What Happens to My 401(k) When I Quit my Job?

When you leave a job, the money you contributed to a 401(k) and the vested portion of any employer contributions are yours to keep. You can leave it with your former employer, roll it into your new employer's 401(k) plan, move it to an Individual Retirement Account or cash out the account. However, before you can make an informed decision about what to do, understand what each option involves, as well as the consequences.

If your 401(k) has a balance of at least $5,000, you can let the money continue to grow temporarily or permanently in your former employer's plan. Although this can be a good option if the fund is currently performing well, it has drawbacks that can affect your investment over the long-term. You will not be able to make any further contributions, and some plans charge former employees additional maintenance fees. In addition, some may stop monitoring funds left with an old employer. This could have a significant negative affect if the plan starts performing poorly.

​Consider also:​ 401K Plans

You can transfer the funds in your old 401(k) into a new employer's plan if it accepts rollovers. There are no fees associated with a 401(k) rollover. You simply fill out and submit a rollover request to the plan administrator of your old plan. Once the funds reach your new account, they will increase the balance. However, if the new plan has a waiting period, you will not be able to exercise this option until you become eligible.

​Consider also:​ Rollovers of Retirement Plan and IRA Distributions

You also can roll 401(k) funds into a traditional or Roth IRA. There is no waiting period, and an IRA gives you more investment options than a 401(k). However, there can be income tax implications. For the funds you roll into a traditional IRA to remain tax deferred, the plan administrator from your former employer must make the transfer, or you must deposit a cash-out check within 60 days. If you transfer 401(k) funds into a Roth IRA, you'll have to include the amount you transfer on your annual income tax return. However, any money for which you pay income tax now will continue to grow tax-free.

Closing your 401(k) and taking a cash payment will trigger an income tax bill -- and if you're younger than 59 1/2 years of age, an additional 10 percent penalty fee. In addition to getting less than the full balance your account, you'll lose any future interest the account could have generated. For example, if the balance is $30,000, you are 29 years of age and are in a 30 percent combined federal and state tax bracket, you'll pay $12,000 in taxes and penalties and be left with only $18,000. However, if you chose another option and the money grew at a rate of five percent, you'd have $173,754 in your retirement fund at age 65.