Once you leave your job -- whether you quit, retire or get fired -- you're free to roll over your 401(k) -- into an IRA. Unlike most early withdrawals from retirement accounts, you don't pay a tax penalty for withdrawing the money for a rollover, as long as you roll over everything. If you don't and you're younger than 59 1/2, the IRS can hit you with a 10 percent tax penalty.
If you don't have an IRA already, you must open one. Then contact the company that manages your 401(k) and ask that the account's balance be transferred to the IRA. If the company cashed out the account when you left and mailed you a check, you have 60 days to deposit the money in a new account. If you wait longer than that, the IRS will require you to pay tax on the withdrawal, even if you eventually complete the rollover.
If your former employer lets you keep the 401(k) open, you don't have to transfer anything. When you start a new job, you also have the option to roll your 401(k) into your new workplace account. Choosing an IRA over other options makes good sense if you think you can do a better job investing the money. IRAs offer a wider range of investment choices than does a workplace plan and may better suit your financial goals.
Moving from a 401(k) to an IRA can cost you a lot more in investment fees. Many companies that offer 401(k) plans are large enough to negotiate discounted fees, lowering the cost below what you pay as an individual investor. Another reason to stick with a 401(k) is lack of time or knowledge to be a hands-on investor. In that case, sticking with your 401(k) may be the smarter move.
If you cash out your 401(k) and make the rollover yourself, the account manager will withhold 20 percent to cover any potential taxes. This isn't necessary if the manager handles the rollover instead. However you make the transfer, you should receive a Form 1099-R in January following the transaction showing how much money you took out of the 401(k) and how much is taxable. If everything went smoothly, none of it should be subject to tax.