Transferring 401(k)

A direct trustee to trustee transfer is usually the best choice. Any of the other choices could result in significant tax consequences. The holding trustee is required to withhold 20% of the funds and send them to the IRS, even if Max re-invests the money within 60 days. If he does not have the 20% sent to the IRS, it will become an early distribution and be subject to taxes and penalties. A loan becomes due and payable at termination. If it is not paid, that will also constitute an early withdrawal and create a tax liability. Finally, leaving funds with a former employer can be costly. First, there may be dormant account fees assessed. Second, if the company decides to change providers, he may not have the same options available going forward, and there will be a freeze period that will prevent him from making any transactions for 60 days.