What to do with your 401(k) after a layoff
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For workers who suddenly find themselves without a paycheck, managing a leftover 401(k) may not be top of mind.
“Most people are really asking, ‘How am I going to survive and be unemployed?'” says certified financial planner Lazetta Rainey Braxton, founder and chief executive of virtual firm The Real Wealth Coterie. “he thinks,” he said. He is a member of CNBC’s Council of Financial Advisors.
“There are areas that employees need to consider regarding their benefits,” he said, such as health insurance coverage and disability loss insurance.
“Generally [dealing with] “A 401(k) is not an emergency,” Braxton said. “Remember what one of your greatest assets is.”
Here’s what you need to know.
How are 401(k) loans handled?
Among 401(k) plans that allow participants to borrow money against their own accounts, roughly 13% of workers had an outstanding loan. by 2024 How Vanguard is Saving America in 2025 report. The average balance owed was $11,000. These figures have changed little in the last five years.
If you have a loan in your 401(k) account when you leave a company, how it is handled depends on the specifics of the plan. For example, according to the Vanguard report, 44 percent of plans in 2024 allow participants who terminate their contracts to continue repaying the loan.
Another possibility: If you take a new job, you can roll the loan along with the assets in your account into the new company’s plan, said Will Hansen, executive director of the Plan Sponsor Council of America.
According to new research from the organization Hansen, the share of companies that will allow you to include or exclude credit from a plan is 15%. It is most common among employers with 5,000 or more employees, at 24.4%.
“More plans are allowing plan credit rollover,” Hansen said. “If you take a new job, check with your employer to see if they accept an outstanding loan through rollover.”
If your plan doesn’t allow for either of these options, you may have to pay back the loan fairly quickly. Otherwise, the amount will be considered a distribution from your account, in which case you may owe income taxes, Braxton said. Additionally, if you are under age 59½, a 10% early withdrawal tax penalty may also apply.
If initially treated as a distribution, you must deposit an equivalent amount into an individual retirement account or other qualified account by tax day of the following year (usually April 15) to avoid a tax hit.
Decide what to do with your 401(k) balance
Besides credit considerations, you’ll also need to make decisions about what to do with your 401(k) savings. One option is: leave it in your former employer’s plan, something most plans allow.
However, if your balance is low enough, the plan may not let you stay. If your balance is less than $1,000, your account may be liquidated and sent to you in the form of a check, which is generally subject to income taxes. And if you’re younger than 59½, you may owe a 10% early withdrawal penalty.
One exception is called the Rule of 55: If you leave your job on or after the year you turn 55, you can take penalty-free distributions from your 401(k).
Your former employer may also roll over balances under $7,000 to an IRA. In such a case, the money may not be deposited in the way you prefer. A. 2024 Vanguard survey It showed that 48% of investors with a Rollover IRA thought the money was automatically invested, and 46% did not know their contributions were allocated to money market funds by default.
Of course, you can also actively move your 401(k) balance to another retirement account, which could include the 401(k) from another employer or IRA. Either way, you can find the same or similar investments you use in your 401(k), such as target date funds or index funds, Braxton said.
The right choice for your money may depend on a number of factors, including available investment options and fees. Additionally, consider the conflicts of interest of financial professionals advising you on delegation.
Be aware of actions that trigger a tax bill
Braxton said it’s important to get professional guidance if you make any moves that could affect your tax situation (for example, rolling over 401(k) assets from a former employer to a Roth IRA).
While Roth assets grow tax-free and remain tax-free upon retirement, unlike traditional 401(k) contributions, contributions are made on an after-tax basis. So if you convert pre-tax money into a Roth account, you’ll owe taxes on that amount.
If you have a Roth 401(k), it can only be rolled over to another Roth account, but this move does not trigger up-front tax consequences.
Additionally, if you decide to move your retirement savings, experts recommend a trustee-to-trustee rollover, which sends the transfer directly to the new 401(k) plan or IRA custodian. Issuing a check to yourself creates risks: If something goes wrong with the money being deposited into a qualified retirement account, it could be considered a withdrawal and subject to taxes and penalties.
When deciding on a 401(k) with a former employer, remember that the money you deposit into your account is always yours, but the same cannot be said for employer contributions.
Vesting programs (the length of time you have to stay with a company for matching contributions to be 100% yours) immediately or may take up to six years. Unearned amounts are typically forfeited when you leave your company.
