Can I Take Out My Retirement Money If I Quit My Job?

When leaving a job, individuals often consider their employer-sponsored retirement savings. Understanding the available paths for these funds is important for financial planning, as several choices exist for handling retirement money after employment ends, each with its own set of considerations and implications.

Options for Your Retirement Savings

Upon separating from an employer, individuals typically have retirement savings in plans such as a 401(k), 403(b), or 457(b). These plans are designed to help accumulate funds for retirement with tax advantages.

Individuals generally face three primary choices for their retirement savings: withdraw the funds, roll them over into another qualified retirement account, or leave the funds with their previous employer. The decision depends on various factors, including age, financial needs, and future retirement goals. Each option has distinct financial and administrative consequences.

Withdrawing Your Retirement Funds

Withdrawing funds from a retirement account before age 59½ typically incurs significant financial consequences. The withdrawn amount is subject to federal income tax at ordinary income rates. An additional 10% early withdrawal penalty usually applies to the taxable portion of the distribution, unless a specific exception is met. Some states may also impose their own early withdrawal penalties or taxes.

The 10% early withdrawal penalty may be waived in several circumstances, although income taxes still apply. One common exception is the “Rule of 55,” which allows penalty-free withdrawals from a 401(k) or 403(b) if an individual leaves their job in or after the year they turn 55. This rule applies only to the plan of the employer from whom the individual separated. Another exception involves distributions made as part of a series of substantially equal periodic payments (SEPP), calculated using IRS-approved methods, which must continue for at least five years or until age 59½, whichever is later.

Other exceptions to the 10% penalty include withdrawals due to total and permanent disability, certain unreimbursed medical expenses, and distributions made to an alternate payee under a Qualified Domestic Relations Order (QDRO). Withdrawals for qualified higher education expenses or a first-time home purchase (up to $10,000) are also exempt from the penalty, though these exceptions often apply primarily to IRAs rather than employer-sponsored plans.

Rolling Over Your Retirement Funds

Rolling over retirement funds involves transferring assets from one qualified retirement account to another. This strategy maintains tax-deferred growth and avoids immediate taxation and penalties. There are two main methods for rollovers: direct and indirect. A direct rollover is the preferred method, where funds are transferred directly from the former employer’s plan to a new retirement account without the individual taking possession. This avoids tax withholding and ensures the funds remain tax-deferred.

An indirect rollover involves the individual receiving the funds personally, usually via a check. The individual has 60 days from receipt to deposit the full amount into another qualified retirement account to avoid taxes and penalties. If the funds are not rolled over within this 60-day window, the distribution is treated as a taxable withdrawal, potentially incurring income tax and the 10% early withdrawal penalty. For indirect rollovers from employer plans, the plan administrator withholds 20% for federal income tax. To complete the rollover and avoid taxation, the individual must deposit the entire original amount, including the withheld 20%, often by making up the difference from other personal funds.

Funds can be rolled into accounts such as a Traditional IRA, a Roth IRA (which involves a taxable conversion), or a new employer’s qualified plan if permitted. Rolling over funds offers benefits, including continued tax-deferred growth, a wider range of investment options, and consolidation of retirement savings into fewer accounts.

Keeping Funds with Your Previous Employer

Individuals may choose to leave their retirement funds in their former employer’s plan. This option can be suitable if the plan offers low fees, a diverse selection of investment choices, or if the account balance is relatively small. Some employer plans allow former employees to keep funds if the vested balance exceeds a certain threshold, such as $7,000. If the balance is below this amount, the employer might automatically roll the funds into an IRA or cash out the account, depending on the plan’s provisions.

However, leaving funds with a former employer can present disadvantages. Investment options might be limited compared to an IRA, and administrative fees could be higher for former employees. There is also a risk of losing track of the account over time, especially if multiple job changes occur.