What Happens to Your 401(k) When You Leave Your Job?
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There are many important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.
A 401(k) may be an excellent way for employees to save for retirement, as it allows them to save for retirement on a tax-advantaged basis, and also many employers offer matching contributions. Here are a few things to know about keeping track of your 401(k) accounts as you change jobs and move through your career
Key Points
• When leaving a job, you have options for your 401(k) account, including leaving it with your former employer, rolling it over into a new account, or cashing it out.
• If your 401(k) balance is less than $5,000, your former employer may cash out the funds or roll them into another retirement account.
• If you have more than $5,000 in your 401(k), your former employer cannot force you to cash out or roll over the funds without your permission.
• If you quit or are fired, you may lose employer contributions that are not fully vested.
• It is important to consider the tax implications, penalties, and long-term financial security before making decisions about your 401(k) when leaving a job.
Quick 401(k) Overview
A 401(k) is a type of retirement savings plan many employers offer that allows employees to save and invest with tax advantages. With a 401(k) plan, an employer will automatically deduct workers’ contributions to the account from their paychecks before taxes are taken out. In 2024, employees can contribute up to $23,000 a year in their 401(k)s, up from $22,500 in 2023. Employees age 50 and older can make catch-up contributions of $7,500 a year for a total of $30,500 in 2024 and $30,000 in 2023.
Employees will invest the funds in a 401(k) account in several investment options, depending on what the employer and their 401(k) administrator offer, such as stocks, bonds, mutual funds, and target date funds.
The money in a 401(k) account grows tax-free until the employee withdraws it, typically after reaching age 59 ½. At that point, the employees must pay taxes on the money withdrawn. However, if the employee withdraws money before reaching 59 ½, they will typically have to pay 401(k) withdrawal taxes and penalties.
Some employers also offer matching contributions, which are additional contributions to an employee’s account based on a certain percentage of the employee’s own contributions. Employers may use 401(k) vesting schedules to determine when employees can access these contributions.
The more you can save in a 401(k), the better. If you can’t max out your 401(k) contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match if they offer one.
What Happens to Your 401(k) When You Quit?
When you quit your job, you generally have several options for your 401(k) account. You can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, move it over to an IRA rollover, or cash it out.
However, if your 401(k) account has less than $5,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer will cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer has 60 days to roll it into another retirement account, such as an IRA, that they help you set up. You may also suggest a specific IRA for the rollover.
If you have more than $5,000 in your account, your former employer can only force you to cash out or roll over into another account with your permission. Your funds can usually remain in the account indefinitely.
Also, if you quit your job and you are not fully vested, you forfeit your employer’s contributions to your 401(k). But you do get to keep your vested contributions.
Is There Any Difference if You’re Fired?
If you are fired from your job, your 401(k) account options are similar to those if you quit your job. As noted above, you can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, roll it over into an IRA, or cash it out. The same account limits mentioned above apply as well.
Additionally, if you are fired from your job, you may be eligible for a severance package, which may include a lump sum payment or continuation of benefits, including a 401(k) plan. But these benefits depend on your company and the circumstances surrounding your termination. And, like with quitting your job, you do not get to keep any employer contributions that are not fully vested.
How Long Do You Have to Move Your 401(k)?
If you leave your job, you don’t necessarily have to move your 401(k). Depending on the amount you have in the 401(k), you can usually keep it with your previous employer’s 401(k) administrator.
But if you do choose to roll over your 401(k) and it is an indirect rollover, you typically have 60 days from the date of distribution to roll over your 401(k) account balance into an IRA or another employer’s 401(k) plan. If you fail to roll over the funds within 60 days, the distribution will be subject to taxes and penalties, and if you are under 59 ½ years old, an additional 10% early withdrawal penalty.
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Next Steps for Your 401(k) After Leaving a Job
As you decide what to do with your funds, you have several options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.
Cash Out Your 401(k)
You can cash out some or all of your 401(k), but in most cases, there are better choices than this from a personal finance perspective. As noted above, if you are younger than 59 ½, you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.
If you are age 55 or older, you may be able to draw down your 401(k) penalty-free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you no longer benefit from tax-advantaged growth and reduce your future nest egg.
Roll Over Your 401(k) Into a New Account
Your new employer may offer a 401(k). If this is the case and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.
Doing this as a direct transfer rather than taking the money out yourself is important to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.
Keep Your 401(k) With Your Previous Employer
If you like your previous employer’s 401(k) administrator, its fees, and investment options, you can always keep your 401(k) where it is rather than roll it over to an IRA or your new employer’s 401(k).
However, keeping your 401(k) with your previous employer may make it harder to keep track of your retirement investments because you’ll end up with several accounts. It’s common for people to lose track of old 401(k) accounts.
Moreover, you may end up paying higher fees if you keep your 401(k) with your previous employer. Usually, employers cover 401(k) fees, but if you leave the company, they may shift the cost onto you without you realizing it. High fees may end up eating into your returns, making it harder to save for retirement.
Does Employer Match Stop After You Leave?
Once you leave a job, whether you quit or are fired, you will no longer receive the matching employer contributions.
Recommended: How an Employer 401(k) Match Works
Look for New Investment Options
If you don’t love the investment options or fees in your new 401(k), you may roll the funds over into an IRA account instead. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. You also may be allowed to roll a 401(k) into a Roth IRA, but you’ll have to pay taxes on the amount you convert.
The advantage of rolling funds into an IRA is that it may offer a more comprehensive array of investment options. For example, a 401(k) might offer a handful of mutual or target-date funds. In an IRA, you may have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.
Recommended: What To Invest In Besides Your 401(k)
The Takeaway
Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may harm your long-term financial security because of taxes, penalties, and loss of a tax-advantaged investment account.
If you have an old 401(k) you’d like to roll over to an online IRA, SoFi Invest® can help. With a SoFi Roth or Traditional IRA, investors can investment options, member services, and our robust suite of planning and investment tools. And SoFi makes the 401(k) rollover process seamless and straightforward — with no need to watch the mail for your 401(k) check. There are no rollover fees, and you can complete your 401(k) rollover quickly and easily.
FAQ
How long can a company hold your 401(k) after you leave?
A company can hold onto an employee’s 401(k) account indefinitely after they leave, but they are required to distribute the funds if the employee requests it or if the account balance is less than $5,000.
Can I cash out my 401(k) if I quit my job?
You can cash out your 401(k) if you quit your job. However, experts generally do not advise cashing out a 401(k), as doing so will trigger taxes and penalties on the withdrawn amount. Instead, it is usually better to either leave the funds in the account or roll them over into a new employer’s plan or an IRA.
What happens if I don’t rollover my 401(k)?
If you don’t roll over your 401(k) when you leave a job, the funds will typically remain in the account and be subject to the rules and regulations of the plan. If the account balance is less than $5,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $5,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.
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