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What Happens to My 401(k) if I Leave My Job?

What Happens to My 401(k) if I Leave My Job?

401(k) account balances can be taken to the next place of employment, rolled into IRAs, or cashed out. Sometimes people don’t know what to do with a 401(k) when the change jobs.

If it sits there too long, and the employer cannot locate you because you changed addresses, your account balance will be taken over by the State in which you worked. Your state should be able to locate your file using your social security number and pay you the account balance as of the date they froze the account.

There is an opportunity cost to letting that money freeze, of course. If it had been allowed to grow, the balance could be significant. It is advisable to take your 401(k) balance with you each time you leave a job. If your new employer has a 401(k) plan as well, you should be able to transfer your balance into it.

You can also open up a Traditional IRA using an online service or a local broker, and follow the instructions to transfer your balance into it. An IRA can serve to consolidate several old 401(k)s if they start piling up.

Since the tax treatment of 401(k)s and IRAs is the same, being pretax money that is growing tax-deferred and taxable as income in retirement, there will not be a taxable event until withdrawals are taken. You do not have to initiate a transfer within a specific amount of time after separation from service.

Doing a transfer means that an IRA account is already set up and the money is going directly from one custodian company to another. This is often mistakenly called a rollover. Rollovers are slightly different.

If you shut down your 401(k) account and have a check cut to you, you have 60 days to deposit that amount of money into an IRA or 401(k), which is known as rolling it over, or the event will be considered a distribution. This could trigger early withdrawal penalties and a taxable event for the balance of the account.

Also, even though the total amount that you contributed to your account, and the gains from it, are yours to keep if you leave a job, the balance of employer contributions made to your account may not be. This depends on the vesting schedule of the plan.

Some plans use cliff vesting, where the entire employer contribution amount is available to you after a certain number of years, while other plans use graduated investing, in which the percentage of employer contributions which are considered vested increases on a schedule over several years.

Keywords: retirement accounts, vesting, rollover, custodian-to-custodian transfer, cliff vesting, graduated vesting,
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