What Happens to My 401(k) After Leaving My Job?

by Owen Pearson

When you leave a lob, either by choice or involuntarily, you will likely have a variety of concerns. If you do not have another job, you may wonder how you will make ends meet. If you are leaving to work for another company, you may worry about fitting in, personally and professionally, with your new employer. However, regardless of your situation, you must also consider what you will do with any 401k account you held with the employer you are leaving.

Cashing Out Your 401k

After you leave your job, you will have the option of cashing out your 401k. You can notify the plan administrator of your intention to receive full distribution of applicable funds from your 401k plan. Applicable distributions include amounts you have contributed to the plan and earnings from contributions made by you and your employer. However, you will only be able to keep employer contributions if you were fully vested when you left the company. However, you will have to pay taxes, typically about 20 percent, plus a 10 percent early withdrawal penalty on any amounts you receive if you cash out your 401k.

Rollover to Another 401k Plan

If your new employer offers a 401k plan, you may direct your previous employer's plan administrator to roll over eligible amounts to your new employer's plan. Funds included in a rollover to a new 401k plan are not subject to taxation or penalties, so you will not lose money by choosing this option. However, your new employer may impose a waiting period before you are eligible to participate in that employer's 401k plan. Check with your previous employer's plan administrator to make sure you can leave your money in your current plan until you are eligible for the new plan.

Rollover to an IRA

If you do not have another job, or your new employer does not offer a 401k plan, or you cannot leave funds in your old plan until your new employer's waiting period expires, you may roll your balance over to an Individual Retirement Agreement, or IRA instead. If you move the funds to a traditional IRA account, you will not incur penalties or pay taxes on the rollover amount. However, you cannot rollover 401k funds directly into a Roth IRA -- you must roll it over into a traditional IRA first, and then convert the plan into a Roth IRA.

Considerations

Whether you can leave your money in your previous employer's 401k plan depends on your account balance when you leave the job. If your account balance is less than $1,000, the employer may distribute the funds to you without your consent. The employer may roll over balances between $1,000 and $5,000 to an IRA if you do not tell them what you want to do with the money. If the vested balance is more than $5,000 and you are younger than 65 years of age, your previous employer must give you the option of leaving your money in the 401k plan until retirement. However, if you choose to leave the money in the 401k plan, you will not be able to make additional contributions.

References

Photo Credits

  • Jupiterimages/Comstock/Getty Images