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Losing your job does not automatically cancel or cash out your 401(k). In general, you can leave vested money in your former employer’s plan, roll it into a new employer’s plan that accepts rollovers, move it to an IRA, or withdraw it. The right choice depends on your plan’s terms, your balance, fees, investments, age, and tax situation.
What happens to the account when you leave?
Your 401(k) remains a retirement account after you leave the employer. The money that is vested is yours, but the plan’s rules determine whether you can keep the account there and what happens if you take no action. Review notices from the plan administrator and confirm any deadlines before choosing.
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The IRS describes four general options for a departing worker with a retirement plan: leave the balance in the plan, move it to another eligible retirement account, or take a distribution, including a rollover to another plan or an IRA. See the IRS guidance on termination of employment.
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Leave the money in your former employer’s plan
You may be able to keep the account in the old plan, where it can remain invested according to the plan’s options. Compare its fees, investment choices, and account services with the alternatives. A plan may require action for a small balance, so do not assume the account will remain untouched indefinitely.
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Roll it into a new employer’s plan
A new employer’s 401(k) can keep retirement savings consolidated, but the receiving plan is not required to accept every rollover. Ask the new plan whether it accepts your specific balance and which assets or distribution types it can receive. Compare its fees and investment choices with those of the old plan.
Roll it into an IRA
A direct rollover to an IRA can preserve tax-deferred treatment for eligible untaxed money. Before proceeding, compare fees, investment choices, services, and how moving the money may affect other retirement-planning considerations. Rolling untaxed 401(k) money into a Roth IRA generally makes that amount taxable in the year of the conversion.
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Withdraw the money
Untaxed money paid to you is generally included in taxable income. If you are younger than 59½, an additional 10% federal tax may apply unless an exception covers the distribution. An eligible employer-plan distribution paid to you is generally subject to 20% federal income-tax withholding. Withholding is a prepayment, not a calculation of your final tax bill.
Small balances: what can happen if you do nothing?
Under the rules described by the IRS and Department of Labor, a plan may distribute a former employee’s balance below $5,000 without consent. The treatment depends on the applicable rules and the plan’s procedures.
- More than $1,000 and less than $5,000: If you make no election, the plan administrator may transfer the balance to an IRA in your name.
- $1,000 or less: The plan may pay the balance to you, generally with withholding. You may still be able to roll over the distribution within 60 days.
Read the plan notice and respond promptly. The IRS and Department of Labor explain these small-balance rules and procedures.
How rollovers work—and why the payment method matters
A direct rollover sends eligible money from the old plan to the receiving plan or IRA without paying it to you first. This is usually the simplest way to avoid having an eligible distribution treated as a payment to you. Confirm with both plan administrators that the receiving account can accept the money and that the distribution is eligible for rollover.
If an eligible distribution from an employer plan is paid to you, the general rollover deadline is 60 days after you receive it. The plan generally withholds 20% for federal income tax. To roll over the full gross amount, you may need to replace the withheld portion with money from another source; you can reconcile the withholding on your tax return. Some distributions are not eligible for rollover, so verify the distribution type before making an election. The IRS rollover guidance explains the general rules.
What if you have an outstanding 401(k) loan?
Leaving your job can change the repayment terms for a plan loan. Contact the plan administrator to find out whether payments can continue, when repayment is due, and whether an unpaid amount will be treated as a deemed distribution or offset against your account. The result depends on the plan and circumstances.
A qualifying plan loan offset caused by severance from employment can generally be rolled over by the due date, including extensions, of your federal income-tax return for the tax year in which the offset occurs. If an offset is not rolled over, it may be taxable and could face the additional early-distribution tax unless an exception applies. See the IRS guidance on plan loan offsets.
How to choose where the money should go
There is no universally best destination. Compare the actual options available to you on the factors that affect your account and circumstances:
- Fees and expenses in the former plan, new plan, and IRA.
- Available investments and account services.
- Whether the new employer’s plan accepts your rollover.
- Whether you value consolidation or prefer to keep accounts separate.
- Whether a withdrawal or Roth conversion would create current taxes.
- Plan-specific distribution rules and any loan repayment terms.
Ask the former plan administrator about your balance, vesting, deadlines, fees, and loan terms. Ask the receiving plan whether it accepts the rollover and how to complete a direct transfer. For decisions with significant tax consequences, consult a qualified tax professional familiar with your circumstances.
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