A comprehensive guide to cashing out a 401(k) after leaving a job

The 401(k) is the primary retirement vehicle for most American workers. Its name comes directly from a provision of the Revenue Act of 1978 — Section 401(k) — which allows employees to avoid upfront taxation on deferred compensation, such as bonuses and stock options. Today, according to the Investment Company Institute, there are more than 60 million active participants in 401(k) plans, along with millions of retirees and former employees. 

If you've ever received employer-sponsored retirement benefits, you probably have a 401(k) yourself. Even if you separate from an employer who sponsored your plan, the 401(k) account remains active, which leaves us with this question: What can you do with it?

What is a 401(k), and how does it work?

A 401(k) is an employer-sponsored retirement account, which means it's available only to employees who work for companies that offer 401(k) plans. An employer that offers a 401(k) plan will typically mention it among its employment benefits. Some employers also offer employer matching, whereby they help fund the account up to a certain rate relative to your contribution.

Traditional 401(k) accounts are funded with pre-tax dollars, whereas Roth 401(k) plans are funded with post-tax dollars. Both accounts grow tax-deferred, but distributions are taxed on the former and generally not on the latter. 

The money grows through investments that you choose, typically from a predetermined menu of investment options. In exchange for investment growth and tax benefits, you agree to not withdraw from the account until you turn 59.5 years old. If you do make a withdrawal before then, you're subject to a 10% early withdrawal penalty.

It's up to you to enroll in your company's 401(k) plan and specify how much of your paycheck goes toward contributions. However, starting in 2025, the SECURE Act 2.0 will require most companies to enroll their employees automatically and set a contribution rate of at least 3%. After auto-enrollment, individual employees can adjust their contribution rates.

What does it mean to cash out your 401(k)?

Cashing out your 401(k) means removing some or all of the money from the account. You can do so at any time, even while you're still working for the employer that sponsors the plan. However, withdrawing from a 401(k) after leaving a job subjects you to the 10% penalty tax if you're under the age of 59.5. Also, if the account is a traditional 401(k), you'll owe tax on the withdrawals, which are taxed as ordinary income. 

Of note, the IRS does allow exceptions to taxation on early withdrawals. For example, your account may be exempt from any withdrawal penalty if any of the following conditions apply:

• Your designated beneficiaries receive distributions upon your death.
• You make a withdrawal on account of a total or permanent disability.
• You make a withdrawal to pay for medical expenses that exceed 10% of your adjusted gross income.
• You make a withdrawal to avoid exceeding the annual contribution limit.
• You make a withdrawal of up to $5,000 for the qualified birth or adoption of a child.
• You're a qualified military reservist called to active duty.
• You separate from your employer after the age of 55.

See the relevant IRS page for other exceptions.

"Cashing out your 401(k) means removing some or all of the money from the account. … However, withdrawing from a 401(k) after leaving a job subjects you to the 10% penalty tax if you're under the age of 59.5."

3 options for cashing out your 401(k) after you leave a job

You have the following three options for cashing out your 401(k) after you leave a job:

1. Let it be

You don't have to do anything with your 401(k) after separating from your employer. Your employer may even allow you to keep the account active. You wouldn't be able to contribute to the account, but your selected investments will continue to function.

However, according to the rules set forth by the IRS, your former employer has the right to take certain actions depending on how much money is in your 401(k) account:

• Less than $1,000: Your employer can automatically close your account and cut you a check for the balance, minus applicable income taxes. As long as you deposit the money into a qualified retirement account within 60 days, you'll be free of the 10% penalty tax.
• Between $1,000 and $5,000: Your former employer may remove you from its plan and roll your 401(k) funds into an individual retirement account. You'd have to request a complete cash-out for the employer to close the account.
• More than $5,000: Chances are that your former employer will let you keep your account active if its balance exceeds $5,000, but you may be subject to fees and restrictions.

2. Roll the funds over

Rolling over your funds means transferring your 401(k) account balance into another type of account. If you have another 401(k) account with a new employer, you can roll the funds over into that account. Alternatively, you can open an IRA and roll the money over there. In either case, the process typically involves notifying your former employer's 401(k) plan manager and formally requesting a transfer of funds. The 60-day rule described above applies here, too, so take quick action to avoid paying the penalty tax.

3. Take a full cash-out

A full cash-out means closing a 401(k) after leaving a job, which entails withdrawing the entire balance. That, in turn, opens you up to the 10% penalty tax if you're under 59.5 years of age and don't meet any of the exception criteria outlined by the IRS. 

Frequently asked questions about 401(k)s

To learn more about 401(k)s, consider the answers to the following frequently asked questions:

How can I find my old 401(k) accounts?

According to Capitalize, a company that specializes in helping people find and optimize their retirement accounts, there are more than 29 million 401(k) accounts that have been left behind or forgotten by employees who've moved on from their employers, amounting to around $1.65 trillion in assets. If you've worked for an employer who offered a 401(k) benefit and you never cashed it out, your account may be among those millions. Fortunately, you have some options for recovering it:

• Get in touch with your former employer. The human resources department or the 401(k) plan administrator can tell you about your account's status.
• Use your Social Security number to search national databases. The Department of Labor, National Registry of Unclaimed Retirement Benefits, U.S. Pension Guaranty Corp., FreeERISA, and the aforementioned Capitalize all operate such databases.
• Visit the National Association of Unclaimed Property Administrators website. There, you can search for state agencies that handle unclaimed properties, including old 401(k) accounts.

What can I do with an old 401(k) account?

If you succeed in locating an old 401(k) account, you have the same options as mentioned earlier: leave it be, roll it over, or fully cash out. Again, if you opt for a rollover, you have the choice to transfer the funds into your current employer's 401(k) plan.

Can I withdraw my 401(k) if I quit my job?

Yes, you can withdraw from your 401(k) if you quit your job. The circumstances under which you leave a job don't affect your ability to cash out your 401(k). The same limitations and risks that we discussed earlier will apply, too. Withdrawals before retirement can trigger significant taxes, and you'll be subject to a 10% penalty tax if you cash out before the age of 59.5.

If you're wondering about cashing out your 401(k), chances are that you're thinking about leaving your job or you've already done so. In that case, you'd do well to get started on the hunt for your next job. Use CareerBuilder to your advantage by getting email alerts about positions that match your requirements and preferences. Searching for a job is much easier when it's a two-way process, with you and prospective employers each seeking the other.

More tips about leaving a job

Sticking with a job you don't like can be more than just a mental or emotional drain. It can also affect you physically and lead to long-term health concerns.

Choosing to leave a job is a serious decision and a huge commitment. So, if you're thinking of quitting, you should know how to optimize your approach for the best outcomes.

Interviewers often ask candidates why they left their previous job. Knowing how to answer this question can improve your odds of landing the position you want.