What Should You Do With Your 401(k) When You Get Laid Off?

When you get laid off, there are many things you need to do, including deciding what to do with your 401(k). You have the choice of leaving the 401(k) funds in your current plan, cashing out of the plan, or rolling the funds over into another qualified retirement account. Your employer will likely give you a packet with all of the necessary information to properly manage your options.

First, find out if you are fully vested. You are always entitled to the money you contributed to the plan, but how much of the employer’s matching contributions you’re entitled to depends on your tenure. If you worked there for a few years, chances are that you’re 100% vested.  Once you know your vesting position, you can explore your options.

3 Things You Can Do with Your 401(k)

1. Leave the Money in Your Old 401(k) Account

This sounds simple, but unless your old plan is extraordinary it’s probably best not to use this option.

  • First, your former employer probably doesn’t want to deal with the hassles and expenses of administering your account, and may pass the expenses on to you resulting in more fees that can erode your real returns.
  • Second, you may find it more difficult to get help when you need it.
  • Third, you will not be able to borrow against your 401(k) balances. This is not necessarily a bad thing, but it does leave you with less flexibility (here’s an article that discusses why borrowing from a 401k is bad).
  • Lastly, this will be one additional account that you’ll have to track and manage. And you won’t even be able to make new contributions to the account to make its management worthwhile.

Also note that if your balance is below certain threshold and you do nothing, your employer may close your account and send you a check. This will put you in a situation similar to the Cashing Out option below.  Try to avoid this, since it will give you much less time to react.

2. Cashing Out

If you cash out without designating a qualified retirement account, such as a 401(k) or an IRA, the employer is required to withhold and send 20% of the money to the IRS. If you do not deposit the remainder into a qualified retirement account within 60 days, you will have to pay taxes, and a 10% early withdrawal penalty if you are under age 59½.

To avoid these taxes and penalties, you have 60 days to deposit the money into a qualified retirement plan, but you will have to come up with the 20% withheld from your own funds to make your old balance whole again. You can recover the withheld amount when you file your tax return.

3. Rolling the Money Over into a Qualified Retirement Account

For many employees, this is the best option when changing jobs. There are two ways to roll over your 401k: direct and indirect.

  • If you do a direct rollover (also known as a trustee-to-trustee transfer), there are no taxes, withholding, or penalties. A check is sent directly from your current 401(k) plan to the designated retirement account, whether it’s your new employer’s 401(k) plan or your IRA. Remember that the option of rolling over to another 401(k) may not be available, unless you find another job right away. You may need to open an IRA to complete the rollover.
  • If you do an indirect rollover, a check will come to you, minus the 20% required withholding that is sent to the IRS. For example, if your balance is $100,000, your employer will send you $80,000.  To complete the rollover, you have to send a $100,000 check within 60 days to your new retirement account custodian to match the exact original amount. Any amount under $100,000 deposited into your new retirement account will result in taxes and a 10% early withdrawal penalty if you are under age 59½. The extra $20,000 that the IRS is holding will be returned to you when you file your tax return.


Out of the above options, I recommend the direct rollover into an IRA.  When done properly, you avoid taxes and penalties, and you don’t have to come up with the 20% difference as per the indirect option. On top of that, if you roll the money into an IRA account you will enjoy a much wider variety of investment options that may better help you achieve your asset allocation objectives and financial goals.

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About the Author

By , on Nov 13, 2011
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (87 Comments)

  1. Chris says:

    I am a few months from being vested in my company in the oilfield and there has been talk of being laid off, my question is do they have to vest me or am i just going to loose out on my money I have put in?

  2. damen says:

    I was laid off of my last job on june 8,2015.

    I wrote a letter to my Human Resources asking that i need my 401k information and i never got a letter back. Then today i emailed her asking again as to how much is on my 401k and where they were putting that money and i been requesting this info. What else i can do or who can help me for them to give me what is mine, I’m also handicap, laid me off, paid my insurance till end of june when i was in hold for a total hip replacement for july and they all new i was due for surgery, neither the had paid me all my earned PTO I just was awarded on may. Im despair and dont know where to get advice or who can help. Please advice.

  3. nichelle says:

    I was terminated from my job so I took the money from my 401k I had to use some for bills and I rolled over the rest to a roth some of my 401k funds were taxed and pretaxed but now its time for me to file taxes and it seems as if i’m being penalized again. Is that correct? Is there something I can do so I won’t owe back so much It seems as if they took an amount when i received it and now they are saying I owe something else. WHY?? this is my first time ever having to pay the IRS and I would like it if I did not owe a cent.

