While most plans give you 30 to 90 days to explore the options and make a decision, the exact timeframe may depend on the balance in the account and on the plan’s rules. If the account balance is less than $5,000, the employer can insist that you transfer or cash out as soon the decision-making period ends. If the balance is more than $5,000, you have a legal right to leave the money in the old plan for as long as you wish.
Take Out a 401(k) Loan
If you leave your 401(k) with your former employer, you may be able to draw money by taking out a loan. Although not all plans offer this option, a loan can be a good alternative to a cash-out. The main advantage is that the Internal Revenue Service will not tax the loan proceeds as ordinary income if you repay the loan in full within five years. A disadvantage is that if you are younger than 59 1/2 years old and can’t repay the loan within this time, you’ll have to pay income tax on the outstanding balance as well as a 10 percent penalty fee.
Transfer 401(k) Funds
You can draw money out of your 401(k) by rolling it to a new employer’s 401(k) or to a traditional individual retirement account. If you transfer funds by a direct rollover, each of these options allows your retirement money to remain tax deferred. A direct rollover means the money never passes through your hands. Instead, you submit a transfer request to the trustee or plan administrator from your old plan, who then rolls your money into the new plan. Although you also can roll funds into a Roth IRA, you’ll be liable for paying income tax on the amount you transfer.
Close the Account
Another option is to request a cash payout and close the account. Although this gives you immediate access to your money, it comes with a significant disadvantage. If you’re younger than 59 1/2/ years old, income taxes and a 10 percent penalty fee ensure that you’ll get much less than the full balance. For example, if the current balance is $50,000 and you are in a 30 percent combined federal and state tax bracket, after paying $15,000 in taxes and a $5,000 penalty fee, your cash-out decreases by $20,000.