A 401(k) is a retirement savings account that you can manage through your employer or independently (like if you own a small business). If you have one through your job, contributions are deducted from each paycheck, and your employer can also contribute. In such cases, you might wonder: what happens to your 401(k) when you leave a job? Where does that money go—and how should you handle it best?
We talked to experts about what to do with 401(k) after leaving a job and got their best advice.
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What are the options?
If you're asking, “what happens to my 401(k) if I quit my job?” chances are you're already thinking about your next career move, possibly preparing to dive back into the job search. Or maybe you're leaving for a new opportunity and got curious about what happens to 401(k) when you change jobs. Either way, the answer is: It depends.
“When leaving a job, people have several options for managing their 401(k) funds,” says Dennis Shirshikov, Finance Professor at the City University of New York and Head of Growth at Gosummer.com. They include:
- Roll your 401(k) into your new employer’s plan
- Roll your 401(k) into an IRA
- Leave the money in your 401(k)
- Cash out your 401(k)
Let’s take a more in-depth look at each of these options.
1. Roll over your 401(k) into your new employer's plan
If you’re leaving your current job for a new one that also offers a 401(k), you can roll over the funds into your new 401(k) account.
“This simplifies financial management, making it easier to monitor and adjust investments,” says Kristy Kim, CEO and Founder of TomoCredit.
Not only does it make it easier to manage your retirement funds (everything is in the same place!), but, if the new employer offers a better plan, that could deliver some financial advantages.
“The new plan might provide a broader range of investment options, including lower-cost institutional funds, allowing for better portfolio tailoring,” Kim says. “It may also offer lower administrative or management fees, potentially enhancing investment returns.”
It doesn't stop there. “Rolling over your 401(k) can provide access to more favorable loan and hardship withdrawal terms, maintain a consistent contribution strategy and asset allocation, and avoid immediate taxes and early withdrawal penalties, preserving more of your retirement savings,” she says.
However, there are also some potential drawbacks—including the process of how to move 401(k) to a new job.
“The rollover process can be complex and time-consuming, requiring you to handle paperwork and coordinate between the old and new plan administrators,” Kim says.
While you’re figuring out how to transfer 401(k) to your new job, you could also temporarily lose access to the funds—which means that, during that time, you can’t make any changes to your investments.
Another thing that’s important to point out: Not all 401(k) plans are created equal. If your new employer’s plan isn’t as good as your old employer’s plan, rolling it over might not be the best decision.
“Some new employer plans might offer fewer investment options than your old plan, limiting portfolio diversification,” Kim says. “Additionally, features like loan provisions, hardship withdrawals, and investment choices can vary, and the new plan might have less favorable terms.”
Kim elaborates on the potential downsides: “The new employer's plan may also impose restrictions and higher fees, impacting your savings, and your retirement funds would be subject to any changes in the new employer's plan policies, fees, or investment options, which may not always be beneficial.”
2. Roll over your 401(k) into an IRA
Rolling your 401(k) to your new employer plan isn’t your only rollover option. You could also roll over the 401(k) into an Individual Retirement Account (IRA).
“IRAs offer greater investment options, including stocks, bonds, mutual funds, ETFs, and other assets, enabling better portfolio diversification and customization,” Kim says. “With an IRA, you have more control and flexibility over your investment decisions, easily adjusting your strategy as needed.”
IRAs may also have fewer administrative and management fees than 401(k)s—which can allow you to put more money towards investing. (Although that’s not a given; for example, Kim says, “managed IRAs may also come with additional advisory fees, which could reduce your overall returns if not carefully considered.”)
Like any financial decision, it’s important to understand the potential challenges of rolling your 401(k) into an IRA—including how and when you can access the funds.
“While 401(k) plans permit penalty-free withdrawals at age 55 if you leave your job, IRAs require you to wait until age 59½ to avoid early withdrawal penalties, except under specific circumstances,” Kim says. “Plus, unlike 401(k) plans, IRAs do not allow for loans, so you won't have access to your funds through borrowing before retirement.”
