When You Leave Your Job
After leaving your job, you have several options for the money accumulated in your 401(k) account:
- leave the money in your employer’s retirement plan,
- cash out the account,
- roll the money over into an IRA,
- move the money into the 401(k) plan at your new job.
It is worth knowing that the Economic Growth and Tax Relief Reconciliation Act of 2001 made retirement plans fully portable, making things easier for people who change jobs.
How Much of the Money Is Yours?
You cannot take all the money in the account with you. The money you contributed always belongs to you, but you have to earn the rights to the money your employer contributed (vesting rights). There are two versions:
- 3-year “cliff vesting” – giving the employee full rights to the employer’s contributions after 3 years of service;
- gradual vesting of 20% a year, starting after two years of work.
Read more in the Department of Labor brochure “What You Should Know About Your Retirement Plan”: www.dol.gov
Leaving the Money Where It Is
If you have more than $7,000 in your 401(k) account and you like the choice of mutual funds your plan offers, you can leave the account with your old employer – without your consent, the employer cannot pay it out to you. You have 30 to 90 days to make a decision. If you wish, you will be able to take this money out at any time in the future.
If you have accumulated no more than $7,000 in your 401(k) account, the employer can close the account without your consent.
Cashing Out the Account
You are allowed to withdraw the money from your 401(k) account and spend it on anything you like. Just remember that this will be equivalent to liquidating your retirement account. Cashing out is costly, because you will pay income tax plus a 10 percent penalty if you are not yet 59 and a half. Squandering your retirement fund is a short-sighted move, because its purpose is to provide for you in your later years.
Note: Some people receive a check from work, deposit it in their bank and do nothing more, not anticipating any trouble. This is equivalent to withdrawing your retirement money, and it doesn’t matter whether the dollars are sitting in a regular bank account or were spent on a car.
Warning: Some people want to withdraw the cash and then deposit it into another retirement account. If you withdraw the cash yourself, 20% will be withheld as a tax prepayment. If you deposit this money into another retirement fund within 60 days, the withheld tax will be refunded to you when you report it on your annual tax return. Let’s say that after many years of work you withdrew $100,000 from your retirement account and $20,000 was withheld as a tax prepayment. Within 60 days, you must deposit the full $100,000 into the second retirement account, which means you have to take the missing $20,000 out of your own pocket. If you don’t, the IRS will treat the missing $20,000 as a distribution and assess tax at a rate that depends on your tax bracket.
In this way you can lose as much as half of your retirement savings. So be careful.
Rolling the Money Over into an IRA
To avoid the problems described above, it is best to make a direct transfer of the money from your 401(k) account to another retirement account, which is called a rollover. You can move the money into an IRA or into a 401(k) account at your new employer.
The financial institutions handle this between themselves. When opening a new IRA, you indicate in the appropriate section of the application which institution and which account the money is to be transferred from. This way you avoid having to pay the 20% tax prepayment.
Note: Don’t deposit the money from your 401(k) account into an existing IRA, so as to avoid mixing money from different sources. Open a new IRA at any financial institution – a bank, a brokerage firm or a mutual fund.
Moving Your 401(k) to Your Second Employer
If your new employer offers a 401(k), it is worth taking advantage of it and transferring the money from your previous plan there to consolidate it. Almost all 401(k) plans accept money from other retirement plans.
Before you move your retirement savings to the new plan, look at what investment options it offers. If they are limited, an IRA at a large firm such as Charles Schwab or Fidelity will give you more choices.
All the retirement plans used in the United States – individual and employer-sponsored, for employees and the self-employed – their contribution and withdrawal rules, tax implications, etc., are discussed in the book “Amerykańskie emerytury” (“American Pensions”).
Updated October 2026.
