Can I cash out my 401(k) after I leave my job?

Summary 

What is a 401(k)? 

A 401(k) is a retirement savings plan with various tax advantages. Many employers offer these plans in America. 

When you sign up for a 401(k), you agree that a percentage of each of your paychecks will be paid into an investment account. Your employer will match part or all of your contribution to the account. 

There are two main options for 401(k) plans: traditional and Roth.

If you choose a traditional plan, your contributions will be deducted from your gross income (before tax).

If you choose a Roth 401(k), your contributions will be deducted from your net income (after tax). 

Nowadays, people change jobs more frequently than they did a few decades ago.  

While this process is usually straightforward, it could create some confusion, especially if you signed up for a 401(k) plan with your previous employer.

Cashing out your 401(k) after leaving your job is an option, but there are a few other possibilities worth considering.  

What to do with your 401(k) after leaving a job 

If you’ve left your job, you might be thinking about cashing out your 401(k). 

Of course, if you’ve had a few different jobs, you might have a few 401(k) plans to cash out, so it’s worth looking for old plans if you suspect you might have a few tucked away somewhere. 

There are a few different options available for those who want to cash out a 401(k). 

Option 1: your 401(k) stays where it is  

Before you cash out your 401(k) plan after leaving your job, let’s look at an alternative you might not have considered – leaving it exactly where it is.  

Many companies give employees the option of leaving their 401(k) accounts in the company plan. 

While it’s not always possible to contribute to the account after leaving your job, it will be business as usual when it comes to the investment portfolio.  

This means that it will grow based on the underlying investments while being overseen by the same account managers.  

You’ll still be able to make changes to the assets, your changes being based on the account’s rules and preferences. 

Not every employer offers this option, so be sure to ask your employer if this is possible.  

Some will automatically close your account if it has only a small amount of money when you leave.

If they do close your account, you will receive a check from your employer with income taxes already withheld. 

Option 2: fully cash out your 401(k)  

Your second option is to fully cash out your 401(k). However, you should approach this option with caution.  

If you are younger than 59 and a half years old, or if you don’t meet one of the IRS’ other exemptions for early disbursements, fully cashing out your plan permanently will automatically trigger a 10% penalty over and above all your existing income taxes.  

Of course, whether this is a good decision depends on your circumstances. If you're unsure, speak to a financial advisor. 

Option 3: roll over your 401(k) into your new employer’s plan  

The third option for cashing out your 401(k) after leaving your job is to roll it over into your new employer’s 401(k) plan.  

Most financial advisors agree that generally speaking, this is the best option when leaving one job for another. 

In many cases, you’ll be able to do this even if there has been a period of time between leaving one job and starting another.  

This gives you the option of consolidating your accounts if you have a 401(k) from a previous employer.

However, it’s important to remember that not every employer offers this option, so be sure to check. 

Option 4: roll over your 401(k) into an IRA 

Your fourth option for cashing out a 401(k) when changing employers is to roll over your 401(k) account into an IRA.

This is an option to consider if you don’t want to use your 401(k) or you don’t have a new one.  

Tax-wise, 401(k) accounts and IRA accounts are similar. If you roll over, the IRS will treat it as a continued retirement account.  

According to many financial advisors, this can be a good way to consolidate your retirement finances.  

A rollover won’t count against your annual contribution limit. How this happens depends on your existing account, although financial managers usually handle this. 

What is the 60-day rollover rule? 

As mentioned, if you cash out your 401(k) permanently before age 59 and a half, you will trigger early withdrawal penalties.

However, thanks to the 60-day rollover rule, you can cash out your 401(k) and deposit the money into a new qualified retirement account penalty- and tax-free if you deposit the money into your new account within 60 days of making the withdrawal. 

This process is known as an indirect rollover.

If you wait longer than 60 days to deposit the money into a new qualified account, the IRS will apply early withdrawal penalties and income taxes. 

Seek expert financial advice 

As you can see, there are several options available to you if you’re thinking about cashing out your 401(k) after leaving your job. However, depending on your circumstances, some of these options might be much better than others.  

To navigate this complex situation and ensure your retirement planning stays on track, it’s best to seek our expert financial advice.  

Unbiased can match you with an SEC-regulated financial advisor who can help. Simply answer a few short questions, and we’ll find an advisor perfectly suited to meet your needs. Better still, your first consultation is free.  

Connect with an advisor now.