    • Pinyo says:

      @Nichelle – Talk to a CPA. If some of your 401k funds were taxed, you should be able to file paperwork to avoid double taxation.

  4. Natalie says:

    OK, this is all very confusing. My employer has notified me that he’s closing his account in a few days on February 1st, 2015 through email.

    Originally, we got laid off in 2010, so I let the account sit and do it’s thing. I do not have another retirement account AT ALL. Does this mean my only option is to cash out (if I don’t have another retirement account) and take all those nasty percentage penalties? This is so unfair.

    Thanks for your help.

    • Natalie says:

      In addition, I was only notified today about my employer closing the account, which is only 6 days before February 1st. I took note we have to act 60 days prior, abs obviously we didn’t get that luxury. What can I do?

  5. Don says:

    If terminated at age 55 or older, penalty free withdrawls can be made from a 401K. That’s an important option that wasn’t addressed.

  6. Pat says:

    My former employer terminated John Hancock 401K program and my 401K assets got rolled over to an IRA with Millennium Trust Company (MTC).

    Per my research, that IRA account is called “Automatic Rollover IRA”. It was established for missing or non-responsive participants who remain in the retirement plan. MTC is a partner with John Hancock.

    However, my former boss and I have been working on rolling over my 401K assets to my existing IRA at Vanguard. My former boss faxed all the rollover request paper works to John Hancock but I think John Hancock (401K) didn’t receive my rollover request and considered me as a non-responsive participant.

    Questions for you,
    1. Is this automatic rollover considered a direct transfer (trustee-to-trustee)? I just don’t want to deal with tax.

    2. Is it advised to have two IRA accounts? I’ll be working abroad for many years starting from this summer. My initial thought was to consolidate all my assets before I leave but if you think there’s an advantage to have more than one IRA account, please advise.

    3. Since all my 401K is rollover to this kind of IRA with MTC, I no longer depend on my former firm, correct?

    4. Do you happen to know if I can rollover my assets from MTC to Vanguard right away? In general, is there a minimum length of time that I have to keep my money with one financial institution before I can rollover it to another financial institution?

    Please let me know if you have other suggestions or comments.
    Thank you.

  7. Amy McInerney says:

    My employer close the doors and cancelled the 401k contract with John Hancock. We were sent paper work for distribution of our funds. Because some of us still unemployed had no other alternative but to withdrawal the funds. We are being penalized for early withdrawal. Is there any exception when its not the employees “fault” that the early withdrawal is being done? How long can they hold the distribution from the employees? The contract was terminated over 3 months ago, the funds still have not been released? Stating the trustee has changed the distribution date. I feel like there’s something going on that’s just not right or even legal. Any advise is greatly appreciated!

    • Pinyo says:

      @Amy – That is not very nice of your ex-employer. Call John Hancock about the fund and see if it’s possible to rollover the fund into an IRA. If the fund is still undistributed and John Hancock can help you with a trustee-to-trustee transfer, you can avoid taxes and penalty.

  8. luis says:


  9. Maripaz says:

    My husband pass away last month and I found the documents with 401K, his last work was on 2002, and the company moved the money into an independent IRA controlled by the state of California, how can I find the IRA’s name? or how can I recover that money? he left my seven years daughter without protection…. please help.

    • Pinyo says:

      @Maripaz, I am sorry about your loss. I would talk to the company and see if they can give you any more information. In either case, you should be the primary beneficiary, and hopefully, your husband (and the comapany that moved your husband’s account) gave the IRA custodian all the pertinent information. If you know who controls the IRA account, you can also try to contact them directly.

  10. Connie says:

    In 2009 after I worked for a small company for 13 years I decided to open up a business of my own. I cashed out my 401K plan that I was fully vested in to do this, and of course I had to pay penalties and taxes. Unfortunately my business did not take off and I closed it. For two years after that I did continue to get notices showing that I had earned some money which my former employer signed the forms sot hat I could get that money. After that I got no notices so I called to check and was told that my former employer had closed my account. Would he have had to notify me that he was doing that? I just received an e mail from him, he says he did not close it. Am I entitled to a copy of anything that he may have signed to do this, and can he re-open this now?

    • Pinyo says:

      @Connie – If there’s still money left in your former 401k, I think you employer would have to consult with you, or at least notify you before closing it. I would try to get documentation and see what’s going on.

  11. Mike says:

    If I get laid off but there is a chance I will be rehired by this same company sometime in the future can I still do a direct rollover into my IRA when laid off.

