The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 77. Leaving the Money Where It Is

MOST EMPLOYEES take their 401(k) money with them when they leave or retire from their employer. But it's not always the best move. There are some compelling reasons to leave your retirement money with your former employer, at least for the time being. For instance, you may have special investment options that you can't duplicate outside the plan, such as a target-date fund, or your employer may subsidize the plan in some way so that investing costs less for you and your co-workers.

Qualified plans, which include the 401(k) plan, sometimes have legal advantages over individual retirement accounts (IRAs), too. For example, the money in a qualified plan cannot be tapped by your creditors if you declare bankruptcy. (It's also safe in the event of your company's bankruptcy.) But IRA money typically can. Money in qualified plans is also eligible for more favorable tax treatments such as forward averaging. When Congress makes new rules about retirement plans, they typically apply to qualified plans but not to IRAs.

So you shouldn't automatically decide to take the money with you. Do some checking first. Find out what happens if you leave it in the plan. The basic guideline is this: If you have less than $5,000 in your 401(k) account, your employer is permitted to write you a check to cash you out of the plan and end the administrative fees associated with your account. If you have more than $5,000, your employer must permit you to remain in the plan. ...