Managing Your 401(k) Assets When You Leave Your Job

How to Keep Your Money Tax-Deferred

When you get ready to move to a new job, you pack up your things, have an exit interview, and let your friends take you out to lunch. Although you’re leaving behind memories, your 401(k) can go with you too.

You’ll want to maintain the tax-deferred status of your retirement savings. There are three options that don’t have any tax consequences.

1. Leave your money invested in your former employer’s 401(k) plan. The easiest way to handle your retirement savings is to keep it in your former employer’s 401(k) plan. Your money will stay invested exactly as it was before. If your vested account balance is $5,000 or more and you're under age 65, you won’t pay any taxes on the money until you withdraw it. If your balance is between $1,000 and $5,000, your employer may be required to move your money automatically into an IRA account on your behalf.
   
   
2. Roll over your retirement savings to your new employer’s 401(k) plan. If your new employer allows this, you’ll get the convenience of having all your retirement savings in one place. However, keep in mind that your investment choices will be limited to the ones your new plan offers.
   
   
3. Roll over the money into a new Individual Retirement Account or one you already have. This option is a “direct rollover” of your 401(k) account to a traditional IRA, either on your own or through your financial advisor. Using this method can give you additional investment options. 
   
   Beginning in 2008, you can also directly roll over your account to a Roth IRA. The amount is subject to current income tax, but qualified withdrawals are income tax-free. Until 2010, you can only convert to a Roth IRA if you have less than $100,000 in adjusted gross income (This income limit is for single taxpayers and married taxpayers filing jointly. Married individuals filing separately cannot convert until 2010.).
   
   

1. Low account balance. If your current 401(k) account balance is $1,000 or less, you may receive the money automatically as a lump-sum distribution. In that case, you’ll have to pay taxes on the money and any early withdrawal penalties.

2. Money taken as distribution. Any money you take as a distribution is taxable. The law requires your employer or 401(k) program administrator to withhold 20 percent of your distribution for taxes. If, within 60 days you decide to roll over the full amount, you’ll have to cover the 20 percent that was withheld. The withholding taxes will be applied to your tax liability when you file your return.
   
   

Now that you know your options, you can concentrate on your new job without having to figure out what to do with the money you’ve worked hard to save.