What Happens to Your 401(k) When You Leave a Company?

When you leave a company, your 401(k) stays yours — every dollar you contributed and every vested dollar of employer match. What happens next is your call: leave the account with the old plan, roll it into an IRA or a new employer’s plan, or cash it out and pay the taxes. Balances under $7,000 are the main exception, because the plan can push those out without waiting for you to decide.

What You Actually Own on Your Last Day

Your own paycheck deferrals are 100 percent yours from day one, no matter how briefly you worked there.¹ Employer contributions — matching funds and profit-sharing — follow a vesting schedule tied to your years of service. Federal law caps how slow that schedule can be: full vesting after three years at the latest under a cliff schedule, or graded vesting that reaches 100 percent by year six.² Plenty of employers vest faster, and some vest immediately.

Anything not vested when you leave is forfeited to the plan.¹ Check your summary plan description or ask HR for your vested balance before your last day, so you know exactly what you’re working with.

Option 1: Leave the Money in Your Old Plan

If your vested balance is above $7,000, the plan cannot force you out.³ The account keeps growing tax-deferred and you can still adjust your investments within the plan menu. You just can’t contribute anymore, and no more matching dollars are coming.

This is worth doing when the old plan has strong, low-cost institutional funds you couldn’t easily replicate in an IRA. The tradeoff is that accounts scattered across former employers get hard to manage, and required minimum distributions still start at age 73.⁴

Option 2: Roll It Over

A rollover moves the balance into another tax-advantaged account, either an IRA or your new employer’s 401(k), without triggering taxes. Federal law requires the plan to offer you a direct rollover.³ There are two ways to do it, and the difference is bigger than it looks.

Direct Rollover

In a direct rollover, the old plan sends the money straight to the new custodian. Nothing is withheld and the full balance transfers.⁵ A check may be mailed to your home, but it’s made payable to the new institution “for the benefit of” you rather than to you personally. Forward it to the receiving custodian and you’re done.

Indirect (60-Day) Rollover

In an indirect rollover, the plan sends the money to you and withholds 20 percent for federal income taxes before it lands.⁵ You have 60 days from the date you receive the funds to deposit the original amount — including the 20 percent that never reached you — into a new retirement account.

On a $10,000 distribution, you’d receive $8,000. To complete the rollover tax-free, you have to come up with the missing $2,000 out of pocket and deposit the full $10,000 within 60 days. Whatever you don’t redeposit becomes a taxable distribution. You’ll get the withheld 20 percent back at tax time, but only if you did the full redeposit. Miss the deadline and it’s income.

Partial Rollovers

You can split a distribution: roll part of it and keep the rest.⁵ The rolled portion stays tax-deferred; the cash portion is taxable income and hits the 10 percent early withdrawal penalty if you’re under 59½.

Option 3: Cash Out

Cashing out gives you the money now and costs a lot of it. The plan withholds 20 percent for federal taxes up front.⁶ That’s a prepayment, not the final bill. The whole distribution is added to your taxable income for the year, so what you actually owe depends on your bracket.

Under 59½, add a 10 percent early withdrawal penalty on top.⁷ On a $10,000 balance, you get $8,000 in hand, owe the $1,000 penalty at tax time, and owe any remaining income tax beyond the amount withheld. Depending on your bracket, 30 percent or more of the account can disappear into taxes and penalties.

Getting to the Money Early Without the 10 Percent Penalty

Several exceptions let you take a 401(k) distribution before 59½ without the additional tax. Some apply only to employer plans, so rolling into an IRA first can cost you the exception.⁷

Separation from service at 55 or older — the “Rule of 55.” Distributions from that employer’s 401(k) are penalty-free if you leave during or after the year you turn 55. Public safety and certain federal employees qualify at 50.
Substantially equal periodic payments based on life expectancy, at any age.
Total and permanent disability.
Unreimbursed medical expenses above 7.5 percent of AGI (only the excess qualifies).
Qualified birth or adoption, up to $5,000 per child.
Federally declared disaster, up to $22,000.
Domestic abuse by a spouse or partner, up to $10,000 or 50 percent of your vested balance, whichever is less.

