What Happens to My 401k If I Get Fired or Laid Off? | Home Matters | AHS (2024)

Getting laid off or fired can be a scary experience. Make sure all of your financial bases are covered, including your 401k.

If you’ve been let go or laid off, or even if you’re worried about it, you might be wondering what to do with your 401k after leaving your job.

The good news is that your 401k money is yours, and you can take it with you when you leave your old employer. Whether that means rolling it over into an IRA or a new employer’s 401k plan, cashing it out to help cover immediate expenses, or simply leaving it in your old employer’s 401k while you look into your options, your money isn’t going anywhere.

You Can Leave Your Money Where It Is

If you have more than $5,000 in your 401k, you can leave it in your old employer’s 401k plan — and even if you have less than that, they still might let you leave the money where it is, but you should ask. If you have less than $5,000, your employer has the option to make you take a distribution, but not all employers will exercise that right.

This is the simplest option, and it’s the one many people choose when they’re fired suddenly. You usually can’t plan for a job loss, so you might not even have time to decide what to do with your 401k money before you get fired or laid off. And you might need some time to process the layoff for a while before you even get around to worrying about the money in your retirement plan.

“Well,” you might ask, “how long do I have to rollover my 401k from a previous employer?” That’s a good question. If you want to do a direct rollover, in which your former employer writes a check directly to your new employer for deposit into your new employer’s 401k plan, you can pretty much wait as long as you want.

However, if you want to do an indirect rollover, where you cash out the money and then depositit into another tax-advantaged account yourself, you have 60 days from the time you cash out to deposit the money into another such tax-advantaged account, like an IRA. If you’re planning to roll over the money into another 401k, you want to avoid this option, since your old employer will be required to withhold 20% from your payout for taxes.

Furthermore, while you can leave your 401k money in your old employer’s 401k, you won’t be able to make contributions anymore. It might also be hard to make changes to your account, like if you need to update your beneficiary or change your address. So, you’ll want to plan to get the money into a new account as soon as you can.

You Can Roll It Over to a New IRA

If you leave your old job and don’t know when you’ll be starting a new one yet, and you also don’t want to leave your 401k with your old employer, you can roll the money over into a new IRA. You can use any financial institution you choose for this. Make sure that your old employer does a direct rollover, signing your money over to the IRA management company, rather than to you, so you can avoid paying the 20% in taxes.

You Can Roll It Over to a New Employer’s Plan

If you’re starting a new job, you can roll over your 401k money directly into your new employer’s retirement plan, in most cases. That’s something to ask about during the onboarding process. You should also ask if your new company will match any of your rollover. If you’re lucky, you’ll get even more money out of your job change.

You Can Cash It Out

Let’s say you get laid off or fired and don’t know how you’re going to pay the bills. You have a mortgage, utilities and a family to think about. Under these circ*mstances, you might think about cashing out your 401k so you can use some or all of it to meet your immediate needs and keep your family afloat until the crisis has passed.

In most cases, you would have to pay the 20% tax on your cashed-out 401k, plus a 10% early withdrawal penalty if you’re under age 59 ½.

Even though you can cash out your 401k, it should be a last resort. If you spend the money now, you may never meet your retirement goals. And even if you lose money on your 401k investments due to stock market volatility, you should regain those losses with time.

When you lose your job, dealing with your 401k may be the last thing on your mind. But even though you may be struggling in the moment, you still need to keep your financial future in mind.