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I've Switched Jobs. Can I Take My 401(k) With Me?

The days are long gone when a young person could secure a position at the local plant or business, and then expect to stay with that company for their entire working life. Estimates vary, but one recent study suggests  that the average American will change jobs 12 times throughout their career.

The moves most U.S. workers undergo during their professional lives mean some serious decisions will need to be made, including what to do with the 401(k)s you've so diligently been contributing to. The good news is there are several options, depending on your situation.

Image source: Getty Images.

A few ground rules

There are three ways to take your retirement savings with you when you leave a company. The first is to transfer the funds from your old plan to one offered by your new employer, assuming it offers a 401(k). Another option is to complete a tax-free transfer or rollover of the money into an Individual Retirement Account (IRA). And finally, you may elect to cash out your 401(k) balance and get a check directly.

The vesting period of your old plan-- these are often five years, but can be shorter or longer -- may impact how much, if any, of the matching funds contributed by your ex-employer you will get to keep, regardless of which decision you opt for. And leaving your investments in their current plan is an option, though you will lose the ability to take a loan out from the fund, and no additional vesting will occur.

If your 401(k) balance is under  $5,000, your employer can initiate an IRA rollover for you, or send you a check directly if you don't respond to a notification letter within 30 days. If the balance is under $1,000, employers have the right to send you a check, triggering taxes and possible penalties.

New company, new plan

Some folks choose a tax-free transfer of their old plan's balance to one offered by their new employer to lower expenses and avoid taxes. The fees charged by 401(k) plans, and the funds they offer, vary significantly, even for similar offerings, and all other things being equal, reducing your expenses boosts returns in a real way over the long run.

Before committing your previous retirement savings to your new employer's 401(k), take some time and conduct a bit of research. In addition to expenses, review the long-term performance of the various investment alternatives available in the new 401(k). Since most plans' fund choices are somewhat limited, you could be stuck with underperforming funds.

Keep in mind that your new 401(k) likely comes with a new vesting schedule, though the funds you contribute will always be accessible, regardless of what choice you make when taking a 401(k) with you.

IRA transfer or rollover

A direct transfer from a 401(k) to an IRA is the more commonly used of the options available. You can initiate one by contacting the plan's administrator and providing them with your new plan's name and address. The former administrator then sends a check directly to your new plan made out to them for the benefit of (FBO) the participant (i.e., you).

The reason this direct transfer is the alternative of choice is that it avoids the 20% federal withholding the former administrator would otherwise be required to send to the IRS, and also ensures you're not hit with the 10% early-withdrawal penalty you would have to pay if you extracted those funds from your retirement accounts while you were under the age of 59 1/2.

If you instead have your 401(k) funds sent to you to manage, you have a 60-day window to roll them over into an IRA -- but unless you want to pay some taxes and penalties, you'll have to make up that 20% your previous fund administrator withheld for the IRS from your other funds. Eventually, if you roll the entire sum into a new retirement account, those withheld funds will make their way back to you, of course -- because the IRS won't count that money as income for the year, and won't tax it. But if your objective is a tax-free fund transfers to an individual account, the direct transfer is the way to go.

My cash, if you please

If their financial situation demands it, an ex-401(k) participant can opt to receive a check directly from the administrator. However, the 20% automatic federal tax withholding and any applicable state taxes are just a couple of reasons that check could be significantly less than the  balance.

And again, cashing out a 401(k) before the year in which you turn 59 1/2 will mean that a 10% early-withdrawal penalty gets tacked onto your tax bill.

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