What Happens to Your 401(k) When You Quit?

Get HR on the phone because—congrats—you just landed a new job. But then comes the time to talk nitty gritties. Namely, what happens to your 401(k) when you quit? Here’s exactly how to proceed.

For those unfamiliar, a 401(k) is a retirement savings and investing plan offered by your employer. Contributions you make to it are automatically withdrawn from your paycheck and invested on your behalf in a pre-selected batch of funds. (If your company offers a 401(k), these funds are typically selected by you during setup.) This money is available to you at any time, though you pay a hefty fee (typically 10 percent of the total you’ve invested) if you access it before the age of 59 and a half, unless it’s for a qualifying reason (called a hardship withdrawal and usually applies to things like medical bills or money to avoid eviction).

One of the biggest advantages of contributing to a 401(k) is that you get a tax break on any funds you allocate to it. Depending on the plan your company offers, you either pay taxes when you put the money in (this is called a Roth 401(k)) or when you take the money out (this is called a traditional 401(k)). Put simply, the advantage of paying taxes later is that investments grow tax-deferred; pay taxes now and investments grow tax-free. In most cases, it’s not a personal choice, but one that depends on the type of plan your employer offers.

Still, the best perk of contributing to a 401(k) is if your company offers any type of employer match program. For example, say the place you work offers to match 50 cents to every dollar you put in or up to six percent of the total amount you contribute—that’s essentially “free money.”

The cool thing about a 401(k) is that it’s one of the few things you get to take with you when you leave your job. (That and loads of added experience, of course.) No, you can’t contribute to your plan anymore, but every dollar in that account is still yours and, typically, you can leave it there for as long as you want.

There are a few exceptions:

• If you contributed less than $5,000 to your 401(k) during your time at the company, your employer does have the right to tell you that, upon your exit, you need to move your money somewhere else. The reason for this is that it costs them money to maintain your account. (There’s a chance they could also move your money into an IRA on your behalf, something called an involuntary cash-out.)

• If you contributed less than $1,000, your employer may simply pop a check in the mail to you for that exact amount. (Note: If that happens, you’ll need to deposit it into another retirement account immediately so you don’t get assessed a penalty from the IRS, which can add up to 50 percent of the balance in your account just for withdrawing early.

• If you weren’t fully vested before you quit your job—meaning you weren’t an employee for the length of time designated by your employer in order for you to collect the full amount of their company-sponsored match—your employer gets to take back any unvested contributions. You still get every cent you put in yourself, but the balance may go down a bit.

You actually have a few options when it comes to how to handle your 401(k) after you quit your job. First, as stated above, if your balance is over $5,000, you can always leave your money right where it is—sitting in your previous employer’s plan. Still, that’s rarely the best choice, especially since you’ll have to keep track of that investment and where it lives as you move from job to job. Instead, it’s worth considering the options below.

A lot of times, when you start a new job, it comes with the option to bring your old 401(k) plan with you and consolidate with your new plan, without being forced to take a tax hit. The advantages can be big, especially if your new plan has a particularly good investment option. It also keeps everything in one place, which makes your retirement savings easier to manage over time.

The purpose of a rollover IRA is exactly this—to serve as a place where you can consolidate other (and older) retirement accounts. When you move money into a rollover IRA, it is held tax-deferred until you retire. You can also invest it however you want (think: stocks, bonds, mutual funds and more). But if that feels like too much to figure out, you can also choose to put it in a lifecycle fund (you know, the kind where you project a retirement date) and let your cash accrue money from there.

A sudden windfall of cash can feel like a gift, no matter the long-term cost. So, while this is an option, it’s not recommended unless you’re desperate given that you’ll owe federal income tax on the money, plus any state and local taxes the minute you withdraw it. You’ll also likely be assessed a penalty fee for taking it out before you reach retirement age.

Bottom line: When you quit, ask your HR department any questions about what to do next with your 401(k) and make sure to write down any deadlines so you don’t lose track of your cash in the process.