Leaving a job can be a stressful time. Tying up loose ends and preparing for your next venture can cause certain things to fall through the cracks. Namely, forgetting to bring your 401(k) with you. There are a few things to remember when you go to rollover your 401(k) from a previous employer.
If your previous employer disburses your 401(k) funds to you, you have 60 days to rollover those funds into an eligible retirement account. Take too long, and you’ll be subject to early withdrawal penalty taxes.
However, there are alternatives to your previous employer cashing out your 401(k) when you leave that can make the process much easier.
What Happens to Your 401(K) When You Leave a Job?
When you leave a job, you have a few options when it comes to your 401(k). It depends on how much you have in your 401(k) when you leave and what your plan’s policies are as dictated in its summary plan description. Knowing your 401(k) balance before leaving and having a plan ahead of time can help save you a lot of time and stress.
401(k) Balance Less Than $1,000
If you have less than $1,000 in your 401(k), your employer could give you a lump-sum check for the amount.
If you didn’t intend to receive your funds in this manner, you’ll have 60 days from the date you terminated your 401(k) to roll the funds over to your current 401(k) or an IRA. Otherwise, the IRS will hit you with a 10% early withdrawal penalty tax for the amount.
401(k) Balance Between $1,000 and $5,000
For 401(k) balances less than $5,000, your employer doesn’t need your permission to transfer your funds out of the 401(k) plan.
However, if you have over $1,000 in your 401(k)—and you haven’t opted to have your funds rolled over to a specific account—the plan’s administrator is required to transfer your 401(k) funds to an IRA.
401(k) Balances $5,000 and Higher
If you have $5,000 or more in your 401(k) account, your employer needs your consent to do anything with it.
You can opt to leave it where it is, roll it over to another 401(k) or IRA, or cash it out if you choose.
Rolling Over Your 401(k) From a Previous Employer
Having your 401(k) funds rolled over to another retirement account is a great option. Rolling over old 401(k)s to a new retirement account ensures you’ll continue growing your retirement fund, and you’ll avoid being penalized for an early withdrawal.
Your previous employer can release your 401(k) in two ways: direct and indirect rollovers.
Direct Rollovers
A direct rollover is when your previous employer transfers your 401(k) balance to the account you have chosen.
This is usually done without the funds ever being withdrawn. Instead, they are sent the same way a wire transfer or an ACH is sent.
All you’ll have to do is provide your former employer your new plan’s information, and they’ll handle the rollover for you.
Indirect Rollovers
If your previous employer mails you a check for your 401(k) balance, this is called an indirect rollover.
You must deposit this check into an eligible retirement account like an IRA or your current 401(k) within 60 days of your plan’s termination. Fail to rollover your 401(k) in time, and you’ll be subject to income tax and an early withdrawal penalty tax of 10%.
How Long Do I Have to Rollover Really Old 401(k)s?
It’s easy to lose track of 401(k)s you’ve held at former employers. At the rate Americans change jobs, it’s possible to have 401(k)s outstanding at multiple employers.
Human resource departments and plan administrators can lose track of 401(k) accounts of former employers, causing them to sit in the plan untouched for years.
There are no specific time constraints with these plans. However, if the plan were to cash out your old 401(k), you’ll have 60 days from the time they terminated the plan to roll it over to another retirement account.
