Your investment is portable—you can take the money with you. When you switch employers, you may have several options regarding your
401(k) plan money, each with its own tax implications.
- You may be able to leave the money with your former employer. If your new employer offers only an IRA, leaving your money with your former employer may be a good idea since a 401(k) plan has numerous advantages over an IRA. Remember, however, you will not be able to borrow from the old plan or continue contributing to it.
- You may be able to withdraw the money. If you are
59 1⁄2 or older, and you take your money in a lump sum, you’ll be subject to ordinary income tax on the amount. If you are under 59 1⁄2, and take your money in a lump sum, you’ll be subject to ordinary income tax and, generally, a 10% tax penalty.
- You may be able to transfer your 401(k) to your new employer’s plan. If the transfer goes directly from your old plan to the new, you avoid having taxes withheld. If you withdraw any of the balance, even temporarily, taxes will be withheld and penalties may be due. Not all employers will accept money from a previous 401(k) plan.
When you die, any money in a 401(k) plan, including all employer contributions, will go to your named beneficiary. If that person is your spouse, he or she will have the same options outlined above. But a beneficiary who is not your spouse will not have the rollover option. Instead, such a beneficiary will have to take the money, either in a lump sum or over a period of years not to exceed his or her life expectancy (as determined by IRS regulations).
