Time is of the essence when deciding what to you with your cashed-out 401(k) plan. If you don't act quickly, you'll be stuck with a permanent distribution, subject to taxes and penalties. However, if less than 60 days have passed since you cashed out, you can roll over the money instead. A rollover to another plan means you don't have to pay taxes or penalties on the 401(k) cash-out.
Pay the Taxes and Penalties
Just because your employer lets you take out the money doesn't mean you don't have to pay taxes and penalties. All 401(k) plan distributions that you don't roll over have to be counted as taxable income when you file your income tax return. In addition, if you're under 59 1/2 when you take the distribution, you have to pay an extra 10 percent penalty tax for taking an early distribution. Only a few exceptions, like a permanent disability that prevents you from working or a court order in a divorce case, can eliminate the penalty.
Roll to Your New Employer's Plan
If you've just moved on to a new job and your old company required that you take the money out when you left, consider moving the money to your new company's retirement plan. You can roll your cashed out 401(k) plan into other employer plans like another 401(k), a 403(b) or a simplified employee pension (SEP). However, your new employer's plan has to accept rollover contributions. Be sure to check with your new plan's administrator to find out if it accepts them.
Roll to a Traditional IRA
If your new plan doesn't accept rollovers, or you don't like the investment options or fees that go along with the plan, you can roll the money into a traditional IRA instead. Moving the money into a traditional IRA allows you to preserve the tax-sheltered growth of your 401(k) money, which means no taxes or penalties until you take the money out. In addition, you can set up a traditional IRA at just about any financial institution, so you can pick one that has low fees and gives you the investment options you want.
Roll to a Roth IRA
You can also move the money to a Roth IRA, which is an after-tax retirement savings account. Since it's an after-tax account, you'll have to pay taxes, but not penalties, on the amount you roll over. The benefit is that when you take qualified distributions, you don't have to pay any taxes. This makes converting your 401(k) cash-out into a Roth IRA ideal if you're expecting to pay a lower rate now than you are in retirement. However, make sure you've got the free cash to pay the extra tax liability.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."