Cashing out your 401(k) after leaving a job

Based on the amount of money in your 401(k) account, your employer may allow you to leave the account with them. However, you will not be able to contribute any more to your old account.

Leaving your account with the old employer may not be prudent—especially when you have access to more flexible individual retirement account (IRA) plans. You may roll over your 401(k) account to your new employer or transfer the funds into an IRA. Or, if you meet the age criteria, you may start taking distributions without having to pay any penalty for early withdrawal.

Do you get your 401(k) if you quit?

Be aware of the following rules regarding your old 401(k) account:

• If your 401(k) has a total vested balance of more than $7,000, your employer may allow you to leave the account with them even after you quit the job.

• If your account has a vested balance of less than $1,000, your employer may force you out and pay the amount left in your account with a check, or roll your funds into an IRA of their choosing.

• If the total investment amount in your old 401(k) is between $1,000 and $7,000 and your employer wants to force you out, they must transfer the amount to an IRA.

Check your prior employer’s Summary Plan Description for specific details around force outs.

Options for cashing out a 401(k) after leaving a job

The vested amount in your 401(k) account, including your contribution, your employer’s contribution, and any earnings on your investments, belongs to you and can supplement your retirement fund. The amount of money accumulated in your 401(k) account may tempt you to cash out your plan, but it’s in your best interest not to do so.

Leaving your account with your old employer may not always be a good idea. There are chances that you may forget the account after some time. Instead, you can roll over to your new employer or set up an IRA to roll your 401(k) funds into.

Rolling over your 401(k) to an IRA gives you flexibility over your investments while consolidating accounts can help you keep track of your savings. If you're transitioning from an employer who partnered with Human Interest for your 401(k), you can roll over funds directly into a Human Interest IRA™. You can benefit from low-cost investment options and zero transaction fees, meaning you’ll never be charged for rollovers, distributions, and trades. 

Alternatively, if you are eligible for the 401(k) plan of your new employer, you may want to roll over your old 401(k) to your new employer’s plan. No matter where you invest, always consider minimizing the risk by diversifying your portfolio. You may never want to invest a large portion of your savings in a single company, no matter how much you trust it.

How to cash out a 401(k) after quitting

You may follow this type of action plan for your 401(k) when you quit your job:

1. If your new employer offers a 401(k) plan, check your eligibility and enroll yourself when you can. Note that some plans allow rollovers to be deposited even before you have met eligibility.

2. Once enrolled, get the funds and investments in your old account directly transferred to your new account. You can opt for a direct administrator-to-administrator transfer through simple documentation to avoid potential taxes and penalties.

3. If you’ve already taken a cash distribution but decide you would like to roll over the funds instead, you can deposit the proceeds in your new account within 60 days of cashing out. That way, you don’t have to pay income tax on the amount of the withdrawal (which is treated as a distribution).

4. If you are over age 73, you will be required to start taking 401(k) distributions from your old employer account. However, if you continue working at a new employer, you can roll your funds into their plan and delay your required minimum distribution until you leave employment with them.

5. If your new employer does not have a 401(k) plan or you do not like the plan your new employer has, you may roll over your old 401(k) account to an IRA. The rollover process is like the process of rolling over to a new account. You can either request that it be sent directly between plans or take out the proceeds in cash and deposit them in your IRA within 60 days. 

Cashing out a 401(k) in the event of job termination

In case you are fired, you can cash out your 401(k) plan even if you are below the age of 59 ½. You just need to contact the administrator of your plan and fill out certain forms for the distribution of your 401(k) funds. However, the Internal Revenue Service (IRS) may charge you a penalty of 10% for early withdrawal if you don’t roll your funds over, subject to certain exceptions.

Withdrawing from a 401(k) after leaving the company without a penalty

In any of the following situations, you may qualify for early withdrawal without being subjected to any penalty:

• If you leave a company after you turn 55 years old

• If you suffer from total or permanent disability

• If you cash out in equal installments spread over an expected period of your remaining lifetime

• If you need to pay for medical expenses, which are more than 10% of your income

• If as a military reservist, you have been called to active duty

• See other exceptions listed on the IRS website

Tax implications of cashing out a 401(k) after leaving a job

The following are some tax rules regarding your old 401(k):

• When you leave your 401(k) account with your old employer, you won’t need to pay taxes until you withdraw the funds.

• If you roll over your old 401(k) account to your new employer, you willnot accrue taxable income.

• If you take a 401(k) distribution in cash, you will increase your taxable income for that year by the gross amount.

• If you haven’t reached the age of 59 ½ years at the time of the cash distribution, you may be assessed a premature withdrawal penalty of 10%, subject to certain exceptions.

• Distributions of earnings from a designated Roth account are tax-free after you reach the age of 59 ½, provided your account is at least five years old.

Although legally, you have every right to liquidate your old 401(k) account and receive a cash distribution upon termination, doing so would reduce your savings for retirement. Additionally, the distributions will increase your annual taxable income.

Roll over your 401(k) with Human Interest today 

It’s important to compare your available options when you leave a job. We believe you should focus on the approach that’s best suited for your long-term retirement saving goals. That’s why consolidating your retirement accounts in one place may help you keep track of your savings. 

If you're transitioning from an employer who partnered with Human Interest for your 401(k), you can roll over your funds directly into a Human Interest IRA™. Human Interest’s IRA™ offers low-cost investment options and zero transaction fees, meaning you’ll never be charged for rollovers, distributions, and trades. You can set up an automated rollover of your 401(k) in minutes, and easily move your funds to an IRA. Start your automated IRA rollover today.