Your 401(k) after leaving a job: choices, vesting and rollover traps

When you leave a job, you generally do not lose the money you contributed to your 401(k). What you can take from employer contributions depends on your vested balance, and you can usually leave the money in the former employer’s plan, move it to a new workplace plan or an IRA, or withdraw it as cash.

The decision can affect costs, investment choices and taxes. If you move the money, a direct rollover sends it from the old plan directly to the receiving plan or IRA provider instead of paying it to you.

Vesting determines how much is yours to take

Your own contributions are 100% vested. Employer match and other employer contributions may follow a vesting schedule, which gives you ownership over time. Unvested employer contributions may be forfeited when you leave.

Check the plan’s record for your vested balance, rather than relying on the account’s headline total. The vested balance determines the amount you can take and may affect the small-account rules that apply after departure.

Four ways to handle an old 401(k)

• Keep it in the old 401(k). If the former plan permits it, the money can stay invested. You cannot make new payroll contributions to that plan or receive future employer matching contributions there. Review its fees, investment menu and any later distribution requirements.
• Roll it into a new employer’s plan. This can put workplace savings in one account if the new plan accepts incoming rollovers. Compare the new plan’s costs and investment choices before transferring.
• Roll it into an IRA. An individual retirement account is not tied to an employer and may offer a wider range of investments. An IRA can be opened regardless of job status, though earned income is required to make new contributions.
• Take a cash distribution. This can create current income taxes and, for many people under age 59½, an additional 10% penalty. It also removes the withdrawn money from future tax-deferred growth potential.

Compare the specific old plan, new plan and IRA on investment choices, fees and expenses, whether consolidating accounts would help, and the withdrawal and distribution rules that apply to each.

Small balances may be moved if you do nothing

Do not assume an old plan will hold a small account indefinitely. A former employer may cash out a vested balance below $1,000 and send a check. For a vested balance from $1,000 to $7,000, a plan may automatically move the account to an IRA in your name if you make no election. At $7,000 or more, former employees generally have the four choices above, subject to the plan’s terms.

Those thresholds apply to the vested amount. Check the plan documents or call the plan administrator to confirm its procedure and timing.

A rollover pitfall: a check payable to you

A direct rollover keeps the transfer between retirement-account providers. If the old 401(k) distributes the money to you instead, it generally withholds 20% for taxes. To complete a rollover of the full distribution, you generally must deposit the entire original amount, including the portion withheld, into a tax-advantaged retirement account within 60 days.

Hypothetical example: Assume an old 401(k) has a $10,000 vested balance and the payment is made to you. With 20% withheld, the check you receive is $8,000. To roll over the full $10,000 within 60 days, you would need to deposit the $8,000 check plus $2,000 from other funds. A direct rollover avoids the withholding process and the 60-day redeposit task.

Before your last day, collect the details

1. Save the account login, plan administrator contact information and plan documents.
2. Confirm your vested balance and the employer contribution vesting schedule.
3. Ask the former plan whether it permits you to leave the account in place and whether it has a small-balance distribution policy.
4. Ask the new employer’s plan whether it accepts incoming rollovers.
5. Compare fees, investment options and distribution rules before selecting an account.
6. If moving the money, request a direct or trustee-to-trustee rollover.
7. Check whether you have an outstanding 401(k) loan. A plan may require repayment soon after you leave; an unpaid balance may be treated as a distribution, with applicable taxes and a potential 10% penalty for someone under 59½.

Keep track of the account, confirm what is vested and understand the transfer method before authorizing a distribution.

Frequently asked questions

Can my former employer force me to move or cash out a small 401(k) balance?

It may be able to. The supplied retirement-plan sources state that a vested balance below $1,000 may be cashed out by check, while a vested balance from $1,000 to $7,000 may be automatically rolled into an IRA if you do not make an election. Check the former plan’s specific rules and process.

How do I roll an old 401(k) into an IRA without triggering withholding?

Request a direct, or trustee-to-trustee, rollover from the old plan to the IRA provider. When the money is paid to you instead, the plan generally withholds 20%, and you generally must redeposit the full original amount within 60 days to complete the rollover.

What happens to unvested employer matching contributions when I quit?

Your own 401(k) contributions are fully vested. Employer contributions may vest over time under the plan’s schedule, so unvested employer amounts may be forfeited when you leave. Confirm the vested balance in your account before deciding what to move.

Sources

• What happens to your 401(k) when you leave a job? - Fidelity Investments — www.fidelity.com
• What happens to your 401(k) if you quit? - Empower — www.empower.com
• What Happens to Your 401(k) When You Quit a Job? - Vanguard — investor.vanguard.com