What Are My 401(k) Distribution Options?

Take Control of Your Retirement Savings

If you’re changing jobs or retiring, one of the most important decisions you may face is how to handle the money you’ve worked hard to earn and save in your employer-sponsored retirement plans. When leaving a company, you generally have four options for your 401(k) savings:

Decide which option is right for you:

Leave your retirement savings in your former employer’s retirement plan

With this option, you don’t need to make an immediate decision about where to move your savings, and your money continues its tax-favored growth potential until you choose to withdraw it. Your account will remain subject to your former employer’s plan rules, including investment choices, withdrawal options, and loan availability.

Advantages

  • No immediate action required of you.
  • Investments keep their tax-favored growth potential.
  • The ability to leave your savings in their current investments.
  • Future withdrawals may avoid the 10% IRS early-withdrawal penalty if you separate from service after reaching age 55.
  • Retirement savings typically protected from creditors’ claims.

Keep in mind

  • Option not available to everyone (eligibility determined by former employer).
  • Savings left with various employers can create account maintenance complexities.
  • Former employer’s plan will determine:
    • When and how you access your retirement savings.
    • Which investment options are available to you.
  • Additional contributions not allowed.
  • Required Minimum Distributions (RMDs) must be taken by April 1 following the year you reach age 70 1/2 to avoid IRS penalties.
  • Withdrawals prior to age 59 1/2 may be subject to an IRS 10% early-withdrawal penalty and will be taxed as ordinary income.

If you choose this option, remember to periodically review your investments, carefully track associated paperwork and documents, and take RMDs (once you reach age 70½) from each of your retirement accounts.

Move your retirement savings directly into your new employer’s retirement plan

If you’re joining a new company, moving your retirement savings directly into your new employer’s plan maintains your money’s tax-favored growth potential. This option may be appropriate if you’d like to keep your retirement savings together, and if you’re satisfied with your new plan’s features and investment choices. Check with your new employer to determine if this option is available to you, as some retirement plans don’t allow direct transfers.

Advantages

  • Investments retain tax-favored growth potential.
  • Retirement savings kept in one account.
  • Required Minimum Distributions (RMDs) may be delayed beyond age 70 1/2 if you’re still working.
  • Retirement savings are typically protected from creditors’ claims.

Keep in mind

  • Option not available to everyone (eligibility determined by new employer’s plan).
  • Waiting period for enrolling in new employer’s plan may apply.
  • New employer’s plan will determine:
    • When and how you access your retirement savings.
    • Which investment options are available to you.
    • How your beneficiaries can withdraw their inheritances.
  • Required Minimum Distributions (RMDs) must be taken by April 1 following the year you reach age 70 1/2 to avoid IRS penalties (may not apply if you’re still working).
  • Withdrawals prior to age 59 1/2 may be subject to an IRS 10% early-withdrawal penalty and will be taxed as ordinary income.

Note: If you choose this option, make sure your new employer will accept a transfer from your old plan, and then contact the new plan provider to get the process started. Also, remember to periodically review your investments, carefully track associated paperwork and documents, and take RMDs (once you reach age 70 1/2, except for 5% owners of companies; there are no RMDs from employer retirement plans for those still working there) from each of your retirement accounts.

Move your retirement savings directly into an Individual Retirement Account (IRA)

If you’re changing jobs or retiring, rolling over to an Individual Retirement Account (IRA) may be a way to get more flexibility in how you manage your savings. IRAs are another type of retirement account, which offer many of the same tax advantages as a 401(k). There are two types: Traditional IRAs and Roth IRAs. An IRA lets you decide how you want to manage your investments, whether that’s using an online account with which you can choose investments on your own or working with a professional who can help you choose investments.

Advantages

  • Investments retain tax-favored growth potential.
  • Access to a variety of investment choices, which allows better diversification.
  • Ability to maintain your retirement savings along with your other financial accounts.
  • Certain circumstances allow penalty-free IRA distributions before age 59 1/2.

Keep in mind

  • Transaction and account maintenance fees may apply.
  • Required Minimum Distributions (RMDs) must be taken by April 1 following the year you reach age 70 1/2 to avoid IRS penalties.
  • Withdrawals prior to age 59 1/2 subject to an IRS 10% early-withdrawal penalty and ordinary income taxes unless an exception applies.
  • Creditor protection may not be provided.

Wells Fargo offers IRAs along with a variety of ways to manage your savings. Learn more about our options.

Note: If you choose this option, you’ll want to research the different types of accounts and where you would like to open an IRA, start the process of moving your savings over to your new IRA, periodically review your investments, and take RMDs (once you reach age 70 1/2).

Withdraw your money as cash

While the option of withdrawing all your money at once may sound attractive at first, carefully consider the financial consequences before making such a decision. The money you withdraw will be taxable, and as such, subject to a mandatory 20% federal tax withholding. In addition, the money is also subject to potential early-withdrawal penalties. Before making this choice, use our online early-withdrawal costs calculator.

Advantages

  • Retirement savings immediately available (after tax withholding and potential early-withdrawal penalties).
  • Cash can be used however you wish.

Keep in mind

  • Mandatory 20% federal tax withholding automatically deducted from the taxable amount you withdraw.
  • Mandatory state tax withholding may apply.
  • Investment loses tax-advantaged growth potential.
  • Retirement may be delayed, or the amount you’ll have to live on later may be reduced.
  • Withdrawals prior to age 59 1/2 may be subject to an IRS 10% early-withdrawal penalty and will be taxed as ordinary income.

Note: If you must choose this option, you may want to consider withdrawing only a portion of your savings, while keeping the remainder saved in a tax-favored account, such as an IRA. This can help reduce your tax liability, while growing some of your savings for retirement at the same time.

Taking cash can be costly
Here’s an example of what may be left of a $20,000 balance if you withdraw your money as cash:
Current Balance
$20,000
10% IRS early-withdrawal penalty*
- $2,000
Regular federal income tax
- $5,000
State and local income taxes
- $1,000
Total savings reduced to:
$12,000

*May be assessed if you are under age 59½.

For illustrative purposes only. Assumes a 25% federal tax bracket and 5% state and local tax rate. Taxes may vary. Depending on your tax bracket, the taxes owed at the end of the year may be higher or lower.



It may take a few weeks to receive your final check in the mail once requested. Remember, your final check amount will reflect the 20% automatic withholding for federal taxes and any gains or losses due to market fluctuation. You’ll want to consider how you’ll cover any additional federal taxes due, along with state taxes and the possible 10% IRS early-withdrawal penalty when filing your tax return for the year.

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rolling over

The process of moving your retirement savings from your retirement plan at your previous employer (i.e., 401(k), 403(b), 457 plan, profit-sharing plan, etc.) into an IRA.

Traditional IRAs

These accept pre-tax amounts from conventional types of retirement plans (i.e., 401(k), 403(b), 457 plan, profit-sharing plan, etc.). You can also make annual contributions to these accounts in addition to your retirement plan at work.

Roth IRAs

These accept post-tax amounts from Roth 401(k), Roth 403(b), and Roth 457 plans. You can also make annual contributions to these accounts in addition to your retirement plan at work.