Federal laws determine how your employer operates a retirement savings plan for workers. The laws protect your participation and investment in your retirement account. Your right to your retirement account does not end when you leave the job, whether you leave voluntarily or because you are fired. You have a right to the funds in your retirement account that you own 100 percent. What happens to your retirement account depends, in part, on which of several options you choose. Your right to employer contributions in the account depends on the plan rules. Your plan’s summary plan description includes details about the plan rules and your rights.
Retirement Savings Accounts
With defined-contribution plans - - such as the 401(k), 403(b) and 457 plans - - you always have 100 percent ownership of the funds you contribute. The plan’s vesting schedule determines your ownership of employer contributions. Vesting is the percentage of ownership you have in certain funds. You might be vested in all or a portion of employer-contributed funds, based on your years of employment. Some plans require that you are employed by the company on the last day of the year to receive employer contributions for the plan year. You forfeit those funds in which you are not fully vested.
Final Distributions and Rollovers
You can take a final distribution paid directly to you. You will pay 20 percent federal withholding tax at the time of distribution, and, if you are under age 59 1/2, the Internal Revenue Service might assess a 10 percent penalty for early withdrawal when you file taxes. Your state also might assess taxes on the distribution amount. You can roll over the funds in the account to another qualified plan or an individual retirement account and pay no taxes at that time. You can still roll over a final distribution paid directly to you, a transaction called an indirect rollover, by replacing the taxes withheld and depositing the total distribution amount into another qualified plan within 60 days of the distribution.
Employer retirement plans often allow for continued participation if you leave the company and your account balance is $5,000 or more. The employer will not continue to contribute to your account and might limit your participation, such as not allowing you to make contributions. However, some plans allow for more participation, including loans and withdrawals. You can continue to manage and monitor your funds and your investments. This option might work for you if you need time to enroll in another employer’s retirement savings plan before moving your funds.
The IRS might consider an outstanding 401(k) loan balance a taxable distribution when you leave the company. If you leave an account balance of less than $5,000, the plan might make an involuntary rollover of the funds to an IRA held by a trustee in your name. A hold on your retirement account, such as from a court order for child support or because of spousal rights to part of your retirement funds, will prevent you from taking a final distribution until the legal requirements are met.
- U.S. Department of Labor: FAQs about Retirement Plans and ERISA
- TRI-AD: 401(k) FAQs
- University Federal Credit Union: What to Do With Your Retirement Plan if You Leave Your Job
- Internal Revenue Service: 401(k) Resource Guide - Plan Participants – General Distribution Rules
- Internal Revenue Service. "401(k) Plans - Deferrals and Matching When Compensation Exceeds the Annual Limit." Accessed May 18, 2020.
- Internal Revenue Service (IRS). "A Guide to Common Qualified Plan Requirements." Accessed May 18, 2020.
- Internal Revenue Service. "401(k) Plan Overview." Accessed May 18, 2020.
- Vanguard. "How America Saves 2019: The Retirement Savings Behavior of 5 Million Participants." Accessed May 18, 2020.
- Internal Revenue Service. "Income ranges for determining IRA eligibility change for 2021." Accessed Oct. 29, 2020.
- Internal Revenue Service. "2021 Limitations Adjusted as Provided in Section 415(d), etc." Accessed Oct. 29, 2020.
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed May 18, 2020.
- United States Congress. "Text: H.R.748 — 116th Congress (2019-2020) Sec. 2202." Accessed May 18, 2020.
- Internal Revenue Service. "Retirement Topics — Required Minimum Distributions (RMDs)." Accessed May 18, 2020.
- Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions." Accessed May 18, 2020.
- Internal Revenue Service. "Retirement Topics - Plan Loans." Accessed May 18, 2020.
Gail Sessoms, a grant writer and nonprofit consultant, writes about nonprofit, small business and personal finance issues. She volunteers as a court-appointed child advocate, has a background in social services and writes about issues important to families. Sessoms holds a Bachelor of Arts degree in liberal studies.