How Long Can an Employer Hold 401(k) Funds After Retirement?

Your 401(k) plan may be your most important retirement asset. A 401(k) plan is a savings account held with your employer that you draw on during retirement. You, your employer, or both of you may fund the retirement account. And the amounts you can put in can be pretty huge. So, it is natural to worry about what happens to your retirement investments when you quit, get fired, or retire, especially if it is one of the companies with the best retirement plans around.

Your 401(k) plan is held for your benefit. Your employer cannot keep your 401(k) plan after you leave your job. The company must release this money to you in some form. When you leave your employer, you may take the money with you even if it is one of the companies with the best retirement plans around.

You can do that through a transfer of funds into a new retirement account which works similarly. In that case, you may have the money transferred by a direct transfer, or you may receive the money and transfer it via an indirect transfer. An indirect transfer allows you to receive the money and deposit it into another retirement account within ​60 days​. You could also do a rollover into a different retirement account. The transfer rules also apply.

Other employers could also choose to liquidate your assets without your consent and give you back your vested funds. That usually happens if the balance in the funds is $1,000 or less. And if the balance is ​$5000​ or less, you may be forced to get the funds out.

Finally, you may cash out the entire retirement account and use the money however you wish. That option works best if you have reached the minimum retirement age of 59.5 years.

The 401(k) plan is legally yours. Your employer won't be able to tell you that you cannot have it. That gives you the freedom to leave your job whenever you want without worrying about your retirement funds are being held hostage by a former employer. You may spend the money immediately if you want, roll the funds into an IRA, and even another 401(k) with a different employer.

You might not be able to get the money that your employer contributed to your 401(k) plan. Your employer may have a vesting schedule that you must meet. The vesting schedule is set by your employer and complies with IRS regulations. Your employer may allow you to take only part or none of the money until a certain length of employment has elapsed.

If you leave before you are fully vested, you could forever lose the non-vested portion of your employer's contributions. However, you are likely to enjoy the fully vested amount if you remain with your employer for the entire vesting period or until you retire. Generally, the average vesting period is anywhere from ​one to six years​.

You could pay a ​10 percent ​IRS penalty for removing your retirement funds before you reach age ​59.5​. This penalty also applies to indirect rollovers that are not completed within the ​60-day​ window allowed by the IRS since they are treated as an early distribution. However, you may access your retirement funds before age ​59.5 years​ only in certain limited circumstances.

The IRS allows an early retirement option, but you must take equal and substantial withdrawals from your retirement account based on your life expectancy at the age at which you start taking those withdrawals. These withdrawals must continue until you reach age ​59.5​ or for at least ​five years​, whichever is longer.

If your employer is one of those companies with the best retirement plans around and allows you to have a 401(k), take advantage of it. The tax advantages the account offers will enable you to build wealth for retirement to be financially independent when you stop working. And if you stop working for that employer, you don’t have to worry about your funds. You can always take them with you.