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What to Do with 401(k) When You Quit or Get Fired

What to Do with 401(k) When You Quit or Get Fired

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When you leave your job, whether you quit or 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.

What to Do with 401(k) When You Quit or Get Fired 1

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.

According to the GAO, separating 401(k) plan participants generally have up to four options for their savings.

What to Do with 401(k) When You Quit or Get Fired 2

4 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. Roll the Money Over to Your New Employer’s Plan

This option is not always available and most likely not the best option either. In general, 401(k) Plans has limited investment options and both the plan and investments are quite expensive. Your best bet is to pick option #3 below.

3. Roll the Money Over to an IRA

This is the best option of the four. You’ll be transferring the money into an IRA account, where you can fully control the investments and expenses.

For more details, see How to Rollover 401(k) to IRA.

4. 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.

By the way, this is probably the worst possible thing you can do and you should avoid this at all cost.

Direct vs Indirect Roll Over

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.

Bottom Line

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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Abigail
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You mention a penalty, but to be more specific, you have to pay 10% for early retirement withdrawal. That isn’t a big deal if you’re just starting out and only have a few hundred in the bank. But if you’ve been contributing awhile, that’s a considerable ding, especially if you don’t make that payment immediately after getting the funds. (Money has a way of disappearing and that 10% that you swore you’d leave in the bank may just disappear.) I guess I’m wondering why you suggest rolling into an IRA. If your 401(k) is doing okay in your old employer’s… Read more »

Kyle
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Kyle

I rolled my 401k into a rollover IRA. I’ll probably end up converting it to a ROTH at some point this year.

Everyday Finance
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Everyday Finance

I’ve known several people who have either left their employer or been laid off and they took the cash. Bad idea in my opinion. I think they felt entitled or had an excuse to take money from the account and indulge a bit, but the reality is that they just took a nest egg they spent years building and then during a career transition, depleted a significant portion of it and started over. If they move a few times during a career, that’s a lost opportunity of a few hundred thousand dollars in retirement (present value assuming market moves up… Read more »

Craig
Guest

Very informative post and very useful for me. That happened to me and I am looking into how to directly rollover my previous simple IRA account into a traditional IRA account.

Kenny G
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Kenny G

401k? i get laid off now.. :). luckily, i have more than 401k at this time. thanks for post, it’s really make sense to me at this time.

poor boomer
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poor boomer

What should you do when you’re laid off if you don’t have a 401(k)?

waggore
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waggore

I may have a really stupid question, but I’m very new at this: Does it matter that the economy is in a slump right now — and you may want to wait to roll over your 401K into an IRA until the market perks up a little to make sure to not “lose” your money? And one more question: Am I correct in understanding you can’t roll your 401K over into a Roth IRA because the amount of money is usually too high to do so?

Kelly Johnson
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Kelly Johnson

Beginning Jan 1 2008 you can actually roll your 401k directly to a Roth IRA. Of course this still could get very expensive if you have a lot of money in the 401k. One still may want to rollover to a Traditional IRA and then convert the entire account to a Roth in different years to break up the tax liability.

pez
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pez

I have a question regarding my 401k. I got laid off and i told them i did not want to take the money out and they said ok. But behold they sent me a check of the 401k with federal taxes already taken out. I went through turbo tax and they said i am having to pay an additional 10% of my 401k which is really stupid because i got laid off instead of just taking the money. Does the 10% rule still apply to me? By the way i did not do anything special with the money i just… Read more »

Chelseamomof5
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Chelseamomof5

My husband got laid off and his employer is also terminating the 401k plans. We have 5 children at home and a mortgage of $1500 a month. We only have about 40k left in the 401k. He is in construction, which has come to a screeching halt. I drive a school bus and carry the med. insurance, so I am afraid to leave that security for a job which I would be lowest on the totem pole. I think we should just pull it out and put it where we can get to it for immediate bills. We have a… Read more »

Steve
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Steve

Ok, I know you said there are no dumb questions but how about this one. My wife gets laid off and we asked about leaving the 401K with the former employers plan which she can do but now we are having second thoughts. The loot is fully invested in bonds and mutual funds and my question is. If she was to roll it over into an IRA does the plan company have to sell the funds and give her a cash check or can you just have a transfer of the funds? The reason I ask is because a couple… Read more »

Trenton Dennis
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Trenton Dennis

All this sounds good, but I was laid off in april 09. Haven’t found a job yet and not even gotten an interview. I worked in HR in staffing (go figure). My money runs out in October. Unemployment is only 1900.00 a month. My mortgage is 1913.00 a month. No job in sight. My 401k has defaulted and I am going tomorrow to find a financial analyst. Fortunately I don’t have any credit card debt but have a 590.00 car payment. I am trying to sell the car but the loan is 26k and I can only get 16k for… Read more »

Nathan
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Nathan

Let’s say I get laid off and rollover my 401k into IRA. After I find a new job, can I rollover my IRA into my new job’s 401k?

