like to hear how others are doing in IRA investing. Never use any other broker before so I have no comparison here.
For most people, every major broker’s trading mechanics and routing will be too similar to make a difference. Therefore, stick with the big guys who don’t charge fees and you will be in good shape.
As to which particular investment to make, that’s a much more complication decision that doesn’t have a “right” answer. I would consult a professional and use their suggestion as a STARTING point.
I worked several jobs in North Alabama and it was employer matched and when I quit those jobs I never heard anything about my 401k. Could you please tell me how to check on it and see if I have money just sitting there that I could sure be using. Thank you.
If you had a 401k setup, you should have received at least a few quarterly statements. Look there first for a phone number to inquire about your account.
Otherwise, check with your plan administrator at your former job (possibly the HR person, or in smaller businesses, the accountant) and ask how you should get in touch with your plan.
i quit my job i just wanted to see if i may have money just setting
I recently got fired from my job, I have an outstanding 401k loan that I would not be able to paid. My balance wich includes my loan is 31900, if I choose to rollover what it is the best place to rollover and what will be the amount that I could rollover and finally what will happens to the loan
The best place depends on how you want to manage your money from here on out. Vanguard has a good selection of IRAs that many people like, especially those who like index funds and the no hassle approach. You can also roll it over to a brokerage firm where you can buy and sell any securities with your money.
The loan needs to be repaid when someone loses his/her job, so the amount will be deducted from your original total balance and then you will have to pay taxes and a 10% early withdrawal penalty on the $31,900 unfortunately come tax time. Check with your plan administrator, because they will sometimes withhold some amount up front too to make sure people pay taxes. It’s a requirement, so don’t beat up on your administrator too much since he/she doesn’t have a say in this.
A 401k loan does not necessarily need to be repaid upon employment termination. The company Summary Plan Description (SPD) dictates. while IRS rules reign, each employer can determine the nuances of the plan via its SPD and this includes how to handle an outstanding loan. I left my employer and am allowed to make monthly payments for my 401k loan – this is rare but a wonderful options. However, my husband may leave his employer and upon doing so will owe the entire amount within 60 days. We knew these consequences upon taking the loans because we read our respective plan SPD’s. Also, one option I did not see in this article is rolling over a 401k into a self directed IRA which I feel is a separate category like Roth and but falls in the tradition IRA category while being non traditional and is becoming more popular these days. Worth mentioning at least knowing about this as an option.
i rolled over a 401K into a traditional IRA 4 years ago when I quit a job. I will be losing my current job (4 years) due to a buyout. Do I need to roll my current 401K into my existing traditional IRA or can I/should I roll over into a different IRA account?
Although you can open a new one, I suggest rolling it into your existing traditional IRA to ease management. The last thing you want is too many accounts.
Why, isn’t diversity good?
Well put.
Anytime you have to leave a job, your 401k should be a priority. I have heard horror stories about individuals who make the wrong moves, and this article lays out a few of the big nono’s.
which article are you speaking about?
esthermasters: If your 401k is with the employer you are still working with, you can delay withdrawals until you retire. However, if you have any funds in your IRA, you must make the minimum withdrawal when you turn 70 and a half.
As to where you put it in, it depends on how much you already have outside of retirement funds as well as how long you plan to work. If you have a solid savings, you might want to invest it in stocks and bonds. If you don’t, then maybe it’s finally time to build some savings.
Should you take your 401k out at 70 when you are still working. What do I put it in if I should and when do I have to start drawing it out.
I don’t have much knowledge about the tax and 401k, but I think this 401k is useful for our retirement life.
Roll it into the IRA is my vote. Better management, more funds, easy transfer, tax-friendly. No question if/when I quit for blogging.
Absolutely avoid just taking the cash and incurring the penalty. I know people that have done that and it’s been throwing it out the window in my opinion. It’s money that you set aside that you had no intention of touching, but then, just due to a life/career change, your Net Present Value decreased by 10%.
I’d roll over:
1) More control
2) Better investment options
3) Lower fees – Vanguard is best in the industry and many 401K plans don’t offer, so I assume yours doesn’t.
On the rollover Traditional vs. Roth, there are some considerations as to whether your income (and hence tax rate) will be higher in your working years or retirement years to offset paying the taxes now. The next election/Congress leaves some uncertainty as well. Tough call, I’d probably opt to do the traditional IRA rollover and incur no tax payments now.
Hello,
I am new at this 401k. i have been at my job for 2yrs and1/2 and have built up quit a bit funds in my 401k plan. I have both the roth and traditional account invested into. now i know i am not going to be staying at this job for very long, but when i do decide to leave what would my better option be? i heard that taking all the money is a bad decision, but i dont want to loose any money if the stock market crashes like it did before and lots of people was affected and lost a great deal of all their hard work, and the times that we are coming into, even though things might look reassuring,, its not, and i just want to make sure i can retrieve all my funds when the time is right. can you help with sound advise.
Capital Couples Finance: Good to know. I will have to research on that and see whether it makes sense for me to go directly to a Roth IRA. The only thing for me to do this is that I’m going to have a much smaller income next year and I may be able to save more taxes next year.
Steve Bonds: I will seriously have to look into it. The income cap wouldn’t be a problem for me next year since I’m quitting my primary job and my biggest source of income.
Indeed, usually the most convenient thing is to do a direct rollover into a rollover IRA account, either pre-existing from previous 401(k) transfers, or a new rollover account. This is special and different from your regular IRA account. A direct rollover avoids the problem of coming up with 20% of your own cash.
You can now (2008) convert a rollover to a Roth IRA, but there are some income caps that are all to easy to reach, especially for a married couple since the limits are the same for single/married. In 2010 those limits vanish. More info on the above fairmark website.
I was in your position just a few months ago and I thought I couldn’t roll over into a Roth IRA without converting to a traditional IRA first, but I ended up being wrong. I just have to pay taxes on it this year.
I went ahead opened the Roth because I have a relatively small balance now and it will cost me a lot less money than paying taxes on the distributions had I rolled it into a traditional IRA.
Frugal Dad: Thanks 🙂 It’s great to know that someone acknowledges my plan.
I don’t remember the exact details but I remember something like 2009/2010 there’s a way to roll them over more efficiently. I will have to look into it. I guess though that come 2009, my income will be lower without my primary job so it might make sense to do it next year.
I like your plan. The IRA should give you more control over your plan as time marches on from the time you leave your current employer. And, you can convert it over to a Roth IRA when tax situations are favorable to do so. Smart plan.