What Happens to Your 401(k) When You Leave a Job?

What happens to your 401(k) if you quit or switch jobs?

It doesn't matter if you've been fired, a better job came up, you've decided to start your own business, or even transition into more of a caregiver role. As far as your 401(k) is concerned, you'll be relieved to know that your account balance doesn't just disappear, but your options depend on how much you've accumulated from employer contributions as well as your own.

You always get to keep the contributions you've made through paycheck deductions, but your ownership of employer contributions depends on the vesting schedule used. In many cases this is 3-5 years, meaning that you would own 100% of employer contributions to your 401(k) after remaining in your role with your employer for the set time.

Options for managing your 401(k)

It's important to consider your investment options carefully and be wary of any tax implications as you take steps toward achieving your long-term goals. Your 401(k) is a valuable tool in your overall financial planning strategy and you'll want to make smart decisions that will keep your money working for your future. If your 401(k) balance is at least $7,000, there are four main options you can choose from.

Leave It with Your Former Employer

If you want to leave your 401(k) right where it is while you take on a new job, you can still enjoy tax-deferred growth on your money, however, you can't make any additional contributions. If you jump around from job to job, this seemingly straightforward option can get a bit sticky from an administrative perspective and will limit your wealth management and investment options. It's also much easier to lose track of the money if your old employer changes providers.

Roll Over to an Individual Retirement Account (IRA)

Upon parting ways with your old employer, you can opt for a direct rollover of your 401(k) balance into an IRA with a brokerage or provider like PensionBee. There are a few types of IRAs, all of which offer a broader range of investment options and allow you to retain more control over your personal investments than when relying on an employer plan administrator. Plus, you can gauge your investments and make changes based on past performance.

The goal with an IRA is to choose specific investments such as stocks, shares, or mutual funds that will meet your personal finance goals. A traditional IRA, for example, features tax-deductible contributions and your earnings enjoy tax-deferred growth until you decide to withdraw, while in the case of a Roth IRA, your contributions are after-tax but qualified withdrawals can be made tax-free. With a PensionBee IRA rollover, you can invest in various portfolios of Exchange Traded Funds (ETFs) managed by one of the largest investment managers globally.

Transfer to a New Employer’s Plan

Transferring your 401(k) to a new company plan can also be a straightforward process provided that the new plan allows for rollovers. In this scenario, you'd need to request a direct rollover from your old plan and ensure that the funds maintain their tax-deferred status. Consolidation makes things much easier in terms of tracking your investments, and once set up your new employer can begin to make contributions, but there is a caveat. Your investment options are still limited and you could end up paying higher fees as part of your new plan compared to your old plan.

Cash It Out

The tempting option when you quit or switch jobs is to take the lump sum and run, but this could significantly and negatively impact your retirement goals. The Internal Revenue Service (IRS) allows employers to force minimum distributions for balances under $1,000, but you'd be on the hook for paying income tax on the entire amount. You'd also lose out on the potential for tax-deferred growth which would further impact your long-term retirement savings, and if you're under the age of 59^1/2, you could suffer a 10% early withdrawal penalty, too. This is why cashing out your 401(k) is an option generally reserved for extreme financial hardship when you're out of money and out of alternative options.

What if your 401(k) balance is under $7,000?

If Your Balance is Less than $1,000

If you leave your job with a vested 401(k) balance of less than $1,000, your employer may cash you out automatically with a forced minimum distribution. But as mentioned, the amount would be subject to income tax and potentially penalty fees. This is why it's advisable to roll over your balance into an IRA, even when it's under $1,000, so it can be used as part of your long-term investment and financial planning strategy.

If Your Balance is Between $1,000 and $7,000

If you switch jobs with a vested balance somewhere between $1,000 and $7,000, your old employer may automatically roll over the funds into your new employer's plan or into an IRA. You should make sure to review the new plan's options and associated fees before making a decision, however, as you may decide to either transfer the funds to an IRA yourself or leave them parked in the old plan if the new plan's fees are too high. As with any investment decision, a financial advisor or financial planner can help you make the most informed choices for meeting your retirement and financial goals.

Frequently Asked Questions (FAQs)

How long do you have to move your 401(k) after leaving a job?

If you're planning to cash out your 401(k), you typically have 60 days to do so before penalties and taxes apply. This should be ample time to consult with a financial advisor or make your own informed decision.

Do I lose my 401(k) if I quit my job?

No, you don’t lose your 401(k) when you quit or change jobs. The vested balance remains yours, and you have multiple options for managing it. That said, the amount of employer contributions that you own depends on your vesting schedule.

What happens if you don't rollover your 401(k) from your previous employer?

If you don’t roll it over, it can stay with your former employer’s plan. Parked 401(k) balances can still enjoy tax-deferred growth, but the lack of ability to actively manage or contribute to them could limit your investment choices.

How to get your 401(k) money when you quit?

You can leave it with your former employer, roll it over into an IRA, transfer it to a new employer’s plan, or cash it out. Each option has implications that could help or hinder your retirement goals.

Can you cash out your 401(k)?

Yes, but cashing out should be a last resort during extreme financial distress. Cashing out your 401(k) triggers taxes and early withdrawal penalties, which is why it's always recommended to consider other options first.

What is a rollover?

A rollover is the process of transferring retirement funds from one account, such as your 401(k), to another account, such as a PensionBee IRA, without having to pay taxes or penalties.

What happens to your 401(k) when you change jobs?

When changing jobs, you can leave your 401(k) with your former employer, roll it over into an IRA, transfer it to your new employer’s plan, or cash it out.

Are 401(k)s FDIC-Insured?

No, 401(k)s are not FDIC-insured as they are investment accounts subject to market risks, not bank deposits with a financial institution. The FDIC only protects money in deposit accounts.

What are the tax implications of withdrawing from a 401(k) after leaving a job?

Cash withdrawals from a 401(k) account are taxed as ordinary income, and early withdrawals may be subject to additional penalties. This should only be entertained as a last-resort option.