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

When you quit your job, you can usually leave the money where it is, roll it into a different retirement account or cash it out. Here’s how to decide the best option for you.

Written by Erin Gobler / August 15, 2022

Quick Bites

  • A 401(k) is an employer-sponsored retirement plan that allows workers to defer a portion of their income for retirement.
  • When you leave a job, you’ll have several options for what to do with your 401(k) balance, including leaving where it is, rolling it into a new account and cashing it out.
  • The best option for you depends on several different factors, but it’s usually best to roll it into either a different 401(k) plan or an IRA.

One of the first things many people do when they start a new job is to get their 401(k) plan account set up. Once you’ve done this, you can start contributing toward your retirement, as well as earning any matching contributions your company offers. But what happens to that money when you quit your job? We’ll answer that question in this article, as well as share some of the different options you’ll have.

Inside this article

  1. What's a 401(k)?
  2. What happens when you quit?
  3. Leaving your 401(k)
  4. Rolling over to new employer
  5. Rolling over to an IRA
  6. Cashing out your 401(k)
  7. Timing
  8. FAQ

What's a 401(k)?

A 401(k) is a workplace retirement plan that allows workers to defer a portion of their income to save for retirement.

The tax advantages you’ll get with a 401(k) depend on the type of account you have. If you have a traditional 401(k), you contribute pre-tax money to the plan, meaning your contributions are taken out of your paycheck before taxes, reducing your taxable income for the year. The money grows tax-deferred in the account and will be subject to income taxes during retirement.

A Roth 401(k) is an after-tax account, meaning you contribute with money you’ve already paid income taxes on. As a result, these contributions don’t reduce your taxable income or tax liability for the year. However, once you pay taxes on your contributions, you’ll never pay taxes on the account again. Your money grows tax-free in the accounts and can be taken out tax-free during retirement.[1]

The IRS allows you to contribute up to $20,500 per year to your 401(k) plan, or an additional $6,500 if you’re 50 or older. Employers usually agree to match their employees’ contributions up to a certain percentage of their salary.[2]

What happens to a 401(k) when you quit your job?

After years of contributing your hard-earned money to your 401(k) plan, you’re probably wondering what happens to it when you quit your job. Do you lose all the money you’ve saved and have to start over at your next job?

“When you quit a job, the 401(k) money you've contributed is yours, as well as any vested matching by your former company,” says Matthew Ure, president of Defense Retirement Systems.

Note: Many employers use vesting schedules for their contributions, meaning you must work there a certain number of years to be entitled to them. When you leave a job, only your vested contributions are yours to take with you. Any unvested contributions are returned to the employer.

Because the money in your 401(k) plan is yours, you can choose what to do with it. You’ll have plenty of options, including leaving it with your former employer, moving it to a new employer, rolling it over into an individual retirement account (IRA), or cashing it out altogether.[3]

Leaving your 401(k) with your former employer

Depending on where you work and your 401(k) balance, you may be able to leave the money where it is. Not only will your former employer continue to manage it, but you’ll also be able to invest it using the same menu of investment options available to employees.

However, this option isn’t always available. First, small companies with a smaller administrative budget may require that you take your 401(k) money with you. Additionally, some companies only allow you to leave your 401(k) balance if you have a certain amount of money invested.

Rolling over your 401(k) to a new employer

Another option available is to roll your 401(k) balance into the plan at your new company. This option has several benefits. First, it allows you to keep all of your retirement money in one place. Rather than having to keep track of several accounts and logins, you can just keep track of one.

Another benefit of rolling your 401(k) over to a new employer is if your new employer has a better selection of investments. The investment menu at each company can look a bit different. Some employers offer a large selection of investments for employees to choose from, while others offer just a few options. Additionally, your new employer might have lower fees for their 401(k) plan, meaning you can keep more of your earnings.

Of course, it isn’t a given that your new employer will offer better investments or lower fees. You should explore the features and costs of both 401(k) plans before deciding which is a better fit.

If you decide to roll your 401(k) over to your new company, enlist the help of your new 401(k) plan administrator. They can provide instructions for rolling the balance over. There are generally two options: a direct rollover and an indirect rollover.

