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

When you leave a job, the retirement account does not leave with you and it does not follow you. It sits where it is, under your name, in a plan administered by a company you no longer work for.

Here is what can happen to it, what it costs, and the two rules that catch people.

The four possibilities

Leave it where it is. Usually allowed above a certain balance. The money stays invested; you keep the plan's fee structure and investment menu; you gain another account to keep track of. Plans sometimes change administrators, and letters go to old addresses.

Move it to a new employer's plan, if you have one and it accepts transfers.

Move it to an IRA you control.

Take the cash. This is the expensive one, and it deserves its own paragraph.

What cashing out actually costs

If you take an eligible rollover distribution in cash, the plan is generally required to withhold 20% for federal tax before you see it. That is withholding, not the final bill — the actual tax depends on your year.

If you are under 59½, there is generally an additional 10% early distribution penalty, unless an exception applies.

So a woman who needs $20,000 and cashes out $20,000 does not receive $20,000, and may owe more the following April. In a year when income has stopped, that is a particularly bad surprise.

There is an exception worth knowing by name — sometimes called the rule of 55 — which can apply if you separate from service in or after the year you turn 55, for that employer's plan. Whether it applies to you is a question for a CPA, and it does not work the same way once money has moved to an IRA. Ask before moving anything if you are near that age.

The loan that becomes a deemed distribution

This is the trap, and it is common.

If you have an outstanding 401(k) loan when you leave, it generally does not continue quietly. The unpaid balance is typically offset against your account and treated as a distribution — which means tax, and the penalty if you are under 59½.

There is relief: you generally have until the tax filing deadline for that year, including extensions, to put an equivalent amount into an IRA or another plan and avoid the tax treatment.

That is a real deadline, it is longer than people assume, and almost nobody is told about it at the exit interview. If you left a job with a loan outstanding, this is worth raising with a CPA now rather than discovering in a notice.

The small-balance rule

Plans can move small balances out without your active consent. Under current rules, balances up to a threshold — raised in recent years to $7,000 — can generally be rolled automatically into an IRA chosen by the plan. Very small balances may simply be cashed out.

Which is how people end up with retirement money in an account they never opened, at an institution they never chose, often in something extremely conservative, quietly for years.

If you have ever left a job with a modest balance, go and look for it.

How to find an account you have lost

Start with an old statement, a W-2, or the plan name in old email. Then the former employer's HR or benefits line. There is also a federal Retirement Savings Lost and Found database, and state unclaimed-property offices hold accounts that were cashed out and never collected.

It is worth an hour. People find four-figure and five-figure balances doing exactly this.

What this article deliberately does not do

It does not tell you which of the four to choose. That turns on fees, investment options, your age, your tax year and creditor protection rules that differ by state — and choosing for you would be advice I am not licensed to give.

What it does is make sure the choice is made deliberately, that the loan deadline does not pass unnoticed, and that no account of yours is sitting somewhere you have forgotten.

Common questions

What happens to my 401(k) when I leave a job?

It stays in the plan under your name. You can generally leave it there above a certain balance, move it to a new employer's plan, move it to an IRA, or take it in cash — and the cash option is by far the most expensive. Which of the others suits you depends on fees, investment options, your age and your tax position.

How much tax do I pay if I cash out my 401(k)?

The plan is generally required to withhold 20% for federal tax on an eligible rollover distribution, and if you are under 59½ there is usually an additional 10% early distribution penalty unless an exception applies. The withholding is not the final bill — the actual tax depends on your income for the year.

What happens to my 401(k) loan if I leave my job?

The outstanding balance is typically offset against your account and treated as a distribution, which means tax and possibly a penalty. You generally have until the tax filing deadline for that year, including extensions, to roll an equivalent amount into an IRA or another plan and avoid that treatment.

Can my old employer move my 401(k) without telling me?

Small balances can generally be rolled automatically into an IRA chosen by the plan — the threshold was raised to $7,000 in recent years — and very small balances may be cashed out. This is why people find retirement money at institutions they never chose.

How do I find an old 401(k)?

Start with old statements, W-2s or email for the plan name, then contact the former employer's benefits line. There is also a federal Retirement Savings Lost and Found database, and state unclaimed-property offices hold balances that were cashed out and never collected.

The Account You Left Behind