Managing a 401(k) After a Layoff

Preserving what you've saved.

The unemployment rate in the United States soared to 10% in January of 2010, leaving millions of Americans out of work, according to the Bureau of Labor Statistics.1 You may be one of them.

In addition to making decisions about your health and insurance benefits, you’ll also need to determine what to do with your 401(k) or other type of company-sponsored retirement plan.

"Unless you need the money immediately to pay bills and stay afloat, you should think about your options and long-term plans," says Ken Hevert, vice president of retirement income and health at Fidelity. "One of the biggest mistakes people can make is taking all of the cash out and losing sight of their long-term plans."

While you may no longer contribute to your 401(k) or 403(b) plan once you leave the company, your employer, in most cases, is still obligated to maintain it for your benefit. There are some exceptions. If your company retirement account has less than $1,000 in it, your employer will close it out and send you a check for the balance. You can still avoid paying taxes on this amount if you reinvest it in an IRA within 60 days. If your account has more than $1,000 but less than $5,000, your employer can automatically roll those assets into a "Safe Harbor" IRA at a provider chosen by the former employer. If you’ve borrowed from your 401(k) and still have more to repay, some companies will make you take the outstanding amount of the loan as a lump-sum distribution, which is subject to ordinary income taxes. And if you’re under age 55, you may also pay a 10% early withdrawal penalty.

The first step is to check in with your 401(k) plan administrator to make sure that you won’t be required to take a direct withdrawal and that you won’t be assessed administrative fees for failure to act on the account.

Keeping It Where It Is

If you are 55 or older and have left your job, most 401(k) plans generally allow you to access your balance without an early withdrawal penalty.2 That’s one of the reasons you might choose to keep your money in a former company’s plan. The ability to keep specially priced or custom investments or managed money services, which may be unique to your plan, and additional protection outside of bankruptcy from creditors are other reasons.

On the flip side, keeping your 401(k) with a former employer means that you may be limited by the investment options that the plan offers and its rules for terminated employees, including:

  • A limit on the number of transactions you can make. 
  • Possible extra service fees.
  • Restricted options for your beneficiaries.

In addition, subsequent business changes, such as a merger, may complicate access to your account.

Rolling It Over to an IRA

Another option is to roll over your assets to a rollover IRA via a direct trustee-to-trustee transfer. This helps you avoid the 60-day time limit and mandatory 20% tax withholding that’s required if you don’t transfer assets directly.3

"In situations where you’re losing your job, putting money into a IRA generally makes more sense because there are more flexible options than with a company plan," says Hevert. "With an IRA, you have total control of that money and you can get access to it any time—although taxes and penalties may still apply."

As Ragnoni suggests, the advantages of a rollover IRA include:

  • More choices of investments and more control over your money.
  • Freedom from any restrictions in your workplace savings plan.
  • More flexible distribution options for you and your beneficiaries.
  • The ability to withdraw, penalty-free, for a first-time home purchase or qualified education expenses.

Some of the drawbacks:

  • You may not be able to keep some of the investment options you had in your former plan.
  • You can’t borrow against IRA assets.

In Conclusion: Avoid Cashing Out If You Can

Most financial advisers caution against taking the savings in your 401(k) as a lump sum in cash, not only because of the taxes and penalties that will be due, but also because of the lost opportunity. Once you take the money out, it stops compounding earnings on a tax-deferred basis.

If you have other savings or benefits, an emergency fund, or a severance package to help cover current expenses when you’re between jobs, so much the better, Ragnoni says. "It may save you from having to take out money and thus jeopardize your future retirement, and also save you from paying penalties and taxes that are otherwise avoidable."


1. United States Department of Labor, Bureau of Labor Statistics, economic news release, January 2010.

2. Your plan distribution will generally be subject to 20% mandatory federal income tax withholding, current income taxes, and a 10% early withdrawal penalty if you are under age 59½. However, distributions from your workplace savings plan are not subject to the 10% early withdrawal penalty if you are age 55 or over when you separate from service with your employer.

3. The taxable portion of your withdrawal that is eligible for rollover into an individual retirement account (IRA) or another employer’s retirement plan is subject to 20% mandatory federal income tax withholding, unless it is directly rolled over to an IRA or another employer plan. (You may owe more or less when you file your income taxes.) If you are under age 59½, the taxable portion of your withdrawal is also subject to a 10% early withdrawal penalty, unless you qualify for an exception to this rule. The plan document and current tax laws and regulations will govern in case of a discrepancy. Be sure you understand the tax consequences and your plan’s rules for distributions before you initiate a distribution. You may want to consult your tax adviser about your situation.

The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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