Your 401(k) after a layoff
Losing the job doesn't mean losing the 401(k). The money is still yours, you have time, and the worst move is usually the panic one: cashing it out. Here's what actually happens to it, and the four things you can do.
THE SHORT ANSWER
The 401(k) is still yours after a layoff, and nothing forces a fast decision. You have four options: leave it where it is, roll it into an IRA, roll it into a new employer's plan, or cash it out, and cashing out is usually the worst move because of taxes and early-withdrawal penalties.
The money you put in is always yours. Your employer's matching contributions are yours only once they've vested, so check your plan's vesting schedule for how much of the match you keep.
Your four options
If your balance is above the plan's cash-out threshold (often $7,000), the old plan can usually keep holding it. Nothing happens, you just stop contributing. Fine as a pause while you decide, and the right call if you left at 55 or older and might need this money before 59 1/2 (see the third trap below).
Move it to an IRA at a brokerage you pick. A direct (trustee-to-trustee) rollover moves the money with no tax and no penalty, and you get far more investment choices than a workplace plan. One catch if you left at 55 or older: moving it to an IRA gives up penalty-free access before 59 1/2, and nothing puts it back.
3
Roll it into a new 401(k)
Once you start a new job, if that plan accepts rollovers you can move the old balance in. Keeps everything in one place, with the same no-tax direct rollover. Same 55-or-older caveat as the IRA: the exception belongs to the plan you left, so moving the money into a new employer's plan gives up that access too.
4
Cash it out (the expensive one)
You can take the money, but you'll owe income tax, plus a 10% early-withdrawal penalty if you're under 59 1/2 and no exception applies, often a third or more gone. This is almost always the worst option. Treat it as a last resort, not a first move.
Three traps to know about
An old 401(k) loan can come due
If you borrowed from your 401(k), leaving the job usually makes the balance due within a window the plan sets, often 60 to 90 days. If it isn't repaid, the plan treats it as a distribution: income tax, plus the 10% penalty if you're under 59 1/2 and no exception applies (see below). You can still avoid both by depositing the amount into an IRA or new plan by your federal tax-filing deadline (including extensions) for that year.
Take a direct rollover, not a check
Ask for a direct (trustee-to-trustee) rollover so the money goes straight to the new account. If the plan cuts you a check instead, the clock starts: you have 60 days to deposit it, and the plan usually withholds 20% you'd have to make up to roll the full amount.
Leaving at 55 or older changes the order
If you left the job in or after the calendar year you turned 55, money in that employer's plan can usually come out without the 10% early-withdrawal penalty, years before 59 1/2. Income tax still applies. The catch is the order you do things in: rolling the balance into an IRA gives that access up permanently, and no later move restores it. If you might need part of this money before 59 1/2, one common approach is to leave that part in the old plan and roll over only the rest. Check with your plan administrator first, plans are not required to allow partial withdrawals.
The official rules
Rollovers of retirement plan distributions (IRS)
The direct-vs-indirect rollover rules, the 60-day window, and the 20% withholding, from the IRS.
↗
Early-withdrawal penalty on plan distributions (IRS Topic 558)
When the 10% additional tax applies to a 401(k) distribution. Topic 557 is the same rule for IRAs, where the age-55 exception does not exist.
↗
Exceptions to the early-withdrawal tax (IRS)
The full list, including separation from service in or after the year you turn 55.
↗
This is general information, not financial or tax advice. Before you move retirement money, confirm the details with your plan administrator and a tax professional, your specific plan and situation can change the math.
YOUR NEXT STEP
The rollover is one clock of five
Your 401(k) can usually wait; some of the other first-week clocks can't. The free 60-second triage dates all five from your last day.
See my five clocks →
Common questions
What happens to my 401(k) when I'm laid off?
It stays yours, and nothing has to happen right away. The money you contributed is always yours; your employer's match is yours once it has vested. You have four options: leave it in the old plan, roll it to an IRA, roll it into a future employer's plan, or cash it out.
Should I cash out my 401(k) after a layoff?
Usually not. Cashing out means income tax, plus a 10% early-withdrawal penalty if you're under 59 1/2 and no exception applies, so a large chunk disappears. It's almost always the most expensive option; a rollover keeps the money working and untaxed. This is general information, not tax advice.
How do I roll over my 401(k) without paying taxes?
Ask for a direct (trustee-to-trustee) rollover into an IRA or a new employer's 401(k), so the money never passes through your hands. If the plan sends you a check instead, you have 60 days to deposit it and the plan usually withholds 20% you'd have to make up to roll the full amount.
Can I take money out of my 401(k) at 55 without the 10% penalty?
Often yes. If you left the job in or after the calendar year you turned 55, money in that employer's plan is generally exempt from the 10% early-withdrawal penalty, well before 59 1/2. Income tax still applies. Rolling the balance into an IRA gives that exception up permanently, so work out what you might need before 59 1/2 before you move anything. Plans are not required to allow partial withdrawals, so confirm with your plan administrator and a tax professional.
What happens to my 401(k) loan if I get laid off?
Leaving the job usually makes an outstanding 401(k) loan due within a window the plan sets, often 60 to 90 days. If it isn't repaid, the plan treats the unpaid balance as a distribution: income tax, plus the 10% penalty if you're under 59 1/2. You can still avoid both by depositing that amount into an IRA or new plan by your federal tax-filing deadline (including extensions) for that year. Confirm the timeline with your plan administrator.