How long do you have to move your 401(K) after leaving a job?

When switching jobs or quitting to start a business, it is easy to get lost in the excitement. As you plan your next move, you should remember your 401(k) plan where you’ve been accumulating your retirement savings. By knowing what happens to your 401(k) and how long it takes to move your 401(k) after leaving a job, you can plan what to do with your retirement savings.

Generally, 401(k) plans are tied to employers, and once you leave your job, you will no longer contribute to the plan. However, the amount you contributed to your account is still your money, and you can choose what to do with it. How long you have to move your 401(k) depends on how much asset you have in the account: you have 60 days from the date of leaving your employer to move the 401(k) money into a preferred retirement plan if your 401(k) balance is below $5000. For large balances over $5000, you can leave the funds in your old 401(k) plan for as long as you want.

You Have Less Than $1000 in Your 401(k)

If you have less than $1000 in your 401(k), you may request to get a lump sum payment via check. Still, if you leave the funds behind without giving any instructions to the employer, the plan administrator may force cash-out in order to close the account.

Usually, active 401(k) accounts incur costs to maintain, and your employer may be unwilling to bear the cost since you will no longer contribute to the plan. The employer will send you a check within 3 to 10 days of leaving the job. Once the payment is made, you have 60 days to deposit the funds into an IRA to avoid paying taxes. If you don’t deposit the funds into an IRA, the payment will be considered an early withdrawal and you will pay an income tax and early withdrawal penalty.

You Have $1000 to $5000 in Your 401(k)

If you had contributed more than $1000 but below $5000, the plan administrator is required to roll over the funds to a new retirement plan instead of transferring the funds as a lump sum. The employer transfers the funds to a retirement plan of their choice, and this type of transfer takes a longer duration to complete, usually up to 60 days.

A retirement saver must wait until the forced transfer is complete to access the funds. If you are 59 ½ and older, you can withdraw the funds from the IRA without paying a penalty tax on the distribution. However, you will still owe income tax on the distribution, and you will be required to report the distribution in your taxable income for the year. If you don't want the employer to decide for you, you should instruct your plan administrator what to do with your 401(k) money.

You Have $5000 or More in Your 401(k)

If your 401(k) account balance is at least $5000, your former employer may allow you to stay vested in their plan indefinitely. Usually, the employer is required to continue holding your 401(k) money in their retirement plan until you provide further instructions on what to do with your retirement savings.

However, employers only consider the amount you have contributed to the 401(k) plan. This excludes retirement savings rolled over from previous employers’ 401(k) plans. For example, if you have a $10,000 401(k) balance, and $7,000 was rolled over into the plan, it means you only contributed $3,000. This amount falls below $5000, and the savings may be moved to a forced-transfer IRA, even if your total account balance is above $10,000.

401(k) Options after Leaving a Job

Rather than leave your 401(k) money with your employer, here are the options you have with your retirement savings:

Move your 401(k) to Your New Employer

If your new employer has a retirement plan, you can ask your former employer to automatically transfer your money to the new 401(k). Direct transfers may take a few days or weeks, depending on the 401(k) plan.

You may also opt to receive a check with your 401(k) balance so that you can deposit it to your new 401(k). In this case, you have 60 days to deposit the check into the new plan. Any delays past the 60-day deadline attract an income tax and penalty on early withdrawals.

Move Your 401(k) into an IRA

If you are looking for greater flexibility with your money, you can rollover over your 401(k) into an IRA with a financial institution or brokerage. An IRA is also a great option if you want to consolidate 401(k)s left with former employers.

With an IRA, you have access to a wide range of investment options, and you have greater control in determining where to invest in, and the fees you pay. You may also qualify for penalty-free withdrawals when buying your first home, paying higher education expenses, or other qualifying expenses.

The 60-day deadline also applies to indirect 401(k) rollover to an IRA. The 401(k) plan administrator will send you a check, and you must deposit it with your IRA within the 60-day window to avoid paying income tax and early withdrawal tax.

Retire

If you are 59 ½ years and you decide to retire after leaving your employer, you can start taking qualified distributions from your 401(k) without paying an early withdrawal penalty tax. However, the distribution will be subjected to income taxes at your tax bracket rate. After cashing out, you can expect to receive a check from the 401(k) plan administrator in 3 to 10 business days.

If you are 55 years but below 59 ½ when you retire, you can also start taking penalty-free distributions from your 401(k). However, this only applies to the current employer, and you will have to wait until you are 59 ½ to access penalty-free distributions from former employers.