Changing Jobs or Leaving the Workforce? What Happens to Your 401(k)

Leaving a job—whether you are accepting a new position, retiring, starting a business, or stepping away from the workforce—often comes with a long list of decisions. One that should not be overlooked is what happens to the money in your 401(k).

The good news is that leaving your employer does not mean losing your retirement savings. Your own contributions remain yours. Employer contributions, however, may be subject to a vesting schedule, so it is important to understand exactly how much of your account balance you are entitled to keep.

Once you leave, you will generally have four options for your 401(k). Each has advantages and potential drawbacks, and the best decision will depend on your circumstances.

Option 1: Leave the Money in Your Former Employer’s Plan

Many plans allow former employees to leave their money invested in the existing 401(k). This may be worth considering if the plan offers:

• Low fees
• Strong investment options
• Professional investment management
• Access to institutional investments
• Services or features that would be difficult to replace elsewhere

Leaving the account where it is may also give you more time to evaluate your options without making a rushed decision during a career transition.

There are some possible disadvantages. You will no longer be able to make contributions to the old plan, and managing retirement accounts from multiple employers can become complicated over time. You may also find it easier to overlook the account, its investments, or its beneficiary designations.

Some plans may require former employees with smaller balances to move their money out of the plan. Review the plan’s rules and communications carefully so an automatic distribution or transfer does not catch you by surprise.

Option 2: Move the Money to Your New Employer’s Plan

If you are changing jobs, your new employer’s retirement plan may accept a rollover from your former 401(k).

Combining the accounts can make your retirement savings easier to monitor and manage. It may also allow you to keep more of your retirement assets in an employer-sponsored plan.

Before transferring the money, compare the two plans. Consider:

• Investment choices
• Plan fees and expenses
• Online tools and educational resources
• Withdrawal provisions
• Access to loans
• Professional advice or account-management services

The new plan is not automatically better simply because it belongs to your current employer. Review its features before deciding whether consolidation makes sense.

Option 3: Roll the Money Into an IRA

Another option is to roll the balance into an Individual Retirement Account.

An IRA may offer a broader selection of investments and more control over how the account is managed. It can also provide a convenient place to consolidate retirement accounts from several former employers.

However, rolling a 401(k) into an IRA is not automatically the best choice. Employer plans and IRAs can differ in their fees, investment options, services, withdrawal rules, and legal protections. Moving the money to an IRA may also affect certain tax-planning strategies or access to funds before age 59½.

These differences should be considered before initiating a rollover.

If you decide to move the money, a direct rollover is generally the simplest approach. With a direct rollover, the funds move from the former employer’s plan directly to the new plan or IRA.

If the distribution is paid to you instead, the plan will generally withhold 20% of the taxable amount for federal income taxes. You would then normally have 60 days to deposit the eligible distribution into another retirement account. To roll over the full balance, you may need to replace the amount withheld using other funds.

Because an indirect rollover creates additional deadlines and tax considerations, it is important to understand the process before requesting a check in your own name.

Option 4: Withdraw the Money

You may also have the option to take the account balance as a cash distribution.

Although receiving the money can be appealing—especially during a period without a paycheck—it can have significant consequences. Previously untaxed amounts are generally included in taxable income. If you are under age 59½, an additional 10% tax may also apply unless an exception is available.

A withdrawal also removes money from your retirement plan, meaning those funds will no longer have the opportunity to remain invested and potentially grow for the future.

For that reason, cashing out a 401(k) should generally be evaluated alongside other available sources of funds and the effect the decision may have on long-term retirement goals.

Do Not Overlook an Outstanding 401(k) Loan

If you have borrowed from your 401(k), find out what happens to the loan when your employment ends.

The rules vary by plan. Some plans may allow you to continue making payments, while others may offset the unpaid balance against your account. An unpaid amount could become taxable if it is not handled properly.

In certain circumstances, the loan-offset amount may be eligible for rollover by the applicable tax-filing deadline. Because the rules and deadlines can be complicated, contact the plan administrator and a qualified tax professional before deciding how to proceed.

