Magazine

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

By Ellevest Team

So you quit your job. Or maybe you were laid off. Or maybe you were even fired? Whatever happened, you’re moving on. That job is behind you, and your future is looking bright — whether new opportunities are around the corner, or you’re taking time to contemplate your next moves.

Stacks of coins sit on either side of a menu with three choices: Withdraw?, Rollover?, or Do Nothing?. Illustration.

Just one piece of your old job is still up in the air — the 401(k) that came with the job, and all the money you invested in it. What happens to that account now? And what do you need to do about it?

What is a 401(k) again?

Let’s refresh: A 401(k) is a specific type of investing account that lets you put money away for retirement with some sweet tax benefits. There are two main 401(k) types: traditional (aka pre-tax) and Roth.

If you have a typical 401(k), it’s because your employer offered it as a benefit. Any contributions you make to your 401(k) come directly out of your paycheck. (You might also get a 401(k) employer match — meaning your employer contributes money to your 401(k), too.)

What happens to my 401(k) when I leave? Does it follow me?

When you quit your job, you won’t be able to contribute to that particular 401(k) anymore, because it’s tied to your employer. But the money already in the account is still yours, usually, so it can just sit in that account for as long as you want — with a couple of exceptions:

  • First, if you contributed less than $5,000 to that 401(k) while you were with that employer, they can legally tell you, “Closing time! Your money doesn’t have to go home, but it can’t stay here.” (It costs them money to maintain every account, after all.)

  • If you contributed between $1,000 and $5,000, your employer might move your money into an IRA, a move otherwise known as an involuntary cashout.

  • If you contributed less than $1,000, they might just mail you a check for that amount. If that happens, you should deposit it into another retirement account ASAP so that you don’t get hit with a penalty from the IRS (more on that below).

Also relevant: If you had 401(k) matching, be sure to check whether there was a vesting schedule attached. If so, you only get to keep the employer contributions that had fully vested as of your last day. Your employer gets to take back any unvested contributions. If there was no vesting schedule — in other words, if 100% of employer contributions vested immediately — then it’s all yours. (Of course, any money you put in yourself is always yours either way.)

So what should I do with this 401(k) now?

Usually, your 401(k) contributions can stay put in your old account, but does that mean they should? That depends. You’ve got options:

You could withdraw the money

Technically, you’re allowed to withdraw your money from your old 401(k), but unless you’re facing some really dire financial circumstances, we advise against it. Early withdrawal comes with big penalties from the IRS, on top of whatever taxes you’d owe on the money. (This also applies if your old employer mails you a check for the balance of your old 401(k) and you don’t deposit it into another retirement account.) In all, you could end up paying as much as 50% of the balance in your account to pull from it. Yeah … ouch.

You could do nothing

If you contributed more than $5,000, and / or your former employer says you can keep your old 401(k), you aren’t required to do anything. In fact, if that specific account has really low fees, for example, or some other unique investment option(s) that you won’t get with an IRA or the 401(k) at your next job, it might make sense to leave it alone.

Also good to know: If your old 401(k) contains shares of your old company’s stock, or if you’re not sure, check with a tax pro about what to do with those assets — you could be giving up tax benefits if you move them.

You could roll it over into a new or existing retirement account

Then again, you might not want to leave your old 401(k) where it is. It could just be for your own sanity. The more investment accounts you have, the more logins you have to remember, the more tax documents you have to wait for, the more addresses and beneficiaries and email addresses you have to keep up to date.

Also, when you have all your investments in one place, it’s a lot easier for your advisor to (a) help you make sure that your investment portfolio is properly diversified, and (b) forecast whether you’re on track to hit your goals, like we do for you at Ellevest.

If you’re starting a new job that offers a 401(k) and their plan allows it (most do), then you might be able to combine your 401(k)s by rolling over your old one into the new one.* A rollover might be a good choice especially if your new 401(k) has particularly low fees or unique investment options. 

