What Happens To Your 401(k) When You Get Laid Off?

There is nothing pleasant about getting fired or laid off. It leaves you with much uncertainty about the future — and rightfully so, as this means a temporary halt in income. But although you are no longer earning, your 401(k) is not in danger.

So, what happens to your 401(k) when you get fired or laid off? Your 401(k) is safe even after a job layoff. You are entitled to the funds you contributed to the account and any earnings they generated.

Learn: 3 Ways to Recession Proof Your Retirement

Read on to understand what you can do and what your termination means for your investment.

What Is a 401(k) and How Does It Benefit Employees?

A 401(k) is a profit-sharing retirement saving plan some U.S. employers offer. It lets you contribute a portion of your pre-tax income to a tax-advantaged investment account. You can invest these contributions in mutual funds, stocks and bonds. Most 401(k) plans have a minimum of three choices for investment, while others offer up to twelve.

The main benefit of a 401(k) is that the money you contribute is not taxed until withdrawal when you retire. This factor helps your savings grow faster over time. Besides your contribution, some employers make matching contributions to your 401(k), where they put a percentage of your contributions to your account.

Does A 401(K) Have Limitations?

Some limitations and rules are associated with your 401(k). For example, annual contribution limits exist, and there may be restrictions on when and how you can withdraw your money. These limits vary from year to year. The IRS recently released the newest contribution limit for 2023 to $22,500, an increase of $6,500.

Moreover, fees and expenses may be associated with managing the account, which varies depending on the plan. Examples include plan administration fees, investment fees, individual service fees, loads or commissions and management fees, among others.

What Happens To Your 401(k) When You Get Fired?

If your employer terminates your job, your 401(k) plan account stays yours. In addition to your contributions, you also have a right to your employer contributions or matching ones, as long as those funds are vested.

What can you do with your 401(k) after termination? Multiple options for accessing and working with your 401(k) are available to you.

• Roll over into a 401(k) with your new employer

• Roll over into an IRA

• Withdraw the funds

• Keep the account as it is.

What Does It Mean To Roll Over Your 401(k) With Another Employer?

Rolling over your 401(k) account means adding your previous employer’s plan to a new employer’s 401(k) plan. Moving your old 401(k) to a new plan consolidates your retirement savings, simplifying your financial management and reducing your account fees and expenses.

However, you must ensure that the new job lets you do so. Always check with a prospective job beforehand, just in case the new one has restrictions or limitations.

How Do You Initiate a Rollover With a New Employer?

To initiate a rollover, you must contact the administrator of your old 401(k) plan and request a direct rollover of your balance to the new one. The new plan administrator will then walk you through the process and alert you in case there is additional paperwork you need to complete.

There are rules and limitations associated with 401(k) rollovers, including tax implications and restrictions on the investments you can hold in your plan.

If you’re unsure of the process, it’s a good idea to speak to a financial advisor or tax professional. Doing so before you initiate a rollover ensures that it aligns with your long-term retirement planning goals and strategies.

What If Your New Employer Does Not Offer 401(k) Plans?

If you want to roll over your old 401(k) but your new employer doesn’t offer one — or you can’t move your funds into the new one — you still have options for managing your account. For example, you may be able to roll the plan into an individual retirement arrangement (IRA). An IRA is a retirement savings account used to save money on a tax-advantaged basis to provide financial security.

Financial institutions like banks, brokerage firms and mutual fund companies offer IRAs, meaning you don’t have to rely on an employer to continue saving for retirement.

Can You Withdraw Your Funds?

If a rollover is not an option, you can simply cash out the funds altogether from the plan. However, that may incur taxes and penalties, depending on your age and withdrawal circumstances. Withdrawing early may not be the best option in the long run, so it’s not advisable unless you have no other choice.

Always review your plan to understand if there are tax and penalty consequences for your 401(k) decisions after getting fired.

When Can You Leave Your 401(k) in Your Old Employer’s Plan?

You can often leave your 401(k) alone when you leave an employer, whether you were laid off or left voluntarily. The one requirement is that you have contributed a minimum amount to it. This amount varies by plan, so make sure you understand the terms of yours.

Also note that you may be responsible for any administrative or other fees.

How Long Can an Employer Hold Your 401(k) After Termination?

If you haven’t met the minimum contribution to leave your 401(k) in the old plan, your employer can hold it for a short time — usually between 30 and 90 days, depending on the plan — before you must roll it over or withdraw the funds.

After termination from your job, your employer or HR department must provide you with information about your 401(k) account. Examples include how to access it, change investment selections and determine if there are associated fees or expenses. They must also distribute your vested account balance promptly and within a specified timeframe. However, this varies depending on the circumstances of your termination.

Blocked Access

Your employer cannot legally block your access to your 401(k) account after they fire you or lay you off, with very few exceptions — such as if you owe the company money or fraud is suspected. Since your 401(k) account is your property, your employer must follow specific rules and procedures regarding your account when you leave the company.

You have options if you believe your employer is not following proper procedures or unlawfully withholding your account balance. You can speak to an attorney or contact the U.S. Department of Labor, Employee Benefits Security Administration, for information on how you can move forward.

Wrapping Up

Although job termination is a challenging experience, it does not jeopardize your 401(k). Your contributions and earnings are still yours, and you have the right to your employer’s contributions if vested. You have several options for managing your account after the termination, like leaving it as is, rolling it over into a new employer’s 401(k) plan or rolling it over into an IRA.

Amber Barkley contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: What Happens To Your 401(k) When You Get Laid Off?