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Cashing Out a 401(k) After Leaving a Job


An office worker in a wheelchairThe IRS established the 401(k) as a tax-advantaged plan for employees, rather than the self-employed. This works fine most of the time, but in an era when people change jobs far more often than they used to it also has created some confusion. What do you do with this account, that’s supposed to grow over decades, when you change employers? There are a few common options. A financial advisor can offer you valuable insight and guidance on handling tax-advantaged accounts.

Inaction Can Lead to Automatic Cashing Out

It may seem odd, but you can choose to do nothing.

Many employers allow former employees to leave 401(k) accounts invested in the company’s plan. You will not be able to make future contributions to this specific account, but the investment portfolio will otherwise continue as normal. It will grow based on its underlying investments. You can make changes to the assets based on the rules and preferences of this specific 401(k) account. And the existing account manager will continue to oversee these investments. Most companies use an outside financial firm to manage their 401(k) accounts, so your ongoing relationship would be with that firm rather than with your former employer.

Not every employer allows this though. If you have a relatively small amount of money in your account, some employers will close out your 401(k) automatically when you leave.

If you have less than $1,000 in your account, the IRS allows your employer to automatically cash you out of its plan. In this case you will receive a check for the account balance. Your employer will withhold income taxes, but you will not pay early withdrawal penalties as long as you place this money into a qualified retirement plan, generally an IRA, within 60 days.

If you have between $1,000 and $5,000 in your account, the IRS allows your employer to automatically remove you from their plan but they can’t cash you out unless you request it. Instead they can roll your 401(k) into an IRA. This comes without penalties, since an IRA is structurally similar to a 401(k) in terms of tax benefits.

If you have more than $5,000 in your account, many employers will allow you to keep your account in place. However, even then they may apply onerous terms such as high maintenance fees and access restrictions. Plans like this are rarely a good option for retirement savers.

The result is that leaving your 401(k) in place with a former employer is situationally useful. If you are early in your career, this is rarely a strong option mostly because you don’t want to leave a trail of under-funded accounts in your wake. However, if your employer offers particularly good terms, or if you are late in your career, this can be a solid choice.

Fully Cash Out

It is unusual, if not rare, that cashing out your 401(k) is a good idea. The IRS does not create an exception for cashing out your 401(k) after leaving an employer. If you are younger than 59.5 years old, and if you do not meet one of the IRS’ other carve-outs for early 401(k) disbursements, permanently taking money from any 401(k) account will trigger a 10% penalty on top of all existing income taxes. This applies equally to any account, whether or not you are still employed there.

Rolling Over Funds

Rolling over funds is when you transfer your money from one retirement account to another. In most cases this is your best option when leaving an employer. Generally speaking you have two options for a 401(k) rollover:

A new 401(k)

Cash next to a piece of paper that says "401K Rollover"

If your new employer offers a retirement program, you can transfer the funds from your former employer’s 401(k) into the new one. You may even be able do this even if there is a gap in time between employers, so someone who has a retirement account from a long-ago employer could consolidate their accounts if they chose. The only catch here is that not every employer accepts rollovers from external 401(k) accounts. Make sure that you can do this.


If you don’t have a new 401(k), or don’t want to use it, you can roll your old 401(k) into an IRA account. From a tax perspective these programs are structurally similar, so the IRS treats it as a continued retirement account rather than a substantive change in your finances. For someone who has had a number of different jobs over the years, this is often a good way to keep your retirement finances in one place.

Rolling over your 401(k) does not account against your annual contribution limit. This is true whether you transfer the money to a new 401(k) account or an IRA.

The specific process for how you will roll over your account depends entirely on your existing 401(k), however, most financial managers handle this similarly. You will need to establish the new account, whether it is a new 401(k) or an IRA. Then you will file a form with your existing 401(k) manager indicating that you would like to roll over the funds, and giving the information for the new account.

The 60-Day Rule

Above, we said that “permanently taking money” from your 401(k) will trigger early withdrawal penalties. because there is an exception for rolling over retirement accounts.

Generally speaking, you can directly transfer money from one retirement account into another. However, you can also rollover your 401(k) account by cashing it out and then depositing that money into a new account (an “indirect rollover”). The IRS allows you to do this tax and penalty free so long as you deposit the money into a qualified retirement account within 60 days of your withdrawal. If so, the agency considers this a rollover rather than a cash out. However, after 60 days both income taxes and early withdrawal penalties apply.

The Bottom Line

Woman leaving her job for good

The IRS does not suspend its rules on early withdrawals when you leave one job for another. If you cash out your 401(k), you have 60 days to put that money into another qualified retirement account or else penalties and taxes will apply. Other common options include directly transferring your retirement account to another qualifying account or leaving it in place.

Tips on Retirement Accounts

  • What’s the right retirement plan for you? Should you roll your 401(k) into another employer’s program or an IRA? What other options might you even have? A financial advisor can provide valuable insight and guidance on this. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Part of what will help you decide what to do with 401(k) money is how far long you are in reaching your financial goal for retirement. Use this no-cost retirement calculator to get a quick estimate of how you’re doing.

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