what happens to my k when i quit
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Switching Jobs? Here’s What You Can Do With Your 401(k)

Dan Clarendon - Author

Aug. 27 2020, Updated 1:33 p.m. ET

What happens to your 401(k) when you quit a job? You have options, and it’s a good idea to decide what to do with that money when you’re ready to switch employers.

Before making that decision, though, you should take note of two fine points, according to Intuit’s Turbo blog.

  1. If you have a loan on your 401(k), you’ll need to repay the balance by the tax due date after leaving your job—else you’ll be taxed on the balance and hit with an early withdrawal fee.
  2. If you’re considering a rollover, note that some account types often allow only one rollover per year.
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That said, here are some options for handling your 401(k) amid a career transition, outlined in broad strokes. To make the best choice, make sure you do research, talk to plan administrators at your old and new workplace, and maybe even consult an accountant or a financial advisor.

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1. Keep your 401(k) with your old employer

Technically, you can keep your 401(k) with your old employer, but some employers may force you out if you have less than $5,000 saved—in which case you’d need to transfer those funds into a new 401(k) within 60 days to avoid being taxed on that distribution, Turbo states.

Also, be advised that if you go this route, you won’t be able to make more contributions or take out a loan on your 401(k), and your old employer may start charging administration fees. For these reasons, you should only consider this option if you don’t have another job lined up or if you’re researching IRA options, as NARPP notes. (More on IRAs later.)

2. Roll the 401(k) over to your new employer

You can also roll your 401(k) over to your new employer. Sometimes, the money can be transferred directly, but other times, your old employer will mail you a check. In the latter scenario, make sure you deposit that money into your new 401(k) within 60 days to avoid being taxed.

It’s also a good idea to review the fine print on the new 401(k) to make sure it’s a good plan, and don’t forget to check whether your new employer has a 401(k) matching program.

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3. Roll the 401(k) over to an IRA

k ira
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Often, people who are losing access to an employer’s 401(k) plan will opt to roll their 401(k) over into an individual retirement account (IRA). Just make sure your old employer can do a direct rollover, NARPP warns, because if they write a check to you, they’ll have to withhold 20 percent in taxes.

The advantages of an IRA, per Turbo, are that you have more flexibility with withdrawing money penalty-free before retirement age and you have more control over your investments. 

4. Cash out

If you must, you can cash out of the 401(k) plan, but unless you’re 59 and a half years old or older, you’ll be charged federal taxes on the funds, as well as any applicable state and local taxes, according to The Balance. In many cases, you’ll be charged a 10 percent early withdrawal penalty. And on top of all that, the money remaining would be fair game for creditors and bankruptcy courts, Turbo notes.

5. Retire

Once you’re 59 and a half years old and you’ve chosen to retire—or, in some cases, before you’ve retired—you can start taking qualified distributions from your 401(k) without being charged an early penalty fee, but those distributions are still subject to income tax.


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