  • Direct rollover: This type of rollover is the simplest since it results in your 401(k) balance being moved directly from one to the other. Generally, the administrators for the two plans coordinate, and your old plan will send your 401(k) balance via a check or digital transfer.

  • Indirect rollover: This type of rollover requires a bit more work on your part. Rather than sending the 401(k) balance directly to your new plan administrator, your former 401(k) plan administrator will send a check to you. You’ll have 60 days to deposit the money in your new plan before it will be considered a taxable distribution.[4]

Rolling over your 401(k) to an IRA

Another option, rather than rolling your 401(k) balance over into a new 401(k) account, is to roll it over into an IRA. The process works almost identically to a 401(k) rollover. You can choose to do either a direct or indirect rollover, meaning the money either goes directly to your IRA or you’ll receive a check with the balance to deposit yourself.

Tip

To do a 401(k) rollover to an IRA, you’ll have to either already have an IRA or open one for this purpose. You can open an IRA with almost every popular brokerage firm.

Rolling your 401(k) balance into an IRA has plenty of benefits. First, you’ll have more control over your money since you manage it yourself.

Another benefit is that you’re likely to have more investment options. While some 401(k) plans offer individual stocks and other securities, many only allow you to invest in a small list of mutual funds.[5] An IRA, on the other hand, allows you to invest in a wider variety of mutual funds, as well as exchange-traded funds (ETFs), individual securities and more.

Finally, IRAs generally have lower fees than 401(k) plans. When you have money in a 401(k), you’ll usually have to pay plan fees in addition to those fees for the investments you choose. With an IRA, you’ll only be on the hook for investment fees. And because you have a wider variety of investments to choose from, it’s easier to find low-fee investments, allowing you to keep more of your returns.

Cashing out your 401(k)

A final option–not one that comes highly recommended–is to cash out your 401(k) in the form of a 401(k) withdrawal. When you do this, you’ll first pay income taxes on any traditional contributions you made to the plan. If you made Roth contributions, then the portion of your distribution that is earnings will be subject to income taxes, while the portion that is contributions won’t be.

In addition to the income taxes you’ll pay when you cash out your 401(k), you’ll also pay a 10% early withdrawal penalty if you’re younger than 59½ (or under 55, in certain circumstances). The IRS imposes this penalty on early withdrawals because the money in the plan is specifically intended to be used for retirement.

Finally, not only will you pay income taxes and a penalty when you cash out your 401(k), but you’ll also be robbing yourself of your hard-earned retirement savings. If you decide to start saving for retirement in another 401(k) or an IRA, you’ll essentially be starting from square one.

How long do you have to move your 401(k) after leaving a job?

Generally speaking, there’s no finite amount of time you’ll have to move your 401(k) to another 401(k) or an IRA. You could decide to keep the money in your current 401(k), but then change your mind later and either roll the money over or cash it out.

The only exception might be if you’re leaving a small company that won’t allow you to keep your 401(k) balance there. In that case, you might be required to transfer your money to another account or cash it out within a certain number of days.

But according to Ure, the process is likely to be easier the sooner you roll over the money.

“Of course, if you're going to move it over, it is generally easier to move the money in the immediate aftermath of leaving the job rather than waiting as the HR file will be more readily accessible, and the employee will be better able to answer security questions having to do with when employment began and ended,” Ure says.

FAQ

Will I get my 401(k) money back if I quit my job?

Any money you contributed to your 401(k)—along with any vested employer contributions—is yours to keep when you leave your job.

How do I get my 401(k) money from a previous job?

To access the money from a previous employer’s 401(k) plan, contact the plan administrator. They can help arrange a rollover to a different 401(k) plan or an IRA.

What happens if I don’t roll over my 401(k) from a previous employer?

If you don’t roll over the money in your previous employer’s 401(k), then it will most likely remain in the current plan and continue to grow. However, if your former employer won’t allow you to keep your money in the plan and you don’t make other arrangements, they might automatically initiate a distribution on your behalf.

Article Sources
  1. “401(k) Plan Overview.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-401k-plan-overview.
  2. Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.
  3. “401(k) Rollovers.” FINRA. https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-rollovers.
  4. “Rollovers of Retirement Plan and IRA Distributions.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions.
  5. “Investing in Your 401(k).” FINRA. https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/investing-your-401k.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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