What to do with your 401(k) after a layoff

For staff who instantly discover themselves with no paycheck, tackling to-dos associated to a 401(okay) left behind will not be prime of thoughts.

“Most individuals are actually considering, ‘How am I going to outlive and may I get unemployment?'” mentioned licensed monetary planner Lazetta Rainey Braxton, founder and managing principal of digital agency The Actual Wealth Coterie. She is a member of CNBC’s Financial Advisor Council.

“There are areas of worker advantages they should take into account,” she mentioned, reminiscent of health insurance coverage and lack of incapacity insurance coverage.

“Often [dealing with] their 401(okay) shouldn’t be pressing,” Braxton mentioned. “Simply remember about what’s one among your greatest property.”

Here is what to know.

Amongst 401(okay) plans that permit members to borrow cash in opposition to their account, roughly 13% of staff had an excellent mortgage in 2024, based on Vanguard’s How America Saves 2025. The common steadiness owed was $11,000. These numbers have modified little over the past 5 years.

You probably have a mortgage in opposition to your 401(okay) account if you depart an organization, the way it’s dealt with will depend on the specifics of the plan. For instance, 44% allow you to proceed compensation on the mortgage, the Vanguard analysis exhibits.

One other chance: If you happen to get a brand new job, you could possibly roll over the mortgage, together with the property in your account, to the brand new firm’s plan, mentioned Will Hansen, government director of the Plan Sponsor Council of America.

The share of firms that permit both the mortgage to depart the plan alongside property or settle for a rolled-over mortgage is 15%, based on new analysis from Hansen’s group. It is most typical amongst employers with 5,000 or extra workers, at 24.4%.

“Extra plans are permitting a rollover of a plan mortgage,” Hansen mentioned. “If you happen to get a brand new job, test along with your employer to see in the event that they settle for an excellent mortgage in a rollover.”

In case your plan permits neither of these choices, you could have to pay the mortgage again pretty shortly. In any other case, the quantity will probably be thought of a distribution out of your account — wherein case you could owe income taxes on it, Braxton mentioned. And if you’re youthful than age 59½, a ten% early-withdrawal tax penalty might apply, too.

Whether it is initially handled as a distribution, you get till tax day — usually April 15 — of the next yr to place an equal quantity into an individual retirement account or different certified account to keep away from the tax hit.

Except for mortgage issues, you will have to make selections about what to do along with your 401(okay) financial savings. One possibility is to leave it in your former employer’s plan — most permit it.

Nevertheless, in case your steadiness is low sufficient, the plan could not allow you to keep. In case your steadiness is beneath $1,000, your account could also be liquidated and despatched to you in test kind, which might usually be topic to revenue taxes. And for those who’re youthful than 59½, you could owe the ten% early-withdrawal penalty.

An exception to that known as the Rule of 55: If you happen to depart your job in or after the yr you flip 55, you may take penalty-free distributions out of your 401(okay).

Your ex-employer can even roll over balances beneath $7,000 to an IRA. If that occurs, the money may not be invested the way you’d favor. A 2024 Vanguard study confirmed that 48% of traders with a rollover IRA thought the cash was routinely invested, and 46% did not know their contributions have been allotted to cash market funds by default.

In fact, you can also actively move your 401(k) balance to a different retirement account, which might embrace a 401(okay) at one other employer or an IRA. In both case, you could possibly discover the identical or comparable investments that you’ve got utilized in your 401(okay), reminiscent of target-date funds or index funds, Braxton mentioned.

The precise selection in your cash can rely on a host of factors, together with obtainable funding choices and the charges charged. Moreover, take into account any conflicts of interest on the a part of monetary professionals providing you with recommendation on rollovers.

Vesting schedules — the size of time you need to keep at an organization for its matching contributions to be 100% yours — could be immediate or up to six years. Any unvested quantities usually are forfeited if you depart your organization.