What Will Happen to My 401(k) If I Quit or Lose My Job?

You have several choices: leave it where it is, take it with you, or cash it out.

Updated by , J.D. · University of Missouri School of Law

You have four basic options for handling your 401(k) when you leave your job, whether you quit, are laid off, or are fired.

Which option you choose will depend on a number of factors, including whether you're in need of money and whether your new job has a 401(k) plan.

What Is a 401(k) Plan and How Does It Work?

A 401(k) plan is a type of retirement vehicle favored by many employers. Employees contribute part of their pre-tax income into the plan, where it is invested. Employees pay no income tax on their contributions or the earnings on the investments until they take money out.

Once an employer sets up a 401(k) plan, employees can defer part of their income into a 401(k) account, before tax. Some employers match all or part of employee contributions; others don't.

There is an annual limit on the amount employees can contribute to a traditional 401(k). For 2024, the limit for employees under the age of 50 is $23,000. Employees who are 50 or older may make larger deferrals, called "catch-up" contributions. For 2024, the limit for older employees is $30,500.

The most popular plans offer employees a range of investment options for their accounts. Neither contributions to the account nor investment earnings are taxable to the employee until the employee begins taking distributions from the plan.

Roth 401(k) Plans

Some 401(k) providers offer a Roth 401(k) option in addition to a traditional 401(k). Under the Roth option, employees make after-tax contributions but withdrawals in retirement are tax-free. Roth plans have the same contribution limits as traditional 401(k) plans.

If your employer offers both a Roth and a traditional 401(k) option, you can contribute to both if desired, but your combined contributions cannot exceed the annual limits described above.

Options for Taking Money Out of a 401(k) Plan

You must pay tax on the money you withdraw from a traditional 401(k) plan. If you wait until you reach the age of 59 and a half, you won't pay a penalty on withdrawals from the plan. If you are at least 55 years old and you withdraw money after you quit, are fired, or are laid off, you also won't pay a penalty. No penalty will be due if you have a qualifying disability or you die (and distributions are made to beneficiaries).

In most other situations, you will have to pay a 10% penalty if you withdraw money from your plan early. This rule is intended to encourage employees to use these plans for their retirement, not for other financial needs that might arise.

Hardship Withdrawals

Employees may take money out of a 401(k) plan if they have an "immediate and heavy" financial need. Most plans limit the amount employees can take for this purpose to the employees' own elective contributions to the plan, not any employer matching funds. Also, employees may not withdraw more than they need to handle the hardship. These hardships will entitle an employee to take this type of withdrawal:

  • medical expenses already incurred by the employee or a family member
  • home buying costs (not include mortgage payments)
  • tuition and related educational expenses for the employee or a family member
  • payments necessary to prevent eviction or foreclosure
  • certain home repair expenses, and
  • funeral expenses.

After taking a hardship withdrawal, an employee won't be allowed to defer any income to the plan for at least six months.

Employees must pay regular income tax on any amounts withdrawn for hardship, and may also have to pay the 10% penalty.

Leave It With Your Former Employer's Plan

As long as you have the minimum amount required (which varies from plan to plan), you can leave your money where it is. Of course, this means you can't make contributions to it any more. And, you'll have to keep track of the plan after you move on: Investment options and fees may change, and you could be taken by surprise.

Many employees find it more convenient to have all their retirement accounts in one place. For that reason, it might makes sense to arrange a rollover.

Roll It Over Into a New 401(k)

If you get a new job that offers a 401(k) plan, you can roll over your existing 401(k) into the new plan. The transfer is not taxable and has the benefit of keeping your retirement monies in a single account.

Roll It Over Into an IRA

If you have an Individual Retirement Account (IRA), you can roll over your 401(k) into it. Many people choose this option to keep their accounts in one place. As with a 401(k), IRA contributions (including rollovers) are tax-deductible, but you pay taxes on withdrawals.

Another option is to roll your 401(k) into a Roth IRA, although you'll have to pay tax on the money when you transfer it. Withdrawals, however, are tax free.

Cash It Out

This is probably the most tempting option, but it comes at a big cost. If you withdraw your money, taxes will be withheld at a 20% rate. Also, unless you're already at least 59 and a half years old, you'll have to pay an additional 10% penalty on top of the taxes.

If you choose to go down this road, contact your HR department or your 401(k) plan provider to arrange the cash-out.

Bottom Line

As you can see, there are pros and cons to each option. The best strategy for you will depend on your financial situation, how much money you have in the account, your age, and other factors.

You should get some expert advice before making a decision, particularly if there's a lot of money at stake.

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