  12. Bled Dry says:

    I was let go from my company of 22 years last year in May. We were able to do all right for a little while on owed vacation pay and my wifes new job. The job turned out to be a bust and so she returned to part time nursing while finishing her school. I was still playing the unemployment game and ended up losing that battle. I had started going to school in June and the bills were already added up.

    I cashed out my 401k in order to pay off most of our debt.

    I was careful to make sure and withhold an extra 5% of taxes for state and federal just in case. Now my wife is also unemployed and trying to finish up the last months of her masters degree before returning to work.

    Two week ago, we went and had our taxes done. To our complete shock, we owed $15,000 to the IRS. I had thought that I would be getting money back because of withholding extra. I was under the mistaken impression (i guess) that the 10% penalty would have been taken out when the distribution was made. The numbers seemed right at the time since out of $170k I only got $109k. Needless to say the money was better spent paying off high interest credit cards, a vehicle, and other debt, than it was sitting in savings.

    Now I find my family with no income and a $15,000 tax bill that will have to be filed for on April 15th. The only bright side to this is that I will be getting $2,500 back from the state which will keep us afloat for a few more months.

    Any suggestions? Comments? (even admonishments?) 🙁

  13. mguy says:

    I filed for unemployment but it has taken more then a month for them to process and approve.(approx $11,000 in benefits) My 401k just sent me a closed out balance check approx $5,000. Do you know how this will effect my unemployment disbursement claim?

    • Pinyo says:

      @mguy – As far as unemployment benefits go, it’s best if you call the state office and ask.

      As for your 401k, if you don’t need the money, you still have 60 days to deposit it into an IRA and avoid paying taxes and penalty. If you can afford to do that, I highly recommend that you do so.

  14. Pinyo says:

    @Alexis – You can always take your 401k contributions with you, e.g., roll it over to an IRA. But you won’t be able to keep your employer’s 401k match. I doubt you can claim the unvested match as a loss.

    @JReichert – If you’re not 59.5, there is a 10% penalty on top of the taxes. You can report the penaly on Form 1040 or Form 5329.

  15. JReichert says:

    Thanks for the article, but I have an additional question. My former company dissolved late last year and they sent me my 401K contribution this week, to the tune of $156, NO taxes were taken out. I need the money and want to cash the check (I have no interest in opening another fund/account) – what exactly are the penalties I’ll be facing?

    I don’t know anything about this stuff, I’m a pay-with-cash-and-don’t-get-over-your-head kinda gal. I’ve avoided this “grown-up” stuff as much as possible, I didn’t even know I was contributing to a 401K or anything.

    I understand about the 10% for early withdrawl, but no one can tell me what other fees I’ll have to pay, or when I’m paying this stuff (I’m assuming tax time).

    Thank you so much!

  16. alexis snyder says:

    my husband was laid off before his employer contributions to 401k were vested….is this considered a loss for tax purposes?

  17. Pinyo says:

    @Eric – You can talk to your plan administrator. You can roll over the remaining balance in your 401(k) and you have 60 days to pay back the $8,400. If you cannot pay back the $8,400, you will have to pay a 10% early withdrawal penalty (~$840) and taxes (probably about $2,000).

    @Luckyj – That depends on your other income and deducations, the $58,000 will be taxed at your marginal tax rate. If that ends up being more than $13,000 then you’ll have to pay more, or you could potentially get some of that back as well.

    @Mixte – I am sorry about your job loss. The best thing to do is give your state unemployment agency a call.

    @Scott – Have you consider putting your education on hold and find a job to get your finances back in shape? If you feel that withdrawing from your 401(k) is the only option and is willing to pay the taxes and penaty, then give your plan adminstrator a call and they can guide you to the process.

  18. Scott Faulkner says:

    I was laid off about 4 years ago, I have 401k with my previous employer. I borrowed from it one time and was in the process of paying the loan back when I was laid off. I left the 401k where it is. I’m in school full-time. My wife is trying her best to make ends meet until I graduate, but times have become dire for money. We really need the money now. I am to the point now that I don’t care how much taxes I have to pay in penalties. What can I do?

  19. Mixte says:

    So I lost my job few weeks ago and I had a 2500$ 401k account with them. I applied for unemployment (which is still to be determined), can I cash my 401k and get full amount of unemployment per week or is cashing 401k counted as additional income that can be held against my unemployment? or should I just roll it to IRA? please help

  20. Luckyj says:

    I took out $58,000 out of my 401k, taxes they took out was close to $13,000 state and fed. I’m 61 years old. Will I have to pay more taxes again?

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