Do You Know What Happens To Your 401(K) If You Quit?
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Is that what you’re seeing? You’ve left behind that old job, so you can look forward to the bright future ahead. It is time to move on to new opportunities – whether they are right now, or if you are just about to make your next move.
A piece of your old job hangs out in your peripheral vision – the 401(k) of that company, and the money you invested there. In other words, what happens to your 401k when you quit, and what should you do?
The 401(k) in a Nutshell
To be completely clear, a 401(k) is a type of retirement account that lets you save money for retirement and enjoy some tax advantages. Roth and traditional (aka pre-tax) accounts are the two main types.
Your 401(k) is a result of your employer setting it up and letting you take part in it. A portion of your 401(k) contributions comes directly from your paycheck. (Your employer may also match your 401(k) contribution – meaning they will put some money into the plan on your behalf.)
When You Leave Your Company, What Happens To Your 401(k)?
Your 401(k) is tied to your employer, so you will be unable to contribute to it after quitting your job. In general, though, the money already in the account is still yours, so you can keep it there as long as you like – with a few exceptions.
As a first point, if you contributed less than $5,000 to your 401(k) while you were working for that employer, they may tell you, “You may keep your money, but you can’t take it back.” (It costs them money to administer your account). When you contribute less than $1,000, they are likely to mail you a check for that amount – in which case you should deposit it quickly into another retirement account to avoid an IRS penalty (see below). An involuntary cashout occurs if your employer moves your money into an IRA if your contribution is between $1,000 and $5,000.
In addition, if you had a 401(k) match, you could only keep that money if you fully vested your contributions before you left. Any unvested contributions would be taken back by your employer otherwise. It is always 100% your money if you put it in yourself.
What Is The Next Step For You?
You can usually keep your 401(k) contributions in your old account, but is that a good idea? You do have options, but it depends.
Withdrawing The Money Would Be Possible
The money in your old 401(k) is technically yours to withdraw, but unless you’re in a desperate financial situation, we wouldn’t recommend it. This is because you’d face massive IRS penalties, and you’d likely owe taxes on the money as well – adding up to as much as half of what you have in your account.
Nothing Could be Done
You are not required to do anything if you contributed more than $5,000 or if your former employer lets you keep your old 401(k). In addition, if that account has really low fees for investing, or offers really unique investment options that you wouldn’t be able to get from a new employer’s 401(k) or an IRA, it might be a good choice to keep it.
Also, if your old 401(k) contains stock from your old employer, you may lose tax benefits if you move the shares. Check with a tax professional about exactly what to do with those assets.
