Beware: You Could Lose Your 401(k)

SmartAsset: Can You Lose Your 401(k)?

Employer-sponsored retirement plans are one of the best ways for working Americans to build wealth. They offer tax advantages, allow your money to grow over time and many employers even match your contributions. But the job market is changing and as employees jump from one job to another, they may be asking, “What happens to my 401(k) after I leave? Can I lose it?” Depending on the circumstances, you could lose part of it. Hence, it’s important to know the rules so you don’t regret your decision later.

A financial advisor could help you put a financial plan together for your retirement needs and goals. 

What Happens to Your Retirement Plan When You Quit?

If you have been contributing to your retirement plan for years and then quit your job or are laid off, your account might stay right where it is. Neither you nor your old employer can contribute anymore, but you can usually log in and see information about the account. In addition, your investments will continue earning interest.

There are some situations, however, where your retirement account won’t stay frozen. If you have just a small amount of money in it, your employer might cash it out or ask you to move the money to a different account.

Rules That Apply to Your Plan Balance

In general, your 401(k) will not simply disappear when you leave your job. But your employer may take certain actions depending on how much money is in your account:

If your balance is less than $1,000, your employer may cash it out and issue you a check.

If your balance is between $1,000 and $5,000, your employer may require you to move it.

If your balance is over $5,000, your employer cannot move your money or require you to do so. In this case, you can roll it into an IRA or simply leave the money in the old plan.

While none of these scenarios necessarily mean you loose your 401(k), you could end up paying avoidable penalties in some situations.

As an example, imagine your employer sends you a check for a sub-$1,000 amount. In this case, you must deposit it into an IRA within 60 days. If you don’t, it will be considered an early withdrawal, and you’ll be subject to a 10% penalty. And if the 401(k) is a traditional account and not a Roth, the money will also be considered income. That means you have to pay tax on top of the early withdrawal penalty.

The same rules apply if you voluntarily move your old 401(k) into an IRA if you opt for a cash transfer. In this scenario, you cash out all of the investments in your account, transfer it to a rollover IRA, and then invest it yourself. You still have to do that within 60 days to avoid taxes and penalties.

Rollovers Don’t Increase Your Contribution Amount

As mentioned in the previous section, your employer can’t require you to move your 401(k) if your balance is in excess of $5,000. But what if you rolled an older 401(k) into your current plan? In this scenario, the money from the older account doesn’t increase the amount you’ve contributed.

For example, if you have contributed $4,500 to your 401(k) and rolled $5,000 into it from an old retirement account, your total balance is $9,500. But your employer can still force you to move your money in this situation.

Vested Balance

SmartAsset: Can You Lose Your 401(k)?

Any money you contribute to your 401(k), such as money contributed via payroll deduction, is money you can’t lose. That employer can’t take that money from you, even if you leave the company entirely. But there is another portion of your retirement plan you may not be able to claim: your vested balance.

If your employer offers matching contributions, the money may not be yours right away. This varies by employer, but in some cases, you have to wait three to five years before the money is fully vested. If you leave before you are fully vested, you may lose some or all of the match plus any earnings that go with it.

Thus, while matching contributions are sometimes called “free money” and can help you reach your retirement savings goals more quickly, you could lose it if you leave your job too soon. Be sure to check your benefits information so you know how long your vesting period is before calling it quits.

What Happens to My 401(k) Loan?

Some employer-sponsored retirement plans allow you to take a loan against the balance of the plan. You might consider this option if you are particularly hard-pressed for cash; it’s a better option than an early withdrawal, which may subject you to tax and penalties. However, you could find yourself in a precarious situation if you leave your job while you have one of these loans outstanding.

The main thing to know is that if you don’t repay the balance, it will be considered a distribution. That means you may still end up having to pay income tax and penalties if you are younger than 59 ½. Plus, your employer may require you to pay the loan in full. All this means you could end up losing money if you take out a loan against your retirement plan, so be sure you are fully aware of the risks before doing so.

Bottom Line

SmartAsset: Can You Lose Your 401(k)?

While it is possible to lose some money with your retirement plan after you leave your job, it’s unlikely you will lose all of it. However, you could lose your employer match if you aren’t fully vested. In addition, there are some cases where you could end up having to pay taxes and penalties on money from your old retirement plan. If handled properly, though, taxes and penalties are easily avoided.

Tips for Retirement Planning

A financial advisor can help put your retirement plan into action. 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.

If you want to figure out whether you are saving enough for retirement, SmartAsset’s free retirement calculator can help you determine how much you will need.

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