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Your 401(k) after a layoff: keep it, roll it over or cash out

After a layoff your 401(k) stays yours, and you can usually leave it where it is, roll it into an IRA or a new employer’s plan, or cash it out. Cashing out before 59½ often brings income tax and a 10% penalty, so most people roll it over or leave it.

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Your options

  • Leave it in the old plan, if the plan allows and the balance is above its minimum.
  • Roll it into an IRA, which usually gives you more investment choices.
  • Roll it into your next employer’s plan, once you have one.
  • Cash it out, which is taxed as income and usually carries a 10% penalty before 59½, with exceptions.

Details to check

  • A direct rollover, trustee to trustee, avoids withholding and a deadline problem.
  • An unpaid plan loan can be treated as a distribution; the deadline to repay or roll it over is generally the tax filing deadline for that year, including extensions.
  • The “rule of 55” can let you take money from the plan of the employer you left, without the 10% penalty, if you separate in or after the year you turn 55. Check the plan’s rules.
  • Company stock in the plan has special tax treatment worth asking about.

Before you decide

Compare fees and investments in the old plan, an IRA and the new plan. A fee-only adviser or the plan administrator can explain your case; this page is general information, not tax advice.

Frequently asked questions

Can my employer take my 401(k)?

Your own contributions are always yours. Employer contributions may depend on a vesting schedule.

Should I cash out to pay bills?

Try unemployment, severance and other options first, since taxes and penalties can take a large part.

How long do I have to decide?

There is no general deadline, but plans can cash out or move small balances, so check the notice you received.

Is a rollover taxable?

A direct rollover to a traditional IRA or another plan is not taxed when done correctly.

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