Concerns about what to do with the balance in a 401(k) are common after losing a job. If you are fully vested, the entire balance belongs to you. If not, the plan administrator will deduct unvested employer match contributions and the balance will shrink. Regardless, you have the right to decide what to with the plan once you leave the company. If you do not qualify or choose not to leave your 401(k) with your former employer, you can draw the money out and do something else with it.
Decision Timeframe
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.
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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.
