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 as employees jump from one job to another, it’s natural to wonder whether you can lose your 401k. Depending on the circumstances, you could lose part of it. It’s important to know the rules so you can make the right decision.

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 lose 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

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 let you borrow against your account balance, which can be tempting if you’re short on cash. This approach is generally less costly than taking an early withdrawal, which can trigger taxes and penalties. Still, it comes with important risks, especially if you leave your job before the loan is fully repaid.

If you separate from your employer and don’t pay back the remaining balance, the unpaid amount is treated as a distribution. In that case, you may owe income tax and, if you’re under 59½, an early-withdrawal penalty. Some employers may also require immediate repayment in full. Because of these potential costs, it’s important to understand the terms and risks before borrowing from your retirement plan.

Can You Lose Your 401(k) When You Move It to a New Employer’s Plan?

If you join a new employer and want to bring your old 401(k) with you, a roll-in can help you keep your savings in one place. The transfer itself does not cause you to lose your 401(k), but certain missteps can lead to avoidable taxes or penalties.

How Transfers Work

A direct rollover is the safest method. In this process, the money moves from your old plan to your new plan without passing through your hands. If you choose an indirect rollover instead, the plan may withhold part of the balance and you must redeposit the full amount within 60 days. If you miss that deadline, the IRS treats the unpaid portion as a distribution. That can create income tax and, if you are under age 59½, an early withdrawal penalty.

Your new plan must also accept roll-ins. If it does not, you cannot move the money there. Some savers who are unaware of this rule request a distribution and then struggle to complete an indirect rollover. That situation can also expose the funds to tax if not completed on time.

The investments in your old plan will be sold before the transfer. This does not cause you to lose your 401(k), but it does mean your money will be out of the market until you select new investments in the new plan. If you do not make those selections, the money will default into the plan’s qualified default investment alternative, which may not match your preferences.

A roll-in also does not protect you from vesting rules tied to your old employer match. If you leave before you reach full vesting, you cannot carry the unvested portion into the new plan. That part of the balance is forfeited when you separate from your employer.

When done correctly, a roll-in keeps your retirement savings intact. The risk of loss comes from forfeited employer matches or from transfers that trigger taxes or penalties. Reviewing the rules for direct rollovers and the vesting schedule of your old plan can help you avoid those outcomes.

Bottom Line

While it’s 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. A financial advisor can help guide you through this transition and answer any other questions you may have about investing for retirement.

Tips for Retirement Planning

A financial advisor can help put your retirement plan into action. SmartAsset’s free tool matches you with financial advisors who serve your area. 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.