Whether you quit, were fired, or were laid off, your 401(k) stays yours. The money you contributed is always yours, and the employer money is yours to the extent it has vested. You have four options, and one of them (cashing out) is almost always the most expensive.
This is general information, not personalized advice. Check your plan’s rules and talk to a tax professional before moving a large balance.
Your four options at a glance
| Option | Taxes now? | Best when |
|---|---|---|
| Leave it in the old plan | No | The plan has good, low-cost funds, or you need time to decide |
| Roll over to an IRA | No (if done as a direct rollover) | You want more investment choices and one place for your money |
| Roll over to a new employer’s plan | No (if the plan accepts rollovers) | You want everything in one plan, or you may want to borrow later |
| Cash out | Yes: income tax, plus 10% penalty if under 59½ | A true emergency, after the other options are ruled out |
1. Leave it in your old employer’s plan
Most plans let you leave the money where it is. Check the details:
- Small balances may be moved for you. Plans can force out small balances. Under federal rules a plan can automatically roll a balance between $1,000 and $7,000 into an IRA, and can cash out balances under $1,000. Check with your plan administrator.
- Fees and funds. You may lose access to some features available to current employees, and the investment menu may be limited.
- Loans. You usually cannot take a new loan from a plan at a former employer.
2. Roll it over to an IRA
A rollover moves the money from your 401(k) to an IRA without triggering tax. Choose a direct rollover, where the plan sends the money straight to the IRA, rather than having a check made out to you.
Why the direct route matters: if the plan pays you directly, it must withhold 20% for federal taxes. To roll over the full amount, you have to make up that 20% from your own pocket within 60 days. Miss the 60-day window and the amount you did not roll over becomes a taxable distribution. See our walkthrough on transferring a 401(k) to a Fidelity Rollover IRA and the beginner’s rollover guide.
Two details people miss:
- Pre-tax 401(k) money goes to a traditional IRA. Roth 401(k) money goes to a Roth IRA. Mixing them can create a tax bill.
- Your IRA gives you more choices than most plans, which also means you choose the investments yourself.
3. Move it to your new employer’s plan
If your new job’s plan accepts rollovers, you can move the old balance in and keep everything in one place. Ask the new plan administrator whether it accepts rollovers and what the process is. This option can also preserve the ability to borrow from the plan. See how 401(k) loans work.
4. Cash it out: what you actually keep
Cashing out means the plan pays you the money. It is taxed as ordinary income in the year you receive it. If you are under 59½, the IRS usually adds a 10% additional tax on top.
There is also a mandatory 20% federal withholding on the payment. That is a down payment on your tax bill, not the bill itself. If your actual rate plus the 10% penalty is higher than 20%, you owe the difference when you file.
Here is an example. It assumes a 22% federal bracket, a 10% penalty, and ignores state tax and the extra income pushing you into a higher bracket, so the real cost is often higher.
| 401(k) balance | Withheld at payout (20%) | Hits your bank account | Total federal tax + penalty (32%) | Extra owed at tax time | What you keep |
|---|---|---|---|---|---|
| $10,000 | $2,000 | $8,000 | $3,200 | $1,200 | $6,800 |
| $25,000 | $5,000 | $20,000 | $8,000 | $3,000 | $17,000 |
| $50,000 | $10,000 | $40,000 | $16,000 | $6,000 | $34,000 |
State income tax comes on top in most states. The point is that the amount that lands in your bank account is not the amount you keep. To see what you give up in future growth, try our compound interest calculator and retirement savings calculator.
If you were laid off
A layoff does not change the tax rules, but it changes what is possible:
- The rule of 55. If you leave your job in or after the calendar year you turn 55, you can take money from that employer’s 401(k) without the 10% penalty. You still owe income tax. This applies to the plan of the employer you just left, not to IRAs or older plans. If you roll the money into an IRA first, you lose this exception.
- Other penalty exceptions include disability, certain medical expenses above 7.5% of income, and a series of substantially equal payments. See Fidelity 401(k) withdrawal rules.
- The IRA health-insurance exception does not apply here. The exception for health insurance premiums while unemployed is for IRA withdrawals, not 401(k) withdrawals.
- Severance and unemployment pay count as income and can raise your bracket in the year you cash out. If your income will be lower this year, that can change the math, but it rarely makes the 10% penalty go away.
- Think twice before cashing out to cover bills. If you need cash, compare it with other options first, including your emergency fund, unemployment benefits and, if your plan allows, a loan before you leave.
Check your 401(k) loan before you leave
If you borrowed from your 401(k), the unpaid balance usually becomes due when you leave. If you cannot repay it, the plan treats the balance as a distribution (a “loan offset”), which is taxable and may be hit with the 10% penalty. You generally have until your tax return due date, including extensions, for that year to roll the offset amount into an IRA to avoid tax. See our guide to 401(k) loans.
Check your vesting
Your own contributions are always yours. Employer matching money may be subject to a vesting schedule. If you are not fully vested when you leave, the unvested part is forfeited. Your plan’s summary or your online account shows your vested balance. If you are close to a vesting date, find out whether the timing of your departure matters.
Don’t forget the paperwork
When you take a distribution, you will get Form 1099-R in the following January. A direct rollover will still produce a 1099-R, with a code showing it was not taxable. See when Fidelity tax forms are available.
A simple way to decide
- Do you need the money in the next 12 months? If not, rule out cashing out.
- Is the old plan good and low-cost? If yes, leaving it is fine for now.
- Do you want fewer accounts and more investment choices? A direct rollover to an IRA is the usual route.
- Does your new employer’s plan accept rollovers, and is it good? Compare fees and funds.
- Are you 55 or older and might need to tap it soon? Talk to a tax professional before you roll anything into an IRA.
FAQ
What happens to my 401(k) if I get laid off?
Nothing happens to the money. It stays in your account, invested as it was, and you can leave it, roll it over, or cash it out.
Can my employer take my 401(k) back?
Not your vested balance. Unvested employer contributions can be forfeited.
Do I have to pay tax on a rollover?
Not on a direct rollover from a traditional 401(k) to a traditional IRA. Converting pre-tax money to a Roth account is taxable.
How long do I have to decide?
In most cases there is no deadline to leave the money in the plan, unless your balance is small enough to be moved automatically. The 60-day window applies only after you receive a distribution.
What is the penalty for cashing out a 401(k) before 59½?
A 10% additional federal tax, plus ordinary income tax, unless an exception applies.
This article is general information, not tax or financial advice. Rules, limits and your plan’s terms can change; confirm with your plan administrator and a qualified professional.
Sources: IRS, Topic no. 558, Additional tax on early distributions from retirement plans; IRS, Rollovers of retirement plan and IRA distributions.