The easiest thing to do may be to leave your
401(k)
assets where they are. If your former employer's plan offers
a range of investment choices that have been providing strong
returns, and if the fees are low, your assets may do as well there
as they would in a new account.
Leaving your money in your former employer's
plan may also buy you time to make a decision, since the plan
assets remain portable. If you decide later you'd rather have
those assets in your new employer's plan or in an
IRA,
you'll
be able to move them without penalty.
However, there are a few drawbacks to leaving
your money in your former employer's plan. You won't be able to
make any new contributions, and you won't qualify for any
matching
contributions.
Depending on the plan, your control over
the account may also be severely limited if you are no longer
an employee. Some 401(k) plans prohibit non-employees from changing
their
asset
allocations,
for example. Furthermore, the plan may charge
higher administrative fees for participants who are no longer
active employees, to cover the added cost of maintaining your
account — and possibly as a way of encouraging former employees
to remove their assets from the plan.
You probably won’t be able to leave your 401(k) money where it is if the balance is below $1,000. Employers are allowed to cash out accounts that small and send you a check for the value, minus the 20% required withholding.
If you cash the check, income taxes and a potential 10% penalty will be due on any amount you don't deposit in a tax-deferred account within 60 days. That also applies to the money that was withheld, even though you never had control of it. If you can come up with the 20% that was withheld and deposit that along with the check from your employer's plan, you can avoid having that amount considered an early withdrawal. But there may be an easier way. Most experts recommend having even small balances transferred directly into an IRA to keep the money tax deferred.
