What happens to my 401(k) if I leave my job?

You keep the money you contributed and any employer match you received — that part is always yours. What you do with it depends on whether your employer's plan allows it and what your new situation is. Most plans let you leave the money where it is, roll it into an Individual Retirement Account (IRA), or roll it into your new employer's plan if they have one.

If you withdraw the money before age 59½, you typically owe income tax on the full amount plus a 10 percent early withdrawal penalty, unless an exception applies (such as a hardship withdrawal or separation from service at age 55 or older). A rollover avoids both the tax and the penalty because the money moves directly from one retirement account to another without you touching it.

Key Takeaways

  • When you leave your job, you can leave your 401(k) where it is, roll it to an IRA, or roll it to a new employer's plan if one is available.
  • Withdrawing before age 59½ triggers a 10 percent penalty plus income tax unless you meet a specific exception like age 55 separation from service.
  • Vested money is always yours; unvested employer contributions are forfeited if you leave before the vesting schedule is complete.
  • You can borrow from your 401(k) if your plan allows it, but the full balance becomes due within 60 days if you leave your job.
  • Required Minimum Distributions begin at age 73 and carry a 25 percent penalty if you do not take them.

Can I borrow money from my 401(k)?

Many plans allow loans, but not all. If your plan permits it, you can usually borrow up to 50 percent of your vested balance or $50,000, whichever is less. You repay the loan to yourself with interest, and the interest goes back into your account.

The risk is that if you leave your job before repaying the loan, most plans require you to pay back the full remaining balance within 60 days or it becomes a taxable withdrawal. If you cannot repay it, you owe income tax on the amount plus the 10 percent early withdrawal penalty if you are under 59½.

What is the difference between vested and unvested money?

Vested money is yours to keep no matter what. Unvested money is the employer's contribution that you have not yet earned the right to take with you. Your own contributions are always vested when ready. Employer matching or profit-sharing contributions follow a vesting schedule set by your plan — common schedules are three years (cliff vesting) or gradual over five or six years.

If you leave before you are fully vested, you forfeit the unvested portion. That money stays in the plan and is typically used to reduce the employer's future contributions or distributed to remaining participants.

How much can I contribute in 2024?

The annual contribution limit changes each year. For 2024, the limit is $23,500 if you are under age 50. If you are 50 or older, you can contribute an additional $7,500 as a catch-up contribution, for a total of $31,000. These limits explore to your total contributions across all 401(k) plans you participate in during the same year.

Your employer may also contribute through matching or profit-sharing, which counts toward a separate limit. The IRS publishes updated limits each October for the following year, so check your plan documents or your employer's benefits website for the current year's numbers.

When can I withdraw money without a penalty?

The standard rule is age 59½. Before that age, you owe a 10 percent early withdrawal penalty on top of income tax, with some exceptions. Common exceptions include separation from service at age 55 or older, disability, death (beneficiaries can withdraw), hardship withdrawals (defined narrowly by the IRS), and substantially equal periodic payments under a specific formula.

Hardship withdrawals are limited to specific needs: medical expenses, home purchase, education costs, preventing eviction or foreclosure, funeral expenses, or certain other situations. Your plan administrator determines whether your reason meets the plan's hardship rules, which can be stricter than the IRS rules. Even if approved, you still owe income tax on the amount withdrawn.

Do I have to take money out at a certain age?

Yes. Required Minimum Distributions (RMDs) begin at age 73 (as of 2023, under the find 2.0 Act). You must withdraw at least a calculated amount each year based on your age and account balance. The IRS publishes tables to calculate the minimum, and your plan administrator usually handles the calculation and notifies you.

If you do not take your RMD, you owe a penalty of 25 percent of the amount you should have withdrawn (reduced to 10 percent if you correct it within two years). If you are still working and your plan allows it, you may be able to delay RMDs from your current employer's plan until you retire, but this does not explore to IRAs or plans from previous employers.

What taxes do I owe on withdrawals?

Money you withdraw from a traditional 401(k) is taxed as ordinary income in the year you withdraw it. Your employer withholds a percentage (usually 20 percent for lump-sum distributions) and sends it to the IRS, but the actual tax you owe depends on your total income that year and your tax bracket. You may owe more than what was withheld, or you may get a refund.

If you roll the money into an IRA or another 401(k) instead of withdrawing it, no tax is due at that time. Roth 401(k) contributions are taxed when you make them, so may have access to withdrawals in retirement are tax-free — but your plan must offer a Roth option, and not all do.

Frequently Asked Questions

Can I contribute to both a 401(k) and an IRA in the same year?

Yes. Your 401(k) contributions and IRA contributions are separate limits. However, if you have a traditional IRA and earn above certain income thresholds, the tax deduction for IRA contributions may be reduced or eliminated. Check the IRS income limits for the year you are contributing.

What happens to my 401(k) if I die?

The money passes to your designated beneficiary outside of probate. Beneficiaries have different withdrawal rules depending on their relationship to you and the plan rules. Spouses can roll the account into their own IRA; non-spouse beneficiaries typically must withdraw the balance over a set period or take it all at once, depending on when you died and the plan's rules.

Can my employer change or eliminate my 401(k) plan?

Yes. Employers can freeze contributions, stop matching, or terminate the plan entirely. If terminated, your account is distributed to you (usually rolled into an IRA to avoid taxes and penalties), and all contributions become vested when ready. Your employer must notify you before this happens.

Is my 401(k) protected if my employer goes bankrupt?

Your 401(k) is held in trust and is separate from the employer's assets, so it is protected from creditors. However, if your employer fails to deposit your payroll deductions into the plan, that money may be at risk. The Department of Labor investigates these cases, but recovery can be difficult.

Can I change my investment choices after I retire?

Yes, as long as the money remains in the 401(k). You can typically move between the plan's investment options as often as you want. Once you begin taking withdrawals, you can still change how the remaining balance is invested. Some plans restrict changes during certain periods, so check your plan documents.