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Your Bank > Education and Advice > CNB University

401(k) Plan Options - Leave Alone or Move?

James P. Terwilliger
James P. Terwilliger, PhD, CFP® is Senior Vice President - Group Manager, Financial Planning Strategies and can be reached at JTerwilliger@CNBank.com or (585) 419-0670 x50630.

Do you have a 401(k) or similar plan residing at a former employer? This might be a result of retirement, changing jobs, or leaving the workforce temporarily.

The key question is - “What should I do with the funds? Keep them there or move them out?”

When employees leave a company, generally there are four options available:

  • Take the money and run
  • Leave the money where it is
  • Move the money to a new employer’s plan
  • Roll the money over to a traditional (not Roth) IRA


Take the Money and Run: Unless you are facing a catastrophic financial emergency, don’t even think of this option! This is clearly a last resort.

First, these assets are a key component of your retirement nest egg. You will need them a lot more then than now. Remember, keeping the money invested will allow for growth. A $30,000 balance today can grow tax-deferred to more than $96,000 in 20 years, say, at a 6% annualized growth rate. And, that’s without making a single additional contribution.

Second, if you take the money now, the entire distribution will be subject to federal and state income taxes at ordinary rates. Twenty percent is required to be withheld by your previous employer for federal taxes. Additionally, if you are under the age of 59-1/2, distributions generally are subject to a 10% early-withdrawal penalty. (There is no penalty for distributions made to an employee who attained the age of 55 before leaving the company.) Up to 50% of the plan’s value can be eaten up by taxes and penalty.

Leave the Money where it is: If your previous plan offers some unique investment s, a full array of investment choices and/or low internal fund and plan management fees, you may want to leave the plan alone.

For example, the Kodak Savings and Investment Plan (SIP) includes a Fixed Income Fund that is currently returning 6.3%. Many Kodak retirees and former employees find this option to be attractive and have chosen to keep their SIP plans intact. Many other employers’ plans include a similar type of guaranteed-return investment in the 3%-5% range, a low-risk alternative to money market and bond funds. These sorts of choices are less commonly available in an IRA.

Taxable distributions are available without penalty, subject to the age restrictions mentioned above.

Move the Money to a New Employer’s Plan: If your new plan offers investment choices and/or fees that are superior to your previous plan, it may make sense to transfer and consolidate your old 401(k) assets into the new plan. On the other hand, you will lose some flexibility since you will not have access to the funds, other than through a loan, while you are working for the new employer

Roll the Money over to a Traditional IRA: This can be an attractive option for many reasons.

First, with the exception of losing access to an attractive employer-specific investment option, IRAs typically offer a much bigger universe of investment choices than 401(k) plans. It all depends on the IRA administrator.

Second, estate planning options are greater with IRAs. For example, most 401(k) plans require lump sum distributions to non-spouse beneficiaries. Income taxes on such distributions become immediately payable. With an IRA, one can name non-spouse individuals as primary or secondary beneficiaries, allowing them to stretch the IRA on a tax-deferred basis over their lifetimes.

On the downside, IRAs do not allow (with a few exceptions) early withdrawals.

Caution: Be sure to roll the money over directly to the IRA custodian; do not have the check made payable to yourself. If you do, your check will reflect the mandatory 20% withholding, and you will have to make up the additional 20% yourself. If you don’t, the 20% will be considered a taxable distribution and may be subject to the early-withdrawal penalty. Also, you have only 60 days in which to complete the rollover, after which it is presumed that you took a full distribution.

This summary covers only a few of the issues needing consideration. Be sure to consult with a trusted financial planner before making a change. What’s right for you depends on your unique personal circumstances. The consequences of making a wrong choice can be disastrous.

WSG Team