There’s plenty to think about when you quit or leave a job. One big thing you’ll need to decide is what to do with the retirement savings account, such as a 401(k) or 403(b), that you (and possibly your employer) have been paying into.
You have a few options. How you decide depends on your future goals, your account balance, and your former and future employers’ rules. Here’s how to make sense of your next steps with savings when you quit or leave a job.
What happens to your 401(k) or 403(b) if you leave your job or quit?
What happens to your 401(k) or 403(b) depends on how much money you have in your account when you and your employer part ways. It’s important to note that the balance thresholds that apply are for what’s called your vested balance. This is a combination of your own contributions (which are always vested) and contributions your employer made that cannot be taken back when you leave.
Need a refresher on vesting? This is a process in which employer contributions to an account gradually become yours. This usually plays out over years and is used by some companies to retain employees. For example, your employer might use a vesting formula that says you get ownership of 20% of its contributions to your 401(k) each year up until you own everything outright after 5 years. If you left after 3 years, you’d only be able to take 60% of your employer’s contributions with you. The other 40% would stay in your employer’s plan. Regardless of when you leave, you’ll be able to take 100% of your own contributions with you.
If you have less than $5,000 in your 401(k) or 403(b)
If your 401(k) or 403(b) balance has less than $1,000 vested in it when you leave, your former employer can cash out your account or roll it into an individual retirement account (IRA). This is known as a “de minimus” or “forced plan distribution” IRS rule. In some cases, if your vested balance is between $1,000 and $5,000 your former employer may also be eligible to perform an automatic rollover to your new employer’s retirement plan.
Note: After December 31, 2023, the threshold will increase from $5,000 to $7,000 for any distributions made due to new retirement plan changes by SECURE Act 2.0.
If you have more than $5,000 in your 401(k) or 403(b)
If you have at least $5,000 vested in your 401(k), 403(b), or other retirement savings plan, you generally have 4 options when you leave or quit:
- Leave your account with your former employer. If your plan sponsor allows you to keep your retirement savings in their plans after you leave. While your earnings will still grow tax-deferred, you won’t be able to contribute additional money to the account, though you can continue to manage your investments. If you do decide to leave your money in your former employer’s plan, keep up with its performance and check that how it’s invested continues to align with your goals. Make sure to verify if your plan requires a distribution at some point in the future.
- Move the money into an IRA. You can open an IRA and move, or roll over, the money in your 401(k) or 403(b) into it. This may have more investment choices than your employer’s plan allowed and let you continue contributing to your retirement account provided you have earned income.
- Move your money into a new employer’s plan. It may be smart to check with your new employer to see if they will accept a rollover from your previous employer’s retirement plan. Managing just one 401(k) plan might be easier. See if your provider can do what’s called a trustee-to-trustee rollover or direct rollover. That’s when your current retirement account provider will send a check to your new provider instead of mailing a check to you, significantly simplifying the rollover process. If your old plan sends the rollover check made out to you instead of your new plan administrator, your old plan is required to withhold 20% of your balance in taxes, and you only have 60 days to deposit that money into a tax-advantaged retirement account, like a 401(k), or you could face early withdrawal penalties. Direct rollover is also an option for rollover IRAs.
- Withdraw the money as cash. This can be a costly choice since withdrawals of cash are subject to taxes and penalties. Leaving your money in a tax-advantaged retirement account preserves the tax benefits and can help with tax-deferred growth potential over time.
Steps to take before you leave your job to make your 401(k) or 403(b) transition as easy as possible
Prior to your last day, gather login information and any contacts for your retirement accounts. Reach out to your HR department to see if they have an exit packet with these details. Make note of the vested amount in your retirement accounts too—it will come in handy for the next part of the process when you decide what to do with your retirement savings or account.
Did you take a 401(k) loan during your time with the company? Heads up that when you quit or leave your current job, you might have to repay your loan in full in a very short time frame, so check policies. If you can’t repay the loan, you’ll owe any applicable taxes and a 10% penalty on the outstanding amount if you're under 59½.
Deciding what to do with your retirement accounts after you quit or leave your job
What you decide to do with your 401(k), 403(b), or other workplace retirement account after you leave your job depends on your goals and personal preferences. Make sure to understand the rules for your old account and the new account before deciding. Compare fees, expenses, and investment options and consider any tax impact. Thoroughly investigating each option can help you decide which will be best for you.
Feeling overwhelmed? Consider talking to a financial advisor who can walk you through your options to help you determine which is best for you.