How Do I Deal With a 401(k) From an Old Job?
A 401(k) from an old job isn’t simply lost in the wind. By “rolling over” your 401(k), you can transfer it to a new provider and continue using the account.
May 9, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
Nationwide, around 52% of employers offer 401(k) plans to their employees. A 401(k) can help employees set aside money for retirement, and comes with valuable tax benefits. Pensions have mostly been replaced by 401(k)s for most companies these days.
But what happens if you switch jobs or are fired? This guide explores what happens to a 401(k) from an old job — and what steps you should take with the account.
What happens to a 401(k) if you leave your job?
Money in your 401(k) account is your money. It won’t disappear or be lost just because you switch jobs. And it doesn’t matter whether you’re laid off, fired, or quit — that money is yours to keep.
By default, 401(k)s stays where they are. These accounts are typically managed by a third-party custodian/broker, who will continue maintaining the account, even if the employer fires you or goes out of business.
However, you’ll want to consider what to do with a 401(k) from your old job.
What to do with a 401(k) from an old job
There are four main ways to deal with a 401(k) from an old job:
Leave it where it is
Roll it over into a 401(k) plan at your new employer
Roll it over into an individual IRA
Cash it out (this will likely cause tax penalties and generally isn’t a good idea)
Each option is discussed in more detail below.
Leave the 401(k) where it is
The simplest option is to leave the account where it is. Your money would stay invested where it is, and you could continue accessing your account through the same platform — but you’d no longer be able to contribute to it.
This isn’t always an option, however. Some employers may force you to transfer the account (as they likely have to pay a small fee to maintain it).
If the account balance is over $5,000, most employers will allow you to keep the plan where it is. If it’s below that amount, they may force you to move the account.
Check with your workplace’s human resources department to learn the specific company policies.
Roll over the 401(k) to a new employer
If you’ve switched to a new employer, check to see if that employer offers a 401(k) plan. If they do, you may be able to complete a 401(k) rollover; essentially transferring the money in an old employer 401(k) into a new 401(k). Be aware of 401(k) fees and how they compare with your new employer.
To roll over a 401(k), you’ll need to work with your new employer’s human resources department. You’ll likely need to submit some paperwork to your previous employer or to the plan administrator who manages the 401(k).
There are two ways to roll over a 401(k) from an old employer:
The administrator of your old 401(k) can transfer the funds directly to the new 401(k). Because the funds are never withdrawn, they won’t be subject to 401(k) withdrawal rules (meaning you won’t owe any taxes now, or any penalties). If this is an option, direct transfers are the simplest and avoid any tax difficulties.
Alternatively, you can transfer indirectly. This involves selling assets in the old account, receiving the money, and then depositing the exact amount of money into the new account. You must redeposit funds within 60 days to avoid tax penalties. Unfortunately, your old employer may be required to withhold some funds for income tax purposes — so this option becomes more complex tax-wise.
Be sure to check with your new employer for details. Some companies require new employees to work for a certain period before they can utilize a 401(k) — and you must have an active 401(k) plan with the new employer to roll over a 401(k) from an old job.
Roll funds into an individual IRA
Another option may be to roll your 401(k) account into an individual IRA account. This could be an option if your new employer doesn’t offer a 401(k) or if you want more flexibility.
You can open an IRA with most stockbrokers online. These accounts are individual and aren’t tied to any employer.
You can roll over a 401(k) to a traditional IRA without penalty as long as you deposit the funds into the new account within 60 days. Keep in mind that there’ll be tax consequences if you try to transfer traditional 401(k) funds into a Roth IRA.
Cash it out
A final option — usually a very bad idea — is to cash out the account. In this case, you’d simply sell the investments, withdraw the funds, and close the account.
However, unless you are of retirement age (59½ or older), it’ll result in a 10% tax penalty — and you’ll have to pay income tax on the entire amount withdrawn.
For example, say you’ve got $50,000 in a 401(k) and you’re 38 years old. If you withdraw the full amount, you’ll be hit with a $5,000 tax penalty (10%), plus you’ll owe income tax on the entire withdrawal.
401(k) employer matching and job loss
One final thing to consider is the effect of leaving your job on 401(k) matching.
When employers add additional funds to an employee’s 401(k) account when that employee contributes, it’s called 401(k) matching. For example, an employer may offer to match 100% of contributions, up to 4% of your salary. If you earn $50,000, that means the employer will match the first $2,000 you put into your 401(k) dollar-for-dollar. However, some employers may require you to stay with the company for a certain period before these funds are “fully vested.” Employee vesting is explained in more detail here.
Ultimately, you’ll need to weigh all your options when deciding what to do with a 401(k) from an old job.
In many cases, the optimal decision is to roll over the funds into a 401(k) with your new employer. If your new employer doesn’t offer this (or you don’t yet have a new job), rolling over to an individual IRA could also work well.
Want to learn more about investing? Check out our detailed investing 101 guide.
Is high-interest debt holding you back from your financial goals? Tally† is an app that helps qualifying applicants consolidate high APR credit card balances to pay it off faster.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.