Understand the Age-55 Exception Before Moving the Account

Employees who separate from service during or after the calendar year in which they reach age 55 may qualify for an exception to the additional 10% early-distribution tax on withdrawals from that employer’s qualified retirement plan.

This exception generally does not apply to an IRA. Consequently, rolling the entire account into an IRA may eliminate an early-access option that could be valuable to someone retiring or leaving work before age 59½.

The exception has specific requirements and does not eliminate regular income taxes on taxable withdrawals. Anyone considering using it should carefully evaluate the rules before moving the account.

Check Your Vesting Status

Your contributions to a 401(k), along with the investment earnings on those contributions, are yours. Employer matching or profit-sharing contributions may vest immediately or gradually over several years.

If you leave before becoming fully vested, you may forfeit some of the employer-funded portion of the account.

Before setting a final employment date, review your vesting schedule. In some cases, remaining employed until a particular date could result in a larger vested benefit. This should not be the only consideration in a career decision, but it is worth understanding before you leave.

Review Your Beneficiary Designations

Changing jobs is also a good time to review the beneficiaries listed on your retirement account.

Beneficiary designations can become outdated after marriage, divorce, the birth of a child, or the death of a family member. These designations generally determine who receives the account at your death, so they should be reviewed as part of any major life or career transition.

If you move the account, make sure new beneficiary designations are completed after the transfer. Do not assume the selections from your former employer’s plan will automatically carry over.

If You Are Leaving the Workforce

Not everyone who leaves a job immediately begins another one. You may be retiring, starting a business, returning to school, managing a health concern, or stepping away to care for a family member.

If you expect a period without workplace retirement contributions, consider how the transition affects your broader financial plan.

Questions to consider include:

• How will the household replace the lost income?
• Will retirement contributions pause completely?
• Can a spouse increase contributions to a workplace plan?
• Could a spousal IRA be appropriate?
• How will health insurance and other employee benefits be replaced?
• When and how will retirement contributions restart?

A temporary pause may be necessary, but it helps to establish a plan for resuming contributions. Without one, a short interruption can quietly become several years of missed retirement savings.

If You Are Starting a New Job

When beginning a new position, review the retirement plan as soon as you become eligible.

Find out:

• When you can begin contributing
• How the employer match works
• Whether employer contributions are subject to vesting
• Whether the plan accepts rollovers
• Whether traditional and Roth contributions are available
• Whether automatic contribution increases are offered

If possible, arrange your new contribution election promptly. Waiting several months to enroll can mean missing both personal contributions and potential employer matching dollars.

Final Thought

There is no single correct place for every former employee’s 401(k). Leaving the account in the former plan, transferring it to a new employer’s plan, rolling it into an IRA, and taking a distribution each have different consequences.

The most important step is to make an informed decision rather than allowing the account to be forgotten or reacting quickly during a stressful transition.

Before moving or withdrawing the money, review the plan’s fees, investments, vesting rules, loan provisions, tax considerations, and available withdrawal options. A thoughtful decision today can help preserve the retirement savings you worked years to build.

Disclosure: The information provided in this blog post is for educational and informational purposes only and should not be construed as financial, tax, or legal advice. Individual circumstances vary, and retirement plan and IRA rules are subject to change. Readers should consult with a qualified financial, tax, or legal professional before making decisions about retirement accounts or implementing the strategies discussed. Past performance is not indicative of future results, and all investments involve risk. Artificial intelligence was used to assist in the writing of this article.

Disclosure: The information provided in this blog post is for educational and informational purposes only and should not be construed as financial advice. While we strive to present accurate and up-to-date information, the financial, tax, and legal landscape is subject to change, and individual circumstances vary. Readers are encouraged to consult with a qualified financial advisor or professional before making any financial decisions or implementing strategies discussed in this post. Our firm does not guarantee the accuracy, completeness, or suitability of the information provided, and we disclaim any liability for any direct or indirect damages arising from the use of this information. Artificial Intelligence was used to assist in the writing of this article. Past performance is not indicative of future results. Any investment involves risk, and individuals should carefully consider their financial situation and risk tolerance before making any investment decisions.