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

Generally, when you quit a job you have 4 options for what to do with your savings: keep it with your previous employer, roll it into an IRA, roll it into a new employer’s plan, or cash it out. This however depends on how much money you have in your account when you and your employer part ways. Do you know what happens to your 401 (K) when you quit a job 

It’s important to note that the balance thresholds that apply are for what’s called your vested balance. This is a combination of your own contributions (which are always vested) and contributions your employer made that cannot be taken back when you leave.

Vesting is a process in which employer contributions to an account gradually become yours. This usually plays out over the years and is used by some companies to retain employees.

For example, your employer might use a vesting formula that says you get ownership of 20% of its contributions to your 401(k) each year up until you own everything outright after 5 years. If you left after 3 years, you’d only be able to take 60% of your employer’s contributions with you.

The other 40% would stay in your employer’s plan. Regardless of when you leave, you’ll be able to take 100% of your own contributions with you.

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

When you quit a job, there are several options regarding what you can do with your 401(k) retirement account. Your choices may depend on your specific financial situation, goals, and preferences. Here are common options:

Keep it With Your Previous Employer

You can choose to leave your 401(k) with your former employer, especially if you are satisfied with the investment options, fees, and overall performance. However, you won’t be able to make additional contributions to this account, and you’ll need to manage it separately from any new employer-sponsored plans.

Roll It Over into a New Employer’s 401(k)

Rolling over your 401(k) into a new employer’s 401(k) plan is a common option when you change jobs. This process, known as a “direct rollover” or “trustee-to-trustee transfer,” involves moving the funds from your old employer’s 401(k) directly into your new employer’s 401(k) plan.  This consolidation can make it easier to manage your retirement savings.

Before initiating the rollover, review the investment options, fees, and other features of your new employer’s 401(k) plan. Ensure that it aligns with your financial goals and preferences.

Roll It Over into an Individual Retirement Account (IRA)

 This option provides more control over your investment choices, and you can continue to contribute to the IRA on your own. There are two main types of IRAs: Traditional IRA and Roth IRA. IRAs typically offer a wider range of investment options compared to employer-sponsored 401(k) plans. You have the flexibility to choose from various stocks, bonds, mutual funds, and other investment vehicles.

With an IRA, you have more control over your investment choices, account management, and beneficiary designations. This can be advantageous for individuals who prefer a more hands-on approach to their retirement savings.

Consider factors such as tax advantages, eligibility, and withdrawal rules when making your selection.

Cash Out the 401(k)

Cashing out your 401(k) is an option when you leave a job, but it’s generally discouraged due to potential tax implications and financial consequences. When you cash out your 401(k), you’re essentially withdrawing the entire balance of the account, which may include both your contributions and any employer contributions or earnings.

Here are some key considerations and consequences of cashing out your 401(k):

The amount you cash out from your 401(k) is considered taxable income in the year of withdrawal. This means you’ll owe federal and, possibly, state income taxes on the distribution. If you are under the age of 59½, you may also be subject to an early withdrawal penalty of 10% on the distribution, unless you qualify for an exception.

In addition to federal taxes, you may owe state income taxes on the distribution, depending on your state of residence.

Consider the Following Before Making a Decision

  • Vesting: Before making any decisions, check the vesting status of your employer’s contributions to your 401(k). If you are not fully vested, you may forfeit some or all of your employer’s contributions if you leave the company.
  • Tax Implications: Consider the tax implications of each option. Withdrawing funds before retirement age may result in taxes and penalties. Rolling over to a traditional IRA or a new 401(k) typically has no immediate tax consequences.
  • Investment Goals: Assess your investment goals, risk tolerance, and preferences when deciding where to move your 401(k) funds. Different options offer varying investment choices and flexibility.
  • Financial Advice: It’s often beneficial to consult with a financial advisor before making a decision. They can help you understand the implications of each option and guide you based on your unique financial situation.

The Bottom Line

If you leave your job, your 401(k) will stay where it is until you decide what you want to do with it. You have several choices including leaving it where it is, rolling it over to another retirement account, or cashing it out. Be sure to look at all the pros and cons of each before deciding what to do with your old 401(k).

The best choice of what to do with your 401k plan after you leave a job depends on your individual circumstances. The key is to make an informed decision that aligns with your retirement goals and financial well-being.