So, if you need access to your 401(k) in the near future—either because you’re near or at 55 and want to start withdrawing funds or because you want to secure a loan—an IRA may not be the best fit for you.
3. Leave the money in your existing account
Generally, you don’t have to do anything with your 401(k) when you leave a job. “People can leave the money in their former employer's plan if the plan allows it,” Shirshikov says.
This can offer a few different advantages—particularly if your old job had a great 401(k) plan, with low fees and/or good investment options. “You could leave it with the previous organization and continue investment growth,” Kim says. “Your investments can continue to grow tax-deferred until you withdraw them.”
However, it doesn’t always make sense to leave your 401(k) with your old employer.
“Leaving your 401(k) with your old employer can result in limited control over investment options, potentially higher administrative or management fees that erode returns, and increased complexity in managing multiple accounts across different employers,” Kim says.
Also, when you're no longer with the company, your ability to make future contributions and adjustments may be limited. (And when you’re not adding to your account, the answer to “how much will my 401k grow if I stop contributing?” is less than it would be if you were consistently contributing.)
Managing the account may also prove more difficult if you’re no longer with the company. “Access to funds might be more restrictive, and communication with the plan administrator could be challenging,” Kim says. “Additionally, your old employer might change the plan’s investment options, fees, or policies without your input, impacting your retirement savings.”
Keep in mind that if you do opt to follow this route, you may eventually need to figure out how to find a 401(k) from an old job and how to access a 401(k) from an old job—which generally means getting in touch with our old employer’s HR department. They should be able to answer these questions—and get you the credentials you need to access your account and monitor your investments.
4. Cash out your retirement account
While experts recommend keeping funds in your 401(k) account until retirement, some people wonder “Can I close my 401(k) and take the money?” The answer is yes; cashing out 401(k) after leaving a job is an option.
There are some circumstances that would make withdrawing 401(k) after leaving a job an attractive option.
“You'd get immediate access to the funds, which can be beneficial during financial hardships or emergencies,” Kim says. “You have the freedom to use the cash for any purpose without restrictions, which may be appealing if you have urgent financial needs that cannot be met through other means.”
But before you start asking questions like, “how to cash out 401(k) from old jobs?”, “can I transfer my 401(k) to my checking account?” or “how much will I get if I cash out my 401(k)?” it’s important to highlight that this option does have some serious consequences.
According to Kim, cashing out your 401(k) triggers several financial drawbacks. “The withdrawn amount is considered taxable income for the year, potentially pushing you into a higher tax bracket and leading to a substantial tax liability,” she says. “And if you're under 59½ years old, you'll likely face an additional 10% early withdrawal penalty on top of income taxes, adding to the financial burden.”
More than that, usually it also means sacrificing your financial security for retirement and missing out on the growth potential of those funds over time. “It also forfeits the tax-advantaged status of your savings, making it challenging to rebuild your retirement nest egg in the future,” Kim says.
In addition to all of the above financial losses, your 401(k) plan may impose its own fees for cashing out the account—which will take even more money out of your pocket.
Bottom line? If you’re considering cashing out your 401(k) after leaving your job, also think about the significant drawbacks, such as income taxes, early withdrawal penalties, and the long-term impact on your retirement savings. “Cashing out should generally be considered as a last resort after exploring other options and consulting with a financial advisor,” Kim says.
Go with the option that is best for you and your financial future
There are a few different options for what happens to your 401(k) when you leave a job—and clearly, there are pros and cons to each one. As such, the best thing you can do is look at your financial situation and goals—and make a decision that most aligns with them. If you’re not sure? Talk to an expert.
“Ultimately, the best approach depends on factors like investment choices, fees, and your long-term retirement strategy,” Kim says. “Consulting with a financial advisor can help you navigate these decisions and ensure you choose the option that aligns with your financial objectives and maximizes the growth potential of your retirement savings.”
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