What Happens to Your 401(k) When You Leave a Job?
Your 401(k) money doesn't disappear when you leave a job. Your own contributions and their growth are always yours, and so is any employer money that has vested. You then have four main options: leave it where it is, roll it into your new employer's plan, roll it into an IRA, or cash it out. For most people, one of the first three is best. Cashing out is usually the most expensive choice by far.
First, check what's vested
- Your contributions are always 100% vested.
- Employer contributions may follow a vesting schedule, for example 20% per year of service over five years, or all at once after three years. Unvested employer money is forfeited when you leave.
If you're close to a vesting date, it can be worth timing your departure. Your plan's summary or online account shows your vested balance.
Option 1: Leave it in the old plan
Often allowed if your balance is above a certain amount. It's easy and keeps any good, low-cost funds the plan offers. Downsides: another account to track, and you can't add to it. Small balances may not be allowed to stay: plans can automatically move balances up to $7,000 out of the plan, usually into an IRA in your name, and may cash out very small balances.
Option 2: Roll it into your new employer's plan
This keeps everything in one place and can make retirement planning simpler. Check the new plan's investment choices and fees, and whether it accepts roll-ins. Keeping money in a 401(k) rather than an IRA can also matter if you might use the "rule of 55" (see below) or want strong creditor protection.
Option 3: Roll it into an IRA
An IRA usually gives you the widest investment choice and can have very low costs. Traditional 401(k) money goes into a traditional IRA and Roth 401(k) money into a Roth IRA, with no tax due if it's done correctly.
Do a direct rollover where the money goes straight from plan to plan. If the old plan sends a check payable to you instead, it must usually withhold 20% for tax, and you have 60 days to deposit the full amount, including making up the withheld 20% from your own pocket, to avoid tax and penalties.
Option 4: Cash it out (usually a mistake)
If you take the money as cash before age 59½, you'll normally owe income tax on it plus a 10% early withdrawal penalty. On a $20,000 balance in the 22% federal bracket, that's roughly $4,400 of tax and $2,000 of penalty, before any state tax. Around a third of the money can vanish, along with all the growth it would have had until retirement.
There are exceptions to the penalty. One important one is the rule of 55: if you leave your employer in or after the year you turn 55, withdrawals from that employer's 401(k) aren't subject to the 10% penalty (income tax still applies). Rolling the money into an IRA loses this exception.
What about a 401(k) loan?
If you have an outstanding 401(k) loan, leaving your job can make it due. If you can't repay it, the unpaid balance is usually treated as a distribution. You generally have until your tax return deadline for that year (including extensions) to roll over an equivalent amount and avoid tax and penalties. Ask the plan exactly how it handles this before you leave.
A simple decision guide
- New plan is good and low-cost? Roll it in.
- Want more investment choice or lower fees? Direct rollover to an IRA.
- Old plan is excellent and you're happy to leave it? Leaving it is fine.
- Need cash urgently? Look at every other option first, including an emergency fund or a lower-cost loan.
Whichever you choose, keep contributing at your new job, ideally at least enough to get the match. The 401(k) calculator shows how your combined balance could grow, and 401(k) vs IRA explains how the two accounts compare. For personal tax questions, check with a tax professional.
Frequently asked questions
What happens to my 401(k) if I quit my job?
It stays yours. You can usually leave it in the old plan, roll it into your new employer's plan, roll it into an IRA, or cash it out.
Should I cash out my 401(k) when I leave a job?
Usually not. Before age 59½ you'll typically owe income tax plus a 10% penalty, and you lose future tax-advantaged growth.
How do I roll over a 401(k) without paying tax?
Ask for a direct rollover, where the money moves straight from the old plan to the new plan or IRA. That avoids the 20% withholding and any tax.
What is the rule of 55?
If you leave your job in or after the year you turn 55, you can take withdrawals from that employer's 401(k) without the 10% early withdrawal penalty, though income tax still applies.