Your 401(k) funds belong to you, so if you lose your job, you get to keep the funds. In addition to your contributions, you also have a right to your employer’s contributions or matching ones, as long as those funds are vested. Vested funds are the ones you have complete ownership of.
Here’s what you can do with your 401(k) if you lose your job.
1. Roll Over Into an IRA
Pros
- Might have more available options to you
- You can avoid early withdrawal penalties and retain any tax advantages
- Fees could potentially be lower
Cons
- You’ll need to set up a new account if you haven’t already set up an IRA before
- There may be trading costs or management fees
- Might not offer loan options
2. Withdraw the Funds
Pros
- You can access your cash to use right away
- It might be necessary if you have an emergency
Cons
- You will pay an early withdrawal penalty, and this could be considered taxable income
- Borrowing from your retirement funds takes away from your future self’s finances
3. Leave the Money in the Account
Pros
- No action is needed right away
- There may be benefits to keeping the account as-is, such as low fees
Cons
- You may not be able to receive employer benefits or add more contributions
- You may be asked to move the funds if you are under the employer’s minimum required to keep balances in the account
- You may have to pay account maintenance fees that your employer was covering before
4. Roll Over Into a 401(k) With Your New Employer
Pros
- Consolidates your retirement savings
- Ensures you won’t pay early withdrawal tax penalties
- Could have more benefits, such as lower fees, than other retirement plans
Cons
- Not every employer will allow a rollover
- Your choices may be limited depending on what the new employer offers.
- Paperwork is involved, as well as the time it takes to transfer
What Happens to Your 401(k) If You’re Fired Before You’re Vested
You may lose out on some contributions if you were fired before becoming vested in your 401(k). If you are vested, the employer must distribute your vested account balance promptly and within a specified timeframe. This varies depending on the circumstances of your termination.
Can Your Employer Hold Your 401(k) After Termination?
Your employer cannot legally block your access to your 401(k) account after they fire you or lay you off, with very few exceptions — such as if you owe the company money. Since your 401(k) account is your property, your employer must follow IRS rules and procedures on distributions when you leave the company.
You have options if you believe your employer isn’t following proper procedures or unlawfully withholding your account balance. You can speak to an attorney or contact the U.S. Department of Labor, Employee Benefits Security Administration, for information on how you can move forward.
Taxes and Your 401(k) After Getting Fired
You won’t have to pay any taxes if you roll your 401(k) into an IRA or into a new employer’s retirement account.
However, if you’re under 59 1/2 and you withdraw your funds, you will have to pay income tax plus a 10% early withdrawal penalty.
How Do You Initiate a Rollover With a New Employer?
To initiate a rollover, you must contact the administrator of your old 401(k) plan and request a direct rollover of your balance to the new one. The new plan administrator will then walk you through the process and let you know if there is additional paperwork you need to complete.
There are rules and limitations associated with 401(k) rollovers, including tax implications and restrictions on the investments you can hold in your plan.
If you’re unsure of the process, it’s a good idea to speak to a financial advisor or tax professional. Doing so before you initiate a rollover ensures that it aligns with your long-term retirement planning goals and strategies.
Melanie Grafil and Amber Barkley contributed to the reporting for this article.