Cashing out your account is a simple but costly option. You can ask your plan administrator for a check—but your employer will withhold 20 percent of your account balance to prepay the tax you’ll owe. Plus, the IRS will consider your payout an early distribution, meaning you could owe the 10 percent early withdrawal penalty on top of combined federal, state and local taxes. That could total more than 50 percent of your account value.
If your former employer’s plan has provided strong returns with reasonable fees, you might consider leaving your account behind. You don’t give up the right to move your account to your new 401(k) or an IRA at any time. While your money remains in your former employer’s 401(k) plan, you won’t be able to make additional contributions to the account—and some employers might prevent you from changing your asset allocation and/or charge higher fees if you’re not an active employee.
Further, you might not qualify to stay in your old 401(k) account: Your employer has the option of cashing out your account if the balance is less than $1,000 (minus 20 percent withholding).
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