Chances are, you’ll have several job changes over the course of your career. You’ll probably work for multiple employers, each with its own set of benefits. If one of those benefits is a 401(k), you may wonder what happens to 401(k) when you change jobs.

But the answer to, “What to do with 401(k) when leaving a job” isn’t straightforward. You have several options, including rolling it over and cashing it out. We’ll go through the pros and cons of each option.

What Happens to a 401(k) After You Leave Your Job?

What happens to 401(k) when you quit? Whether you leave your job voluntarily or not, any money you’ve contributed to your 401(k) will remain in the account until you’re ready to take it out at retirement. If your employer contributed money to it, whether the money remains yours depends on whether vesting was required. Some employers require you work for a fixed number of years, known as vesting, before any employer-contributed funds become yours. Otherwise, part or all of those funds may revert to the employer. Once you’ve left your job, you have a few options for the money that remains in your 401(k).

Leave It With Your Former Employer

If you’re wondering what to do with your 401(k) after leaving your job, you aren’t alone. It’s a fairly common question. One of the easiest routes may be to leave it with your former employer. The money will be there when you’re ready for it.

But this isn’t always an option. Plan administrators are allowed to cash out any 401(k) plans of departing employees that have a balance of less than $5,000. In this case, you’ll have the option to roll it over or accept it in a lump sum. The latter comes with some tax repercussions, though.

Another downside to leaving your 401(k) is that it will be harder to track. You may find it easier to roll it over simply to be able to keep an eye on it. Your plan could also come with higher fees than you’d find with competitors. Before deciding what happens to your 401(k) when you leave a job, check into those fees before keeping it there.

Roll It Over to Your New Employer

Another option for your 401(k) after leaving your job is to roll it over to your new employer. This can be a tricky maneuver, though. First, you’ll need to make sure your new employer offers a 401(k) option and that plan accepts incoming rollovers into their plan. And then, it’s important to look at the fees your new plan administrator is charging. As easy as it might be to have everything in one place, you could end up losing money in fees.

Many people answer what happens to 401(k) when you leave a job by leaving it, but there are some benefits to moving it over. You can use your 401(k) as collateral for a loan, but if you have it spread out between various accounts, it will be more complicated than if you have it all in one place. There’s also the risk, if your account balance falls under $5,000, that your former employer will issue a check for the amount without notice, leaving you with the burden of paying the taxes.

Roll It Over Into an IRA

One of the most popular options for the 401(k) leaving job dilemma is to roll it over into an individual retirement account. There’s a reason it’s popular. An IRA gives you more investment options than you’d get with a 401(k). You also can shop around and choose the provider that offers the most options while taking the lowest commissions.

If you’re considering an IRA as an answer to what happens to my 401(k) when I change jobs, there are two types of IRAs:

• Traditional IRA – With a Traditional IRA, your contributions are tax-deductible. The amount you contribute will be deducted from your taxable income. The problem with this option is that you’ll owe taxes when you retire. This can be a good option if you’re assuming you’ll be in a substantially lower tax bracket when you start taking distributions.
• Roth IRA – A Roth IRA doesn’t give you a tax deduction, but that means at retirement time, you’ll enjoy tax-free distributions. Since you’ll likely see a lower income after retirement, consider how much of a benefit you’ll get out of tax-free distributions.

Take Distributions

If you turn 55 or older in the year you separate from your employer, you’ll have another option. You can begin taking distributions. Ordinarily, you’d have to wait until age 59½ to start taking distributions, unless you’re okay with paying a 10 percent penalty.

But just because you can start taking distributions at termination, that doesn’t mean you should. Your distributions will be taxed as ordinary income, so that will take a chunk of the money before you can enjoy it. You’ll also lose any interest you would have earned by leaving it in the account a little longer.

Cash It Out

There’s one more answer to the question “what happens to my 401(k) if I quit my job?” You can opt to cash the full amount out. Unless you turn age 55 or older the year you separate from your employer, you’ll have that 10 percent penalty for cashing out early. You’ll also lose some or all of your retirement savings.

If you need the cash, there are other options. You can roll the money over or leave it alone and use it as collateral on a personal loan. But if you’ve gone through all the options and found this is the only way, make sure you cash out only what you need to get you through the emergency. If possible, replace the funds as soon as you can.

Final Thoughts

The best answer to, “What happens to my 401(k) when I quit?” is, “It’s up to you.” You can decide to leave it with your former employer, transfer it to a new employer, roll it over to an IRA, or cash it out. If you’re leaving your current employer, we recommend working with a Certified Financial Planner® to find the best option for your own situation. What works for one person might not be the best for another.