Thank You

Bryon Severns
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Bryon Severns

To Chelseamomof5: I am running for Congress and I would like to use your story to illustrate the pain felt by millions of Americans who have been laid off and need to spend their savings in 401k. Making you pay 10% penalty in your time of need really is kicking you when you are down. This is an unjust tax and I am trying to fight it, but I need real life stories to convince people to repeal this tax. If we succeed then maybe you can get a refund of that 10% penalty. Please reply to me at [email protected],… Read more »

CanesFan
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CanesFan

Hello- My wife has two (401k)s with two former employers both plans are just sitting there. She is now a stay at home mom and with our family growing we have decided to add 2 bedrooms to our home. My question is… Can we cash out one of the 401k’s for the addition on our home without a penalty? or can I borrow against it even though she is no longer working there? Based on what I’ve read neither of these are an option which leads me to one more question. If I roll over both 401k plans into a… Read more »

Jennifer
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Jennifer

How do a get at my 401k when the company American Staffing Resources doesn’t exist anymore? I paid into it. So I would like to do the roll over into a IRA. Also I was in the U.S Army for 2 years. So I paid in that 401k too. Where do I go please?

geraldine
Guest
geraldine

I want to quit my job . Roll over my 401k. However I have a loan against my 401k about 17,000. I dont have that kind of money lying around to pay it all back what should I do?

Gergana
Guest
Gergana

I enjoyed reading this post and yes, it does not really make sense to leave your money with your previous employeer. I actually work in the industry and one of my concentrations is on helping people figure out what to do with their 401K.

Jennifer, I think that you need to sit down with a professional and have someone take a look at your situation because it is sensitive. Do you have any kind of paperwork from your 401K?

Lisette
Guest
Lisette

I have a question/issue I was hoping you could shed some light upon. I became recently unemployed. I was hoping to find work before my next rent would be due (wishful thinking I know). I haven’t unfortunately found a job and I don’t qualify for unemployment. I opted to take my 401k out (cash out) so I can pay the bills and not be on the street…unfortunately, I’m just now seeing your post about not cashing out and how it will affect you. I haven’t received the check from my former employer yet, as it will take about a week… Read more »

Goldie
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Goldie

It seems like these people who are in desperate times are not being heard. Unless they are close to retirement the should take their money and do the most constructive things with it, like food and shelter. Thousands are out of work and living on the street should not be an option to avoid paying what I agree is absolutely ridiculous amount of tax and penalty on your ow money. When you get back in stride do your homework and choose a good retirement plan and put in more than you normally would. The other thing that I experienced is… Read more »

Karl
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Karl

If I have a loan out againsted my 401K and I’m laid off do I need to repay the loan in full before I can roll over to a IRA, or will it still allow me to repay in intallments? Thanks—-

Constance
Guest
Constance

I was laid off my job and took out a loan from my 401k two years which still have a balance of $18,150 and do not have the money to pay it back. I still have $35,000 in my 401k so not sure on how to handle the $35,000 and the outstanding loan of $18150. Please give me any advise on how I just start.

Justin
Guest
Justin

I am thinking about borrowing money out of my 401K to buy a home. If I were to get laid off first would it be better to just cash out my 401K and pay all penalties and taxes or roll the money into a roth and borrow from that?

Stephanie
Guest
Stephanie

Hello I’m getting layed off in a few months, my husband and I have saved enough in our saving to pay for our mortage and bill for almost 2 years. We owe 102K in student loans, and I wanted to know if it was a good idea to take out whats in my 401K (about 25K) to pay off one of my private loans. The interest on my private student loan is not fixed, so right now its 4.25%, but it use to be at 9%. When I get laid off, we can live off my husband income, but can’t… Read more »

What to Do with 401(k) When You Quit or Get Fired

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