401(k)s are a type of employer-sponsored retirement account that you contribute to with each paycheck. Since these funds are tied to your company, you may wonder what happens to your 401(k) when you quit or leave your workplace. You’re entitled to the entire account balance, no matter the reason for your departure. In this article, we’ll break down a few investment options that will keep your 401(k) in your retirement plan.

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What happens to your 401(k) when you quit?

No matter how much money you have in your 401(k) after leaving a job, your old company can’t take your 401(k). Instead, they have a few distribution options based on how much you’ve saved:

• If you have $1,000 or less: Your former employer can cash out your 401(k) by cutting you a check.
• If you have between $1,000 and $7,000: Companies can roll the balance over into an individual retirement account (IRA).
• If you have more than $7,000: You can choose from several distribution options, which we’ll cover in the next section.

With any method, you’ll receive your entire balance aside from any unvested contributions. Employers with matching programs might add funds to your 401(k) on a set schedule, and if you leave before the company contributes the full matched amount, they’ll keep any funds they haven’t sent you yet.

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What to do with your 401(k) after leaving a job: Six options

When considering how to withdraw from your 401(k) after leaving your job, keep the following six options in mind.

1. Cash out the 401(k)

You can take your 401(k) in a lump-sum payment, but this can come with tax consequences. All 401(k) distributions are subject to income tax, and the Internal Revenue Service (IRS) charges an additional 10% penalty for withdrawals prior to age 59½. If you take a check for the entire amount of your 401(k), you may end up owing a hefty tax bill that year.

2. Roll over to an annuity

A strategic way to defer your taxes is moving your 401(k) into another savings vehicle, like an annuity. To do this, you generally need to request a direct rollover to an IRA from your 401(k) plan administrator. Then, you can move these funds into a qualified annuity product.

In addition to the tax benefits, there are several reasons to transfer your funds into an annuity, including:

• Tax-deferred growth
• Customization options through different annuity types or contract riders
• Higher annual percentage yields than other options
• Steady income for a fixed period of time

3. Roll over to a new employer’s plan

If you’re taking a new job that also offers a 401(k), you can move your old funds directly into your new account. Before making this decision, ensure that the suite of investments in the new plan line up with your investment goals. And ideally, the new plan should include an attractive employer match.

4. Roll over to an IRA

While an IRA can act as a temporary vessel, it can also be your old 401(k)’s final stop. Rollover IRAs offer similar tax benefits to 401(k)s, including tax-deferred growth and potential tax breaks on contributions.

You can choose to roll these funds over directly, which won’t trigger a taxable event. But in the case of an indirect rollover, where you receive cash proceeds from your old 401(k), the IRS gives you 60 days to transfer the money into a qualified account.

5. Leave the funds in the 401(k)

If your balance is over $7,000 and your former employer allows it, you can leave the money in your old 401(k).

This can be the easiest option, but it’s not always the best one. On the plus side, your money continues to grow on a tax-deferred basis in your old 401(k). But you can’t add new contributions, which can limit growth.

6. Take 401(k) distributions

If you’re over the age of 59½, you can simply start taking payments from your old 401(k). Roth IRAs allow for tax-free distributions as long as you’ve held the account for at least five years. With a traditional IRA, you’ll still be on the hook for income taxes, but you won’t owe early withdrawal penalties.

At age 72, the IRS requires you to take minimum distributions each year, even if you’re still employed. Failing to do so may result in taxes and penalties.

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FAQs

If you receive cash from your 401(k), will your employer withhold taxes?

Once you start receiving distributions from a traditional 401(k), you’ll owe income taxes on the payments. Employers may automatically withhold these fees, but it depends on the company, so be sure to check your terms before spending or reinvesting any funds you receive.

In the case of an indirect rollover, your employer will withhold 20%. Additionally, you’re required to reinvest these funds within 60 days, or else you’ll incur additional penalties.

Can a company take your 401(k)?

No, a company can’t keep your 401(k) when you leave a job. But if you took a loan out against your 401(k) and didn’t repay it, you’ll need to resolve this with your plan administrator or face potential tax consequences.

What happens to your 401(k) if your employer goes bankrupt?

If the company you work for goes bankrupt, you’re generally protected. A custodian, often a large financial institution, manages your plan. These banks are responsible for holding and protecting your money, not the company itself.

Does your 401(k) follow you?

Yes — all you need to do is exercise one of the options listed in this article, and you can take your old 401(k) cash with you wherever you go.

How long can a company hold your 401(k) after you leave?

If you have more than $7,000 saved, companies can’t force you to remove your funds from the account. But they’re required to send you a check or roll your funds into an IRA if your balance is less than $7,000.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.