If you aren’t opening a new 401(k), or if you just want more choices about what kinds of things you invest in or the fees you’ll have to pay, then you could roll over your 401(k) into an IRA instead, be it one you already have or a new one altogether. (Yep — we do that at Ellevest.) Here’s an article that lists out the pros and cons (and rules) of rolling over into a new 401(k) vs an IRA.

The good news is, there aren’t really any “wrong” answers. No matter what you do with your old 401(k), the fact that you’re thinking about the options and making a decision means you’re looking out for Future You. And that’s really what this is all about.


Disclosures

Important considerations when deciding to roll over your 401(k) or 403(b):

Planning to work past the age of 72?

Once an individual reaches age 72 (previously 70 ½, for those born before June 30, 1949), the rules for both 401(k) / 403(b) plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution (RMD).

If you continue to work past the age of 72, however, your plan might not require you to make withdrawals from your 401(k) / 403(b) plan until you stop working. That means the funds in your plan can continue to grow tax-deferred until you retire. This is different from an IRA, where you’re required to start making withdrawals starting at age 72, whether you’re working or not.

Filing for bankruptcy?

If you are considering filing for bankruptcy, then funds you have held in a 401(k) or 403(b) plan are generally protected from creditors. Depending on your state of residency, funds in your IRA may not be fully protected from creditors. Please consult with your legal professional for additional guidance as to what may be applicable for your situation.

Comparing important factors when considering a 401(k) or 403(b) rollover:

Fees and Expenses

In general, both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. “Investment-related expenses” may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. (Ellevest does not charge loads or commissions.) “Plan fees” typically include plan administrative fees (ex, recordkeeping, compliance, trustee fees) and fees for services such as access to customer service representatives. In some cases, employers pay for some or all of a plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account set-up, and custodial fees. (Each of the fee types listed here may or may not apply to your portfolio managed by Ellevest; please see your Ellevest Membership Terms and Conditions Agreement and Ellevest Wrap Fee Program Brochure for details.)

Required Minimum Distributions

Once an individual reaches age 72, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 72, however, they generally are not required to make required minimum distributions from their current employer’s plan. This may be advantageous for those who plan to work into their 70s.

Penalty-Free Withdrawals

If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.

© 2019-2022 Ellevest, Inc. All Rights Reserved.

Important considerations when deciding to roll over your 401(k) or 403(b):

Planning to work past the age of 72?

Once an individual reaches age 72 (previously 70 ½, for those born before June 30, 1949), the rules for both 401(k) / 403(b) plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution (RMD).

If you continue to work past the age of 72, however, your plan might not require you to make withdrawals from your 401(k) / 403(b) plan until you stop working. That means the funds in your plan can continue to grow tax-deferred until you retire. This is different from an IRA, where you’re required to start making withdrawals starting at age 72, whether you’re working or not.

Filing for bankruptcy?

If you are considering filing for bankruptcy, then funds you have held in a 401(k) or 403(b) plan are generally protected from creditors. Depending on your state of residency, funds in your IRA may not be fully protected from creditors. Please consult with your legal professional for additional guidance as to what may be applicable for your situation.

Comparing important factors when considering a 401(k) or 403(b) rollover:

Fees and Expenses

In general, both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. “Investment-related expenses” may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. (Ellevest does not charge loads or commissions.) “Plan fees” typically include plan administrative fees (ex, recordkeeping, compliance, trustee fees) and fees for services such as access to customer service representatives. In some cases, employers pay for some or all of a plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account set-up, and custodial fees. (Each of the fee types listed here may or may not apply to your portfolio managed by Ellevest; please see your Ellevest Membership Terms and Conditions Agreement and Ellevest Wrap Fee Program Brochure for details.)

Required Minimum Distributions

Once an individual reaches age 72, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 72, however, they generally are not required to make required minimum distributions from their current employer’s plan. This may be advantageous for those who plan to work into their 70s.

Penalty-Free Withdrawals

If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

As of 8/15/2022,  Ellevest Membership fees can be found here. Other fees as described in Ellevest’s Wrap Fee Program Brochure and the Ellevest Membership Terms and Conditions Agreement will continue to apply.

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Ellevest Team

The Ellevest team is working to help women reach their financial and professional goals.