The Rule of 55 catches people out. It only applies to the plan of the employer you’re separating from, not to old 401(k)s from earlier jobs, and it disappears the moment you roll the money into an IRA. If you’re near 55 and thinking about early retirement, think twice before rolling that account over.

If You Have an Outstanding 401(k) Loan

An unpaid 401(k) loan becomes a problem the moment you leave. Most plans want it repaid in full shortly after employment ends, and if you can’t, the remaining balance is treated as a distribution and reported to the IRS.⁸ That means income tax on the unpaid amount, plus the 10 percent penalty if you’re under 59½.

You can avoid this by rolling the offset amount into an IRA or another eligible plan. The deadline is your federal tax return due date, including extensions, for the year the offset happens.⁹ Leave a job in 2026 with an unpaid loan, and you’d generally have until April 15, 2027, or October 15 with an extension, to come up with the money and roll it over.

What Happens to Small Balances Automatically

If your vested balance is $7,000 or less, the plan can move your money without your instructions.³ What that looks like depends on the size:

Between $1,000 and $7,000: the plan can roll your balance into an IRA it selects on your behalf, under Department of Labor safe harbor rules that require advance notice and specific standards for choosing the provider.¹⁰
$1,000 or less: the plan can mail you a check, minus the 20 percent federal withholding. You still have 60 days to roll it over.⁵

Automatic rollovers usually park the money in a conservative default like a money market or stable value fund, which tends to earn less than a diversified 401(k) portfolio. If this happens to you, find the IRA provider and either take over the investments or roll the balance somewhere you actually manage.

Roth 401(k) Rollovers Work a Little Differently

Your own Roth contributions were made after tax and won’t be taxed again on a qualified distribution. Employer matching dollars are different: even when matched against Roth deferrals, the match sits in a pre-tax account and is taxed as ordinary income when distributed.¹¹

Rolling a Roth 401(k) into a Roth IRA is generally clean, but the five-year clock resets — years spent in the employer plan don’t count toward the Roth IRA’s five-year requirement for tax-free withdrawals.¹¹ If you already have a Roth IRA that’s more than five years old, the earlier clock governs, so opening and seeding one well before you need it solves the problem.

How to Actually Start the Process

Contact the old plan’s administrator — often Fidelity, Vanguard, or Empower — and ask for the distribution election form. For a direct rollover, you’ll need a few pieces of information from the receiving institution:

The exact legal name of the receiving bank, brokerage, or plan trustee.
Your new IRA or 401(k) account number.
Mailing address or wire transfer details, depending on how the receiving custodian accepts funds.

Most administrators handle this through an online portal now. Some still use paper forms, and a few require notarized signatures. Processing runs from a few business days to a few weeks. Watch the receiving account to confirm the funds arrive and get invested rather than sitting in a default cash sweep.

If you opted for an indirect rollover and the check comes to you, mark the 60-day deadline immediately. Miss it and the whole distribution becomes taxable income.⁵

Tracking Down a 401(k) You Lost

If an old 401(k) has slipped through the cracks — a former employer merged, closed, or you moved and lost the mail — the Department of Labor runs a free search tool. The Retirement Savings Lost and Found database, created under the SECURE 2.0 Act, searches retirement plans tied to your Social Security number for private-sector employers and unions.¹²

The database uses historical filings, so contact information for a plan administrator can be stale. If you can’t reach the listed contact, an EBSA Benefits Advisor can help find the current one. Reach EBSA at AskEBSA.dol.gov or 1-866-444-3272.

1
U.S. Department of Labor. FAQs about Retirement Plans and ERISA
2
Office of the Law Revision Counsel. 26 U.S. Code 411 – Minimum Vesting Standards
3
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
4
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
5
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
6
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
8
Internal Revenue Service. Retirement Topics – Plan Loans
9
Internal Revenue Service. Plan Loan Offsets
10
Federal Register. Fiduciary Responsibility Under ERISA – Automatic Rollover Safe Harbor
11
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
12
Employee Benefits Security Administration. Retirement Savings Lost and Found Database