How Long After I Quit Can I Get My 401k?

A 401(k) plan is an employer-sponsored retirement savings account allowing employees to contribute pre-tax income, often with employer matching. These plans offer tax advantages for retirement savings. After leaving a job, individuals face several choices regarding their accumulated 401(k) assets.

Understanding Your Post-Employment 401(k) Options

When an individual separates from employment, it triggers a “distributable event” for their 401(k) plan, allowing them to take certain actions with their retirement savings. Vesting refers to the percentage of employer contributions that an employee owns. While an employee’s own contributions are always 100% vested, employer contributions may be subject to a vesting schedule. This schedule determines how quickly an employee gains full ownership of the money their employer contributed, often based on years of service.

Common vesting schedules include “cliff vesting,” where an employee becomes 100% vested after a specific period, such as three years, and “graded vesting,” where ownership increases gradually over time, for example, 20% per year over five years. If an employee leaves before being fully vested, they may forfeit the unvested portion of employer contributions. After leaving a job, there are three main paths for a 401(k): rolling it over to another retirement account, taking a cash distribution, or leaving the funds in the former employer’s plan. The specific rules of the 401(k) plan and the account balance can influence which options are available.

Initiating a 401(k) Rollover

Rolling over a 401(k) is a recommended option because it allows the funds to continue growing on a tax-deferred or tax-free basis, avoiding immediate taxes and penalties. There are two primary ways to execute a rollover: a direct rollover or an indirect rollover. A direct rollover involves the funds moving directly from the former employer’s plan administrator to the new retirement account custodian without the employee ever taking possession of the money. This method avoids mandatory tax withholding.

Conversely, an indirect rollover means the 401(k) distribution is paid directly to the employee, who then has 60 days to deposit the funds into another eligible retirement account. For indirect rollovers, the plan administrator is required to withhold 20% of the distribution for federal income taxes. To complete a full indirect rollover and avoid taxes and penalties on the entire amount, the employee must deposit not only the amount received but also an additional amount equal to the 20% that was withheld, using other funds. If the entire amount is not rolled over within the strict 60-day deadline, the unrolled portion is treated as a taxable distribution and may be subject to early withdrawal penalties if the individual is under age 59½.

Common destinations for a 401(k) rollover include a new employer’s 401(k) plan, if permitted by that plan, or an Individual Retirement Account (IRA). Rolling over to a new employer’s plan can consolidate retirement savings, but the new plan’s investment options and fees should be evaluated. Rolling over to an IRA, either a Traditional IRA or a Roth IRA, offers a wider array of investment choices and greater control over the account. A rollover from a traditional 401(k) to a Traditional IRA is a tax-free transfer, maintaining the tax-deferred status. However, rolling a traditional 401(k) into a Roth IRA is considered a Roth conversion, meaning the converted amount is subject to ordinary income tax in the year of conversion, though future qualified withdrawals will be tax-free.

Before initiating a rollover, individuals should gather specific information, including their old 401(k) account number, contact details for the plan administrator, and the account information for the new IRA or employer plan. They will need to obtain the necessary rollover request forms from both the old plan administrator and the new custodian. These forms require details about the old account and the destination account. Once completed, the forms can usually be submitted via mail, online portal, or phone. After submission, processing times for fund transfers can vary, and it is important to monitor the transfer and confirm the funds are received and invested in the new account.

Taking a Cash Distribution from Your 401(k)

Taking a cash distribution from a 401(k) means receiving the funds directly rather than rolling them into another retirement account. This option has significant tax implications. Any amount distributed from a traditional 401(k) is taxed as ordinary income in the year it is received, which can increase an individual’s taxable income.

In addition to ordinary income tax, distributions taken before age 59½ are subject to an additional 10% early withdrawal penalty. Exceptions to this penalty include separation from service in or after age 55, distributions due to total and permanent disability, or payments to a beneficiary after the account owner’s death. Other exceptions may include substantially equal periodic payments (SEPP), distributions for qualified medical expenses, qualified birth or adoption distributions, or distributions for domestic abuse survivors.

State income tax withholding may also apply depending on the individual’s state of residence. Before requesting a distribution, individuals should gather necessary information such as their bank account details for direct deposit and any specific forms required by the plan for distribution requests. These forms can be obtained from the old plan administrator and will require details about the distribution amount and tax withholding preferences.

After completing and submitting the distribution request forms, funds are processed within a few business days to a few weeks. The plan administrator will also issue Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” which reports the gross distribution, taxable amount, and any withheld taxes. This form is essential for accurately reporting the distribution on federal and state income tax returns. Cashing out a 401(k) can diminish retirement savings due to taxes and penalties.

Leaving Your 401(k) with Your Former Employer

One option for a 401(k) after leaving a job is to leave the funds in the former employer’s plan. This is typically possible if the vested account balance exceeds a certain threshold. For smaller balances, employers may have the right to force a distribution or automatically roll over the funds into an IRA chosen by the plan.

Leaving funds in the old plan can offer some benefits, such as familiarity with existing investment options and potentially lower institutional fees. The funds continue to grow on a tax-deferred basis, and no immediate action is required from the former employee. However, there are also potential drawbacks. The former employee can no longer make new contributions to the old plan, and they may have limited control over investment choices. The plan’s fees might also be higher for former employees, or the investment options may change and no longer align with the individual’s strategy.

If the balance is above the forced distribution threshold, no specific action is required from the individual; the funds will remain invested in the plan. If a forced distribution is imminent due to a low balance, the employer is obligated to notify the former employee of their options, such as taking a cash distribution or rolling it over to an IRA. Reviewing the notification is important to avoid unintended tax consequences or automatic cash-outs. Understanding the former plan’s specific rules regarding minimum balances and forced distributions is advisable.