Did You Leave a Retirement Plan at a Former Job?Dennis Zuehlke / July 24th, 2017
Did you leave behind a 401(k), 403(b), or 457 governmental deferred compensation plan at a former job—or are you about to? Before making any moves, contact your plan administrator and, if necessary, a financial or tax adviser for complete information about the rules and tax consequences.
Option 1: Leave your savings with your former employer
Before settling on this alternative, review your plan's investments, fees, services, withdrawal restrictions, and distribution rules. Then compare the plan with an IRA (individual retirement account) and, if you have one, your new employer's retirement plan.
Option 2: Roll over your plan to a traditional or Roth IRA
Once you've left your employer, you have the option of directly rolling over part or all of the eligible distribution from your 401(k), 403(b), or 457 governmental plan to a traditional or Roth IRA. Rolling over your plan allows your savings to continue accumulating tax-deferred.
A traditional or Roth IRA may offer you a broader selection of investment options than your current or new employer-sponsored retirement plan. It also offers you and your beneficiaries more flexible and tax-favored distribution options than your employer retirement plan.
Keep in mind that pretax amounts rolled over to a Roth IRA are included in your gross income in the year of the rollover, but the 10 % early withdrawal penalty tax will not apply.
Option 3: Move your savings to your new employer plan
If you have a 401(k), 403(b), or 457 governmental plan with a former employer, you can roll over eligible distributions tax-free to any such plan that accepts rollovers.
When considering the alternatives, compare your new employer retirement plan with your current plan and an IRA. Evaluate the investments, services, withdrawal restrictions, loan provisions, distribution options, and fees.
Option 4: Cash out and pay taxes
As a last resort after you've left your job, you can withdraw part or all the vested portion of your employer-sponsored retirement plan. However, you'll lose a significant chunk of your savings to federal income taxes, possibly state income taxes, and possibly to the 10% early withdrawal tax penalty.
In addition, your employer must withhold 20% upfront as prepayment for the federal income taxes you'll owe at tax filing time. You'll also lose out on future years of earnings and tax-deferred growth.