So, what happens to your 401(k) when you quit, get laid off, leave your job, or change jobs? That’s a great question. The short answer is that it’s mostly up to you, and you have a few options. 

What is a 401(k) and can you keep it if you leave your job?

401(k) plans are tax-advantaged retirement savings plans offered by employers as a fringe benefit to employees. The tax advantages of a 401(k) are very powerful, and many companies auto-enroll employees to help promote the tax savings opportunity. In fact, compared to other tax-advantaged savings options, a work-sponsored 401k plan generally offers additional opportunities and flexibility to help you save for retirement. 

Many employers also provide a “match,” which helps boost the amount you can save. However, because 401(k) plans are sponsored by the company, a frequent question people ask is, “What happens to your 401(k) when you quit or leave your current job?” 

As with almost all personal financial questions, the answer depends on your facts and circumstances.

Questions to ask about your 401(k) if you might quit

Do you have unvested matching contributions?

While not everyone has the luxury of planning ahead, prior to leaving your current job, you should first consider the value of any unvested employer-matching contributions. If matching contributions are unvested, this means that you will not get to keep this money if you leave prior to vesting. 

In many instances, matches vest over a period of two or three years and once you are vested, you get to keep any balances if you leave or are terminated. If you have a significant amount of unvested money and you are close to the vesting date, consider delaying your departure until after you are fully vested.

Do you have an outstanding loan against your 401(k)?

Once you have officially quit, in most cases, you do not need to take immediate action and you have time to assess your alternatives. There is, however, one significant exception that does require immediate attention. Specifically, if you have an outstanding loan from your 401(k). 

This is because 401(k) loans are repaid via payroll deductions and if you no longer have payroll deductions (because you no longer have payroll) then there is no ongoing mechanism to repay the loan. Thus, if you leave a job, either voluntarily or involuntarily, you are required to repay the outstanding loan balance in full. If you do not, it will be treated as a distribution, which is generally subject to both income tax and a 10% early distribution penalty. 

What to do with your 401(k) after leaving your job

If you do not have a 401(k) loan, you generally do not need to make rash decisions. Rather, take your time and understand the pros and cons of the available options. The following is a high-level list of the primary 401(k) options available if you quit. 

  1. Leave the money in your former employer’s plan: With few restrictions, you can leave your money in your former employer’s plan. However, this option may have limited investment options and higher fees, so it’s important to weigh the costs and benefits.
  2. Roll over the money into an IRA: You can roll over the money in your 401(k) into an individual retirement account (IRA). This option may offer more investment options and potentially lower fees than leaving the money in your former employer’s plan. 
  3. Roll over the money into a Roth IRA: You can also roll over the money in your 401(k) into a Roth IRA. When you roll a traditional 401(k) into a Roth IRA, you are not only moving funds to a new brokerage account but you are also making a strategic tax planning decision. Specifically, you will owe tax on the total amount but, once secured in your Roth IRA account, your savings will grow tax free for the rest of the account’s existence.

    You might consider this option if stock market valuations are depressed, if you are in a low-income tax bracket, or if you expect future tax rates to increase. For a more detailed assessment of Roth options, read “Roth vs Traditional IRAs: Which Should You Choose?”
  1. Cash out the account: Vested 401(k) retirement account funds are yours and you have the option to cash out. However, because 401(k) plans offer special tax treatment, if you decide to cash out prior to retirement age (59 ½) you will not only pay income tax on the amount you cash out but you will also incur a 10% penalty. 

    While there are certain emergency, disaster, and need-based exemptions to the 10% penalty rule, these options are limited and in most cases, the 10% penalty applies. Be sure to speak with your CPA if you think this is an option.  

Consider consulting a CPA before or after you leave your job

Leaving a job is an important life event that presents both challenges and new opportunities. While your 401(k) is not always top of mind, making smart decisions with your 401(k) funds post-departure should be taken seriously, and your decisions can yield significant gains down the road.