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What Happens to my 401(k) When I Quit my Job?

Laid off employees should discuss their options for what to do with their 401(k) with the human resources or accounting department.
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  • Written By: O. Wallace
  • Edited By: Niki Foster
  • Last Modified Date: 05 November 2014
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Leaving a job due to a lay off, termination, or move can be a stressful process. The decision of what to do with a 401(k) only adds to the stress and confusion. Fortunately, choices are fairly limited as to what a former employee can do with a 401(k) after leaving a job. Most importantly, one should consult with the human resources department, as well as an accountant or financial advisor, or do in-depth research oneself. Be aware of pertinent deadlines for decisions that must be made concerning the future of the 401(k).

The Internal Revenue Service (IRS) requires the administrator of the 401(k) to send an explanation of the options available to the former employee within 30 to 90 days of the decision deadline. During this period, it is important to fully research the options available. Of course, these will depend on whether one has a new job already, whether the new employer offers a qualified retirement plan, and one’s financial situation. If money is tight, and the money in the 401(k) must be accessed to cover living expenses, this is an option, albeit an expensive one.

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If the former employee does nothing about his or her 401(k) with the former employer, the administrator may decide to have the 401(k) distributed directly to the owner of the plan. There is an automatically charged 20% tax, often withheld directly by the administrator. If the owner is younger than the retirement age of 59½, he or she may also be hit with an early withdrawal penalty of 10%. Depending on one’s tax bracket and earnings for the year, there may be additional taxes owed on an early withdrawal.

A second option may be to keep the 401(k) as it is, with the same institution. This may not always be an option for many reasons. For example, it may cost the former employer to keep the account active.

Some employers may choose to charge former employees fees to maintain the 401(k). The former employee’s 401(k) may only be eligible with a minimum balance of 3,500 to 5,000 US dollars (USD). The individual may continue to contribute to the 401(k) on his or her own, without the matching funds of the employer.

Another option is to transfer the 401(k) to a qualified retirement plan at the new employer’s financial institution of choice. Some lose value in the plan during the rollover due to the sell-off of stocks and other holdings. The former institution may have to sell all the assets, because the new institution may not have the same investments, requiring the 401(k) to be transferred in cash. Any qualified retirement plan, such as a Keogh plan or other pension plan, can be a place to transfer an existing 401(k) plan.

A fourth option for a 401(k) is to transfer it, in a process called a “rollover,” into an individual retirement plan (IRA) at the financial institution of one’s choosing. This may give one added freedom in the institution that one chooses, instead of being limited to that of the new employer. This may also be an option if the employee has not found a new job in the period allowed by the administrator of the old 401(k). Be sure to check with the financial institution if future contributions to the rolled over account are tax deductible, because in some cases, they may not be if one is contributing to another investment plan in the same year. With all options that involve transferring funds from an old 401(k) into another qualified retirement plan, be sure to use a “direct rollover,” so that the money never touches one's hands, triggering unwanted taxes.

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Discuss this Article

taylor1904
Post 17

I have been working a temporary job and now I am at the end of it and I have just terminated my 401k plan today (and requested a direct deposit to my bank). The status in my ING profile says "awaiting review." My tax return was absorbed by the IRS and I just want to have an idea of how long it will take for my money to post to my account. I understand the penalty; I know what the amount is going to be minus the tax penalty. I really need the money now, since I am facing unemployment for an indefinite period of time.

anon350176
Post 14

I am 59 1/2 years old and was terminated about two weeks ago. I do not want to make decision this year about 401 k payout or rollover. Can I wait until January 2014 ?

anon318073
Post 13

I left my job because I moved and I've done an early withdrawal from my 401K, and only received my portion which has been greatly taxed. What happens to the company match contribution? I understand so far it's in a separate account, but do I get that too, or do I have to wait until age 59 1/2?

anon315282
Post 12

My last day with my current employer is February 15 and I'm fully vested into my 401K. What is the best option to take out a loan and roll over the remaining balance?

anon314815
Post 11

What happens if my former employer does not send me my balance on my 401k?

anon313552
Post 9

My partner died in January 2013 and I am the beneficiary of his 401k. I've already sent in the death certificate and a w9. How long do I have to wait until I get the money from the 401(k)? When do they cut the check. I know it sounds funny about asking, but the bills are piling up.

ohseabear
Post 8

Once I notify my employer of my choice (after leaving their employ), how long does the employer have to complete the paperwork and transfer the funds to the option of my choice?

anon271060
Post 7

About 45 days have passed since they sent me a notification. I have not yet decided what to do. I don't have a new job yet. The amount is $1,008. What happens if I don't make a decision?

anon174055
Post 6

So if I do nothing, they will just automatically send me a check minus 20 percent?

anon130599
Post 5

You can retire at the age of 55. Review the IRS rules carefully, but you will not have to pay the penalty if you properly set up payments that are in relation to your age upon death.

pgh727
Post 4

I was just terminated from my job and will need to withdrawal my 401k monies to survive. I will be 55 this year and understand that the 10 percent penalty fee is waived. Is this correct?

anon50647
Post 2

I have that same question. I was let go in early October and he's holding my last paycheck along with my retirement money. At the present time i have no income.

anon12888
Post 1

What happens if my former employer does not send me my balance on my 401(k)?

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