Leaving Microsoft with a buyout? US employees have 3 main 401(k) options; what happens if they make one mistake that could trigger taxes?

Microsoft made a recent announcement of a new voluntary exit offer that has brought attention to the financial decisions employees face when leaving the company. The eligible US employees face one important decision that concerns their 401(k), a workplace retirement savings plan.

The latest buyout offer

The technology giant announced a new, time-limited Voluntary Exit offer for eligible employees in participation teams in the US, UK, Canada and India. It covers employees at level 70 and below, with eligibility depending on the employee's organisation and team.

Microsoft said the offer provides financial support and career-planning resources to employees considering leaving the company.

Why departing employees need to consider their 401(k)

A 401(k) is a US workplace retirement savings plan. Leaving Microsoft does not mean employees must immediately withdraw their retirement savings.

Microsoft's official benefits page says departing employees can request a distribution of their vested account balance 30 days after their employment ends.

Fidelity, which administers the distribution process, is expected to send a packet with tax and distribution information approximately two weeks after termination.

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Option one

Employees whose account balances exceed $7,000 can leave their savings in Microsoft's plan after leaving the company.

The funds remain subject to the plan's rules and investment arrangements. Under the published guidance, balances above $7,000 can remain in the plan until the employee takes action or reaches age 73, when required minimum withdrawals begin.

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Option two

Former employees can roll over their distributed balance into an IRA, Roth IRA or another qualified retirement plan.

The tax treatment depends on the destination account and how the transfer is completed. A rollover into a Roth IRA may have different tax consequences from a transfer into a traditional IRA. Employees should distinguish a direct rollover, in which the payment goes to the receiving account's custodian, from a distribution paid directly to them.

Option three

Microsoft permits deporting employees to take a lump-sum cash payout. Taking the money directly can also affect long-term retirement savings because the withdrawn amount is no longer invested in the retirement account.