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When you leave your employment, you have the option to transfer your 401K to another fund. It can be an IRA or another 401K. Understanding how much time you are allowed to make that transfer will help you with your retirement planning.
The Money You Have In Your 401K Still Belongs To You
Some people complain that they can no longer borrow from the 401K that they have under a former employer, not even for emergencies. The good news is that there is a way for you to have early access to your former 401K or IRA funds without any tax or penalties.
When you are making major life changes like changing jobs or leaving an employer to start your own business, the excitement of the transition can dominate your attention. In the midst of planning for this change, you should not forget about the 401K that you had been contributing into. Understanding what you can do with those funds, how to transfer them, and how much time the transfer requires will help you plan ahead to make the money work for you.
In general, 401K plans are connected to the employer. When you leave your employment, you stop contributing to it. However, the amount that you have already contributed to your 401K belongs to you, and you are free to do whatever you want with it.
The window of time allowed for transferring your funds depends on how much money you have in it. If the net value of your 401K is $5,000 or less, you have 60 days from the last day of your employment to transfer the money into another retirement plan of your choice. If have more than $5,000, you can choose to leave your money in the existing 401K for an indefinite time.
A 401K BALANCE OF LESS THAN $1000
If your 401K has less than $1,000, you can request your employer to issue you a check with a lump sum. If you do not request that, your former employer can still proactively issue you a check anyway so they can close your account.
The reason is that an employer must pay a fee for maintaining employees’ active 401K accounts. When you leave your job, you no longer contribute to the funds, so your former employer would be unwilling to continue to pay maintenance fees on your account. Therefore, your employer will issue you a check for the lump sum within three to ten days after your last day of employment.
When you receive the check, you have 60 days to put the money into another retirement account in order to avoid taxes. If you do not make that deposit within 60 days, the IRS will consider that an early withdrawal, and you will be required to pay an early withdrawal penalty as well as income tax on the amount.
A 401K BALANCE BETWEEN $1000 AND $5,000
If your account balance is from $1,000 to $5,000, your former employer will transfer the funds into another retirement plan of their choice. They cannot issue you a check for the lump sum. The transfer usually takes up to 60 days to complete. During the transfer, you cannot access your funds.
You must wait until the transfer is complete before you can access your money. After the transfer is complete, if you are at least 59 1/2 years of age, you can withdraw the money from the new IRA without any penalty. However, this would still be counted as income, so you will be required to pay income taxes on the withdrawal.
If you do not want your employer to transfer your money to a fund of their choice, you need to send clear instructions to the plan administrator on what you want them to do with your funds.
A 401K BALANCE WITH MORE THAN $5,000
If you have $5,000 or more in your 401K, you have the option to keep your money in the existing account for as long as you want. Your former employer is obligated to continue to keep your funds in their 401K plan until you give them instructions on what you would like to do with those funds.
This can become complicated if your 401K includes funds that were rolled over from a previous employer’s 401K plan. In that case, your last employer will only count the funds you contributed during your employment. If the amount of your contribution is less than $5,000, your last employer can still transfer that amount into another IRA of their choice. Here’s an example: When you left your last employer, you have $10,000 in your 401K. Back when you started your job, you rolled over $7,000 from a former employer’s 401K plan. Since then, you’ve contributed $3,000 to your current 401K. Because it’s less than $5,000, your last employer can move the $3,000 into another IRA even though your total 401K balance is $10,000.
Instead of leaving your money in your last employer’s 401K, you can consider other options.
ROLLOVER YOUR FUNDS TO THE 401K OF YOUR NEW EMPLOYER
If you have a new job and your employer has a retirement plan, you can request your employer to transfer your money from your former 401K plan to the new one. This direct transfer can take anywhere from several days to several weeks to complete.
You can also request your former employer to issue you a check for your 401K balance which you can deposit into your new 401K yourself. You must make the deposit within 60 days or else you will incur an early withdrawal penalty and income taxes.
TRANSFER FUNDS FROM YOUR 401K TO AN IRA
If you want more flexibility in how you invest your funds, you can rollover your 401K funds into an IRA administered by a brokerage or a financial institution. If you have multiple 401Ks from various former employers, an IRA is also a good way to consolidate them.
An IRA gives you a wider range of investment options, more control over where your money goes, and how much fees you pay. You can also withdraw funds from your IRA without penalty if you use the money to pay for college expenses, buying your first home, or for other types of expenses that qualify.
When your former plan administrator sends you a check for the lump sum of your 401K, you have 60 days to deposit the funds into an IRA. If you miss that window, you will be liable for early withdrawal penalties and income taxes.
WHEN YOU RETIRE
After you leave your job and you decide to retire, and you are at least 59 1/2 years old, you can start withdrawing from your 401K without any early withdrawal penalties. Just keep in mind that the money you withdraw will be counted as income, and you will be required to pay income taxes on it based on your tax bracket. When you make a withdrawal, the plan administrator will send you a check in three to 10 business days.
If you are still working, and you are at least 55 years old but less than 59 1/2, you can withdraw from your current 401K without any penalties. You will still have to wait until you reach 59 1/2 years of age if you want to withdraw funds from retirement accounts from former employers.
DON’T FORGET ABOUT YOUR MONEY
In the United States, there is around $100 billion in abandoned 401K accounts. Make sure these do not include your accounts.