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

By Austin Kilham · December 10, 2021 · 3 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

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

There are lots of important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.

401(k) Refresher

A 401(k) plan allows workers to make tax-deferred contributions to an account, which the employer deducts automatically from their paychecks. Some employers also offer matching funds up to a certain amount. Employers may use vesting schedules to determine when employees have access to these contributions.

Employees make contributions to traditional 401(k)s with pre-tax dollars that reduce their taxable income in the year the contributions are made. In 2022, employees can contribute up to $20,500 a year, up from $19,500 in 2021. Employees age 50 and older can make catch-up contributions of $6,500 a year for a total of $27,000.

In general, the more you can save in a 401(k) the better. If you can’t max out your contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match, if they offer one.

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

This depends on the balance of the account. If your 401(k) account has less than $5,000 in it, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer will cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer has 60 days to roll it into another retirement account, such as an IRA, that they help you set up. You may also suggest an account for the rollover.

If you have more than $5,000 in your account, your former employer cannot force you to cash out or make a roll over into another account without your permission. Your funds can usually remain in the account indefinitely.

Next Steps for Your 401(k) After Leaving a Job

As you decide what to do with your funds you have a number of options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.

Withdraw Your 401(k)

You are allowed to cash out some or all of your 401(k), but in most cases this is not the best choice from a personal finance perspective. If you are younger than 59 ½ you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.

If you are age 55 or older, you may be able to draw down your 401(k) penalty free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you are no longer benefiting from tax-advantaged growth, and you’re reducing your future nest egg.

Roll Over Your 401(k) Into a New Account

Your new employer may offer a 401(k). If this is the case, and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.

It’s important to do this as a direct transfer, rather than taking the money out yourself in order to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.

Look for New Investment Options

If you don’t love the investment options or fees in your new 401(k), you may choose instead to roll the funds over into an IRA account. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. If your old 401(k) plan allows you to make a rollover into a Roth IRA, you’ll have to pay taxes on the amount that you convert.

The advantage of rolling funds into an IRA is a wider array of investment options. For example, a 401(k) might offer a handful of mutual funds or target-date funds. Whereas in an IRA, you have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.

The Takeaway

Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could choose to leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may have a negative impact on your long-term financial security.

If you’re considering going the IRA route, a great way to open a new account is on the SoFi Invest brokerage platform. You can use it to open a traditional IRA, a Roth IRA or a taxable brokerage account.

Photo credit: iStock/chengyuzheng

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