How to Get Your 401(k) After Leaving a Job

Leaving a job presents a transition for your retirement savings. Understanding your 401(k) options is important, as decisions can significantly affect your financial future. This guide explores paths you can take after separating from an employer, including keeping funds with a former employer, rolling them over, or cashing them out.

Keeping Your 401(k) with Your Former Employer

One option for your 401(k) after leaving a job is to leave the funds within your former employer’s plan. This can be a straightforward approach, particularly if you are satisfied with the investment options and fees. Many plans allow individuals to keep their savings in the plan after separation, especially if the balance exceeds a certain threshold, often around $5,000 or $7,000. Some plans now allow balances of $7,000 or more to remain.

A benefit of keeping your 401(k) with a former employer might be access to institutional-priced investment options. However, you will no longer be able to contribute new money to the account, nor will you receive employer matching contributions. Your control over the account may also be limited, and tracking multiple old 401(k) accounts can become complex. If you have lost track of an old 401(k), the National Registry of Unclaimed Retirement Benefits can assist in locating forgotten accounts.

Rolling Over Your 401(k)

Moving your 401(k) funds to a new retirement account, known as a rollover, is a common and often advantageous choice. This process allows your retirement savings to continue growing on a tax-deferred basis without immediate tax consequences. You can generally roll over your 401(k) into a new employer’s 401(k) plan, if that plan accepts rollovers, or into an Individual Retirement Account (IRA). An IRA often provides a broader range of investment choices and more control.

Preparatory Information

A rollover involves transferring funds from your old 401(k) to a new eligible retirement account. There are two primary methods: a direct rollover and an indirect rollover. A direct rollover, also known as a trustee-to-trustee transfer, involves the funds being sent directly from your former plan administrator to the new account custodian. This method is generally simpler and helps avoid tax complications.

An indirect rollover means you receive the funds yourself, typically as a check, and then you are responsible for depositing them into a new retirement account within 60 days to avoid taxes and penalties. If you choose an indirect rollover, your former plan administrator is required to withhold 20% of the distribution for federal income tax. To defer tax on the entire amount, you must deposit the full original distribution, including the 20% withheld, into the new account.

Before initiating a rollover, gather essential information from your former employer’s plan administrator, such as your account number and their contact details. For the receiving account, you will need the account number and the custodian’s information. This preparation ensures a smooth transfer and helps prevent delays.

Procedural Action

Once you have selected your new retirement account and gathered all necessary details, contact your former employer’s plan administrator to begin the rollover process. Request the required distribution forms, which will specify the type of rollover you intend to perform. For a direct rollover, instruct the administrator to make the check payable directly to your new plan’s custodian. This ensures the funds are transferred without passing through your hands, thus avoiding the mandatory 20% tax withholding and the 60-day deadline.

Complete all forms accurately, providing the new account’s name, number, and routing information. Submit them to your former plan administrator for processing. A direct rollover can take approximately 30 days. If you receive a check for an indirect rollover, deposit the full amount into your new retirement account within the 60-day timeframe to prevent it from being considered a taxable distribution and subject to early withdrawal penalties.

Cashing Out Your 401(k)

Cashing out your 401(k) is an option, though it typically comes with significant financial implications. While it provides immediate access to funds, it generally leads to a reduction in your retirement savings and can incur substantial taxes and penalties. This approach is often considered less financially advantageous than other options due to these costs.

Preparatory Information

When you cash out a traditional 401(k), the entire distribution is generally taxed as ordinary income in the year you receive it. This means the amount withdrawn is added to your other income for the year, potentially pushing you into a higher tax bracket. Federal law typically requires a mandatory 20% federal income tax withholding on the distribution amount, which is sent directly to the IRS. This withholding is a prepayment of taxes, but it may not cover your full tax liability.

State income taxes may also apply to the distribution, depending on your state of residence. If you are under age 59½, the distribution will likely be subject to an additional 10% early withdrawal penalty, on top of the regular income tax. This penalty discourages early access to retirement funds.

Procedural Action

To request a cash distribution from your former employer’s 401(k) plan, contact the plan administrator. They will provide the necessary distribution forms to initiate the withdrawal. These forms will ask how you wish to receive the funds, such as a check or direct deposit.

After submitting the forms, the plan administrator will process your request, and funds, minus the mandatory 20% federal withholding, will be disbursed. You will receive IRS Form 1099-R by January 31 of the year following the distribution. This form reports the total distribution and taxes withheld, for use when filing your federal income tax return.

Early Withdrawals and Penalties

Accessing 401(k) funds before age 59½ typically incurs a 10% early withdrawal penalty from the IRS, in addition to being taxed as ordinary income. This penalty applies unless an exception is met, encouraging individuals to retain retirement savings until traditional retirement age.

Several exceptions exist for the 10% early withdrawal penalty. The “Rule of 55” applies if you separate from service with your employer in the year you turn age 55 or later. Under this rule, distributions from that employer’s 401(k) plan are exempt from the 10% penalty, though income taxes still apply. This exception applies only to the plan of the employer from whom you separated, not to plans from previous employers.

Another exception is a series of “Substantially Equal Periodic Payments” (SEPP), or 72(t) distributions. This allows penalty-free withdrawals before age 59½, provided payments are calculated using IRS-approved methods and continue for the longer of five years or until you reach age 59½. Other penalty exceptions include:

• Withdrawals due to total and permanent disability.
• Qualified medical expenses.
• Distributions to a beneficiary after death.
• Qualified reservist distributions.
• Payments to satisfy an IRS tax levy.
• Birth or adoption expenses, up to $5,000 per account.
• As of 2024, survivors of domestic abuse, up to the lesser of 50% of the account balance or $10,000.