If you lose your job can you cash out your 401k

Getting laid off or fired can be a scary experience. Make sure all of your financial bases are covered, including your 401k.

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You Can Leave Your Money Where It Is
You Can Roll It Over to a New IRA
You Can Roll It Over to a New Employer’s Plan
You Can Cash It Out
401(k) Loans
Hardship Withdrawals
Roll Over to an IRA

If you’ve been let go or laid off, or even if you’re worried about it, you might be wondering what to do with your 401k after leaving your job.

The good news is that your 401k money is yours, and you can take it with you when you leave your old employer. Whether that means rolling it over into an IRA or a new employer’s 401k plan, cashing it out to help cover immediate expenses, or simply leaving it in your old employer’s 401k while you look into your options, your money isn’t going anywhere.

You Can Leave Your Money Where It Is

If you have more than $5,000 in your 401k, you can leave it in your old employer’s 401k plan — and even if you have less than that, they still might let you leave the money where it is, but you should ask. If you have less than $5,000, your employer has the option to make you take a distribution, but not all employers will exercise that right.

This is the simplest option, and it’s the one many people choose when they’re fired suddenly. You usually can’t plan for a job loss, so you might not even have time to decide what to do with your 401k money before you get fired or laid off. And you might need some time to process the layoff for a while before you even get around to worrying about the money in your retirement plan.

“Well,” you might ask, “how long do I have to rollover my 401k from a previous employer?” That’s a good question. If you want to do a direct rollover, in which your former employer writes a check directly to your new employer for deposit into your new employer’s 401k plan, you can pretty much wait as long as you want.

However, if you want to do an indirect rollover, where you cash out the money and then deposit it into another tax-advantaged account yourself, you have 60 days from the time you cash out to deposit the money into another such tax-advantaged account, like an IRA. If you’re planning to roll over the money into another 401k, you want to avoid this option, since your old employer will be required to withhold 20% from your payout for taxes.

Furthermore, while you can leave your 401k money in your old employer’s 401k, you won’t be able to make contributions anymore. It might also be hard to make changes to your account, like if you need to update your beneficiary or change your address. So, you’ll want to plan to get the money into a new account as soon as you can.

You Can Roll It Over to a New IRA

If you leave your old job and don’t know when you’ll be starting a new one yet, and you also don’t want to leave your 401k with your old employer, you can roll the money over into a new IRA. You can use any financial institution you choose for this. Make sure that your old employer does a direct rollover, signing your money over to the IRA management company, rather than to you, so you can avoid paying the 20% in taxes.

You Can Roll It Over to a New Employer’s Plan

If you’re starting a new job, you can roll over your 401k money directly into your new employer’s retirement plan, in most cases. That’s something to ask about during the onboarding process. You should also ask if your new company will match any of your rollover. If you’re lucky, you’ll get even more money out of your job change.

You Can Cash It Out

Let’s say you get laid off or fired and don’t know how you’re going to pay the bills. You have a mortgage, utilities and a family to think about. Under these circumstances, you might think about cashing out your 401k so you can use some or all of it to meet your immediate needs and keep your family afloat until the crisis has passed.

In most cases, you would have to pay the 20% tax on your cashed-out 401k, plus a 10% early withdrawal penalty if you’re under age 59 ½.

Even though you can cash out your 401k, it should be a last resort. If you spend the money now, you may never meet your retirement goals. And even if you lose money on your 401k investments due to stock market volatility, you should regain those losses with time.

When you lose your job, dealing with your 401k may be the last thing on your mind. But even though you may be struggling in the moment, you still need to keep your financial future in mind.

AHS assumes no responsibility, and specifically disclaims all liability, for your use of any and all information contained herein.

Cashing out a 401(k) may be tempting, especially if you’re facing financial difficulties or a significant medical emergency or repair. Most 401(k) participants only access their 401(k)s when they leave a job.

Normally you can't cash out your 401(k) without quitting your job. However, some plans allow participants to cash out their 401(k)s via a 401(k) loan or through a hardship withdrawal. A 401(k) loan will prevent you from having to pay taxes and penalties, but the loan plus interest will need to be repaid into the account. Hardship withdrawals are categorized by the IRS. You’ll still need to pay taxes; however, you’ll be exempt from the 10% penalty tax.

Retirement accounts are built and intended to help you save a nest egg to last throughout your retirement years. The best advice is to simply leave it to grow. But if you need access to your 401(k), it may not be necessary for you to quit your job to do so.

401(k) Loans

If you’re anticipating staying at your job for longer than five years, then perhaps a 401(k) loan is your best option to cash out your 401(k). The only thing to be aware of is defaulting on the loan. It won’t affect your credit if you’re fully vested; however, the IRS will view your defaulted 401(k) loan as income and tax you accordingly. They will also consider the loan as an ineligible withdrawal and issue you a 10% penalty tax.

401(k) loans are capped at $50,000 or 50% of your 401(k) balance, whichever is less. Most 401(k) loans process within a couple of business days, with funds reaching a bank account a couple of days after that.

The loan must be repaid within five years. Although legislation was passed due to the COVID-19 pandemic has extended this timeline. It’s best to check with the current regulations to know how long you have to repay your 401(k) loan.

Lastly, should you quit your job or get fired with an outstanding 401(k), your employer may require to repay the balance in full within 60 days.

Hardship Withdrawals

Many plans allow participants to take out hardship withdrawals. Categorized by the IRS, hardship withdrawals allow 401(k) participants to cash out their 401(k)s in order to fund challenging or life-changing events.

Luckily, those who qualify for hardship withdrawals are spared the 10% penalty tax by the IRS. However, standard income tax will still be applied come tax time via a 1099.

The IRS defines hardship withdrawals as a distribution that is:

Due to an immediate and heavy financial need.
Limited to the amount necessary to satisfy that financial need.

Additionally, the IRS automatically categorizes a hardship withdrawal through the Safe Harbor regulations:

Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.
Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents, or beneficiary.
Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
Certain expenses to repair damage to the employee’s principal residence.

Roll Over to an IRA

Lastly, employees can roll over their 401(k)s to an IRA and avoid taxes and penalties. Since an IRA is an eligible retirement account, rollovers from a 401(k) to one are allowed by the IRS.

Distributions from an IRA are still subject to the same rules as those from a 401(k). However, if your goal is to have more control over your investment options, a rollover from a 401(k) to an IRA is void of any taxes and penalties.

The best way to facilitate a rollover from a 401(k) to an IRA is to have your 401(k) plan administrator transfer the funds over. Everything will be handled for you, and your funds will be in your IRA much faster. If your 401(k) administrator sends you a physical check, you’ll have 60 days to deposit into your IRA to avoid taxes and penalties. Most institutions require you to mail the physical check to them, so be sure to obtain tracking information.