Reasons Why a Person Would Want to Leave His 401(k) With His Former Employer

There a number of reasons why a person would want to leave his or her 401(k) with a former employer, even if that employer terminated the person’s employment. Here a few of the reasons why a person would consider this course of action:

• A person who leaves his or her 401(k) with former employer will not incur the 10% distribution penalty if that person choose to withdraw money before they turn 59 1/2. The rules are bit different if the person transfers his or her 401(k) to an IRA. If a person does this, they will likely pay the 10% distribution penalty if they choose to withdraw from the IRA. Regardless of whether a person chooses an IRA or 401(k), the money withdrawn is treated as ordinary income for federal income tax purposes.
• A person might be able to take advantage of certain tax strategies, “such as the tax benefit for Net Unrealized Appreciation (NUA).”
• In addition to the favorable tax advantages, there might be lower fees associated with leaving a person’s 401(k) with that person’s former employer.
• It might also be more favorable to leave a person’s 401(k) with his or her former employer because it will give a policy holder access to advice on how to manage the 401(k). The costs associated with managing the account outside of an employer’s management is much more expensive than with a person’s employer.
• A person might also want to keep his or her 401(k) with his or her former employer because the employer has a fiduciary duty to maintain the account.
• However, a person might have no choice in the matter if the products within the plan itself cannot be transferred. 
• A person’s 401(k) plan might provide better protection to a policy holder against a person’s creditors.
• A policy holder who choose to leave the 401(k) with a person’s former employer because it might provide access to emergency loans, and give the person who owners the 401(k) the ability to purchase life insurance with the company.
• There are some other reasons why a person might want to keep his or her funds in a 401(k) account. It might provide additional protection from the early distribution penalty in the case of divorce. 

See Robert Powell, 11 Reasons to Leave Your 401(k) Behind, MarketWatch – Wall Street Journal, Aug. 16, 2012.

Special Thanks to Brian J. Cohan for bringing this article to my attention.