Cashing out your 401(k) after leaving a job

9 MIN READEditorial Policy

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 from most brokers. You may roll over your 401(k) account to your new employer or transfer the funds into an IRA. 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 investment of more than $5,000, your employer may allow you to leave the account with them even after you quit the job.

  • If your account has a balance of less than $1,000, your employer may force you out and pay the amount left in your account with a check.

  • If the total investment amount in your old 401(k) is between $1,000 and $5,000 and your employer wants to force you out, they must transfer the amount to your IRA.

Options for Cashing Out a 401(k) After Leaving a Job

The 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 huge 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 a good idea. There are chances that you may forget the account after some time. You can, instead rollover to your new employer or even set up an IRA to roll 401(k) funds into.

Rolling over your 401(k) to an IRA gives you the flexibility to invest your funds the way you want. However, in some states like California, your creditors have easier access to your IRA funds than the money kept in a 401(k) account. If you see any potential claim or lawsuit against you, you may want to let your funds lie in a 401(k) account rather than transferring into an IRA.

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 account. 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.

  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. Instead of direct transfer, you can also cash out your old account and 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 distribution).

  4. You must start taking 401(k) distributions after you turn 70 ½ years old and you are not working anymore. However, unlike traditional plans, in a new retirement plan with your current employer, you cannot be forced to take the required minimum distributions even after you reach the age of 70 ½.

  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 get it done directly through your plan administrator or take out the proceedings 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 years. 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, 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 the same year 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

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 choose to withdraw the funds.

  • Even when you roll over your old 401(k) account to your new employer, you need not pay any taxes.

  • At the time of your 401(k) distributions, you will be liable to pay income tax at the prevailing rates applicable for such distribution.

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

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

Although legally, you have every right to liquidate your old 401(k) account and cash out the entire funds, doing so would reduce your savings for the retired life. Additionally, the distributions will add up to your annual taxable income.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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