The 401k plan is the dominate savings and investing account for many in the U.S., with around 54 million people participating as of 2015. (1) As a result, many people wonder what happens to their 401k plan if they quit or leave their job. In the following article we will address this question and provide some links to follow to learn more about your possible options available to you for your 401k when you quit your job.
You may also be interested in 401k pros and cons.
What Happens To My 401k If I Quit?
You have just quit your job. You had been contributing to your employer’s 401k for the entire duration of your employment with that organization and the question is, what happens to your 401k when you quit (or are forced to leave)?
Rest Assured, as The 401k Account Still Belongs To You
The short answer is that nothing of substance happens. Your account is frozen, meaning you can no longer contribute to it. However, that 401k account, as well as most if not all the money in it, is still legally yours and continues to belong to you even after you have left that employer.
The money remains with the investment manager or the custodian of your now former employer’s 401k plan. Nothing has changed regarding ownership of that account or the funds in that account except that you no longer work for that employer.
You are no longer eligible to contribute to that 401k account but whatever funds you had in an account with that employer’s 401k plan are yours to keep.
This is true for all funds you personally may have contributed to your account with your now former employer’s 401k plan. Certain matching contributions made by your employer may not be included in the funds available to you if you have not met your particular plan’s requirements for vesting. However, any contributions that you personally made to that plan will be yours to keep.
Many employers require that you remain with the company for a specific amount of time. For example, your employer may require that for you to be fully vested in the company’s 401k plan you must work at the company for at least 3 years. If you leave before your third year work anniversary, any employer match would remain at the company.
What Happens Next After You Have Stopped Working for That Employer?
When you stop working for an employer, the next question is what will happen to your account with that employer’s 401k plan. You generally have three options in such a scenario.
The first is to simply leave your account with that employer’ 401k plan. Some employers allow you to keep your account with the company’s 401k plan (but without the ability to continue contributing to that account) even if you no longer work for the company. In that scenario, your holdings would remain the same and your funds would stay with the employer until you found them a new home.
Depending on the plan, you may receive a distribution of the proceeds of the amounts in your 401k account once you leave the employer’s service whether you want one or not. Some employers will have certain account minimums below which they will just automatically send you a check if you leave the employer. For example, on lower balances under $5,000, you may receive a check for the balance or roll your 401kbalance over into an IRA.
You may also have the option of rolling your 401k plan into your new employer’s 401k plan. Take a look at the new plan and determine if this would be the better route for you to take than rolling your existing 401k plan into an IRA.
Should I Cash Out My 401K?
You may be wondering, if you should cash out your 401k plan. And the answer to that question is “it depends.” You see, there is no right or wrong answer, rather the answer is nuanced based on your particular situation.
Cashing out early can make you subject to taxes and penalties. So you need to keep that in mind. However, you also have to weigh the negatives of cashing out early with the potential advantages.
Advantages such as:
Rolling Over Your 401k With a Former Employer
No matter what the terms of your former employer’s 401k plan, you always are free to roll an account from a 401k over into a personal IRA. Some people may wish to cash out their 401k plan at this time or take a distribution. However, you need to be familiar with 401k withdrawal rules, as there are various fees and penalties associated with early withdrawals.
There are many choices to make when deciding what to do with your 401k after you quit your job. Our advice would be to not rush, but take your time to consider your options. Check out the articles linked to in this article for more opportunities for the money in your 401k to consider when leaving your employer.