What Happens to Your 401(k) When You Leave a Job

Your Money Does Not Disappear

The first thing to know: the money you contributed to your 401(k) is always yours. Whether you quit, got laid off, or were fired, every dollar you put in belongs to you. What may not fully belong to you is the employer match -- that depends on your vesting schedule, which we covered in a previous article. But your own contributions, plus any investment gains on them, go where you go.

That said, your 401(k) does not automatically follow you to your next job. You have to decide what to do with it, and the decision matters because doing the wrong thing can cost you real money in taxes and penalties.

Your Four Options

Option 1: Leave it where it is. Most plans allow you to keep your money in your former employer's 401(k) as long as your balance is above $7,000. Your money stays invested and continues to grow. You just cannot make new contributions. This is the easiest option in the short term, but it means you now have an orphaned account to track. Over time, if you change jobs several times, you can end up with 401(k) accounts scattered across multiple providers -- and it becomes easy to lose track of them.

Option 2: Roll it into your new employer's 401(k). If your new job offers a 401(k) and the plan accepts rollovers, you can transfer the money directly from your old plan to your new one. This keeps everything in one place and is not a taxable event as long as the transfer is done directly (your old provider sends the money straight to the new one). Before you do this, compare the investment options and fees in both plans. Not all 401(k) plans are created equal.

Option 3: Roll it into an IRA. You can open a traditional IRA at a brokerage or bank and transfer your 401(k) money into it. This gives you more control over your investment choices (IRAs typically offer a much wider range of investments than most 401(k) plans) and the fees are often lower. Again, as long as it is a direct rollover, there are no taxes or penalties. This is a popular option for people who want to consolidate old retirement accounts into one place.

Option 4: Cash it out. You can withdraw the money as cash. This is almost always the most expensive option. If you are under 59-1/2, you will owe income tax on the full amount plus a 10% early withdrawal penalty. On a $20,000 balance, that could mean losing $5,000 to $7,000 or more to taxes and penalties. Your former employer is also required to withhold 20% for taxes before sending you the check, so you would only receive $16,000 upfront. The only scenario where cashing out might make sense is a genuine financial emergency where no other option exists.

The Forgotten 401(k) Problem

According to estimates, there are tens of millions of forgotten 401(k) accounts in the United States -- money that people left behind at former employers and simply lost track of over the years. If you think you might have an old account somewhere, you can search the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com or check with your former employer's HR department. Your state's unclaimed property office is another place to look.

If your old 401(k) balance was under $7,000 and you did not tell your former employer what to do with it, the plan may have automatically rolled it into an IRA or even cashed it out and sent you a check (which you may have missed if you had moved). Tracking this down is worth the effort -- even a small account that has been growing for a decade could be worth more than you expect.

Watch Out for the 60-Day Rule

If your old employer sends you a check made out to you instead of doing a direct transfer to your new account (this is called an indirect rollover), you have exactly 60 days to deposit that money into an IRA or new 401(k). If you miss the deadline, the entire amount is treated as a taxable distribution, and you will owe income tax plus the 10% penalty if you are under 59-1/2. To avoid this entirely, always request a direct rollover where the money goes straight from one institution to the other without passing through your hands.