Can I Cash Out My 401(k) When I Leave My Job?

by Kristen Hamlin

You’ve been diligently saving a percentage of your paycheck every week for the past few years, and your 401(k) nest egg is healthy and thriving. The time has come, though, to move on to a new position, and you need to decide what to do with your retirement fund. You have a number of options, including taking a cash disbursement of the money.

Cashing Out

Whenever you leave a job, you can cash out your 401(k) retirement plan. However, doing so comes with some financial consequences. First, your former employer must retain 20 percent of the balance for taxes. In addition, if you take the money before you are 59 1/2 years old, you’ll pay an additional 10 percent penalty on the funds. And of course, by cashing out your 401(k), you miss out on any future investment gains toward your retirement.


Instead of cashing out your 401(k) when you leave your job, you can avoid penalties and taxes by rolling the money into a traditional Individual Retirement Account. Moving your money into an IRA generally gives you more investment options than you had with your 401(k), such as the choice of investing in individual stocks and bonds, and more control over your money. You can also take certain allowable distributions from your IRA for qualified expenses that your employer might now allow under your 401(k), such as education. A direct transfer from your 401(k) to your IRA requires no withholding. If you choose a rollover, meaning you actually receive the check, your employer must withhold 20 percent for taxes, and you must roll the entire 401(k) distribution -- including the withheld amount -- into your new IRA account within 60 days or pay taxes and penalties.

Another 401(k)

When you get a new job, some employer plans allow you to roll the money from your former employer's 401(k) into their 401(k). The advantages of this method are that you keep all of the money you've saved, minus any unvested contributions from your former employer, and all of your money is in one place and earning interest. In addition, if all of your 401(k) money is in one plan, and you need to take a loan or hardship withdrawal from the account for qualified expenses, you're more likely to be able to do so. If you don't immediately have another job with a retirement plan, roll your funds into an IRA.

Leaving Funds Behind

While you can generally choose exactly how you wish to handle your 401(k) plan when you leave a job, if you have less than $1,000 in the account, your employer may automatically cash it out, and anything up to $5,000 may be automatically rolled into an IRA for you. If you have more than $5,000 in the account, you have the option of leaving it with your former employer. Once you leave the company, you will no longer be able to contribute to the plan. In addition, you may be less likely to keep up with the plan and monitor the investments and fees associated with it. Over time, failing to monitor your plan could cost you money. Talk with a financial advisor before making a decision to determine the best course of action for you and your money.

About the Author

Kristen Hamlin began writing professionally in 1998 and is the author of "Graduate! Everything You Need to Succeed After College" (Capital Books). Her work has appeared in publications such as "Young Money," "Scrapbooks, Etc.," and "Creating Keepsakes." She holds a Master of Liberal Studies in Creative Writing.

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