Upon leaving a company, 401k participants face several choices regarding their retirement plan. Plan participants should explore all individual rollover options but be aware of each option's unique set of tax implications.
With balances greater than $5,000, 401k participants can leave their account with their previous employer.
With a lump sum distribution an IRS-mandated 20% tax withholding charge is levied. Participants under 59 1/2 will also be levied a 10% early-withdrawal penalty. For all participants, the 20% tax will be counted against income tax payable at year's end while the 10% will not.
Rollover Into a New Company's 401K
Rolling over a 401k plan into a new company's 401k plan results in no taxes or penalties levied by the IRS.
Rollover Into a Regular IRA
Funds can be rolled into a regular IRA without any tax implications as long as they are moved within 60 days.
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Rollover into a Roth IRA
As 401k money is pretax money and Roth IRAs contain after-tax funds, a participant must pay taxes on the 401k money to comply with IRS rules.
Rollover Into a Self-Directed IRA
This option allows investments in financial instruments such as commodities, real estate and tax liens. The 60-day rule also applies.