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When you quit a job, what happens to the money in your 401(k) retirement account depends in part on how much is in it.
But here’s the big takeaway: That money is yours, and those savings stay with you whenever you quit a job.
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If you have less than $1,000 in your 401(k)
If your 401(k) has less than $1,000 when you quit a job, the IRS allows the plan administrator to automatically withdraw your money and send you a check, minus 20% in taxes, per the IRS.
You can also initiate a rollover: a direct transfer of your money from a 401(k) account to another tax-advantaged retirement account. (More on rollover deadlines and tax implications later.) The easiest way to roll over your money is to contact your 401(k) administrator and have them handle it.
Communicate your preferences quickly, though — if your 401(k) account has a low balance, most companies won’t delay closing the account and cutting you a check, according to CNBC.
If you have between $1,000 and $5,000 in your 401(k)
If your 401(k) has between $1,000 and $5,000 when you quit, your employer may move your money into an individual retirement account, or IRA, according to the IRS.
If you don’t have an IRA, some employers will automatically open an account for you and deposit your funds into the account. If you do have an IRA, you initiate the rollover by contacting your 401(k) administrator.
You can also withdraw your money, but you’ll pay 20% in federal income tax, as well as a 10% early withdrawal penalty (unless you’re at least 59 ½ years old), according to the IRS.
An IRA is a tax-advantaged retirement account that an individual typically sets up, unlike a 401(k) account, which an employer sets up.
If you have at least $5,000 in your 401(k)
If your 401(k) account has at least $5,000 when you quit a job, your employer isn’t allowed to move your money without your consent. What happens next is up to you. There are a few things you can do with your money, according to the investment advisor Vanguard:
Roll over your money into a new retirement account
Leave your money in your old 401(k)
Cash out your 401(k) — and potentially pay a 10% federal penalty tax
Let’s dig into those options.
Rolling your money into a new 401(k) or IRA
What is a rollover?
Reminder: A 401(k) rollover is the process of moving money from your 401(k) account into another retirement account.
So, say you’re leaving your job for a different position, and your new employer offers a 401(k) plan. You can roll over your old 401(k)’s funds into a new 401(k) account, if your new employer allows this, according to the IRS.
Or you can roll over your old 401(k) to an IRA. This type of account typically offers more investment options than a 401(k), says Christopher Manske, a certified financial planner and the president and founder of Manske Wealth Management in Houston.
“In your individual retirement account, you’re going to have a lot more flexibility to tailor the investments to the wide world of what’s available out there,” Manske says.
Whether you roll over your retirement savings into an IRA or new 401(k), moving your money to a single fund can make it easier to manage your money and keep track of your retirement savings.
That’s as opposed to simply keeping your old 401(k) open, which becomes one more account to manage. (We’ll dive into that option in a bit.)
How to roll over funds — and avoid tax missteps
If a rollover sounds like a solid option, contact the administrators of both your old 401(k) and the other retirement account — either your new 401(k) or an IRA. Tell them you’d like to roll over your funds.
They’ll collect information from you and initiate a direct rollover, which means one institution directly transfers funds to another institution, according to Fidelity.
This is as opposed to an indirect rollover, meaning your 401(k) plan administrator sends you a check, and you personally deposit the 401(k) funds into another retirement account. In that case, your plan administrator would likely withhold 20% of your 401(k) funds for taxes.
With this indirect rollover, you then have 60 days to deposit the complete 401(k) account balance — including the amount kept for taxes — into the new account. So to deposit the full amount, you would need to come up with the 20% portion yourself. Then you’d get a refund for that amount come tax time.
If you miss the 60-day deadline, you’d likely get penalized for early withdrawal and have to pay income taxes on the distribution, according to Capitalize, a 401(k) rollover resource.
One last important note: Whether you choose a direct or indirect rollover, if you move money from your old 401(k) account to a Roth IRA — a specific kind of IRA — you’ll have to pay income tax on that transfer, according to the IRS. (This doesn’t apply if you’re rolling over your funds from a Roth 401(k), though.)
Leaving your money in your old 401(k)
Another option? Do nothing.
Your 401(k) account isn’t going to disappear once you quit a job; that money will always be there. But once you leave the job that set up the 401(k) account, you can’t make any more deposits, per Vanguard.
While leaving your 401(k) on autopilot is the simplest option, it may not be in your best interest. Assuming you’ll continue investing in another account or have a new 401(k) at your next employer, it will be harder to track your finances in more places.
And some 401(k) plan providers may charge you fees if you’re no longer an active employee, according to Charles Schwab, the financial services firm.
“I can’t think of any pros of leaving it there,” Manske says. “You’re not really connected formally to that company anymore, so why would you keep your money there? They don’t have a reason to keep you happy.”
Cash out your 401(k) — which is rarely recommended
Yes, you can withdraw cash from your 401(k) whenever you want. But there are significant downsides to this option.
Pulling out money from your 401(k) before retirement can trigger hefty taxes, says Joe Buhrmann, certified financial planner and senior financial planning consultant at Fidelity’s eMoney Advisor.
Any withdrawals from a 401(k) before you reach the age of 59 ½ are considered early withdrawals and are slapped with a 10% penalty tax, per the IRS. That’s in addition to federal income taxes and, depending on where you live, state income taxes.
“Hypothetically, on a $50,000 401(k), you might lose as much as $20,000 to taxes and penalties and be left with $30,000,” Buhrmann says.
If you urgently need cash, that might be a reason to withdraw some money from your 401(k). But doing so should be regarded as a last resort, Manske says.
There are other ways to get money quickly that don’t come with taxes and penalties, such as community loans, gig work, and more.
» LEARN: 19 ways to find fast cash
Buhrmann encourages individuals to not just consider the immediate losses that come with withdrawing your 401(k), but also the long-term earnings they’re missing out on.
“They’re not just having to pay some taxes and pay some penalties,” Manske says.