What happens to my 401(k) when I get laid off?

Even when you’re no longer employed, your retirement account is still yours. You’ll still be able to check your balance, change investment choices, make withdrawals or roll over your account. That said, a few things will change:

Employee and employer contributions stop

When you’re let go, you will typically lose access to your employer-sponsored benefits, including your workplace retirement plan. While you’ll still be able to access your retirement account, neither you nor your employer will be able to make additional contributions to it. Additionally, if your company offered a match that required vesting, you won’t keep any money that hadn’t matured before your exit date.

You may face administrative fees

When you’re employed, your employer may cover fees associated with managing your retirement account. According to Fisher Investments, about 17 percent of companies cover full 401(k)-related plan fees and another 19.5 percent share some of the burden with employees.

Once you’re no longer on the payroll, you’re probably going to be on the hook for any administrative fees associated with your account. These are costs outside of the expense ratio, or what it costs to run the funds you invest in. Administrative fees relate to the costs associated with maintaining your account and average about 0.45 percent of all assets in your 401(k) plan.

You can no longer borrow from that 401(k)

Under certain circumstances, when you’re employed, your company may allow you to borrow from your workplace retirement plan. This can provide what is essentially a no-interest loan—you’re only giving up the investment returns you won’t earn—and you won’t face any penalties or taxes as long as you pay yourself back on time. Once you’re no longer with your company, though, this benefit generally disappears as the company has less assurance you won’t default.

What should you do with your 401(k) if you’re laid off?

Just because you’re no longer employed at a company doesn’t mean you should necessarily close the retirement account you hold with them. You can leave the account alone. But there are also other options to consider.

Options for your old 401(k)

Do nothing

If you’re happy with your investment choices and any administrative fees, you don’t have to do anything with your old employer’s 401(k). You can let all the money you’ve built there continue to grow until you need it in retirement.

Your plan provider will generally be more than happy to keep your account open, though circumstances may change if your company changes providers. Then you’ll probably have to roll it into another retirement account. (More on that below.)

Just make sure you’ve safely stored your login credentials. An estimated 900,000 employer-sponsored retirement accounts are lost every year. (If you think you may have an old 401(k) that you’ve lost track of, contact your former employer and ask to speak to the HR department, which can check plan records.)

Cash it out

Though it’s generally advised against, you can get a lump sum distribution of your workplace retirement plan. If you’re under retirement age, though, you’ll probably be hit with a 10 percent penalty and may also owe income taxes if you cash out your 401(k) account. You’ll also miss out on years or decades of compounded returns, which might hamstring your retirement goals.

If you really need the money, consider rolling your 401(k) into an IRA instead and then taking a hardship withdrawal. During the coronavirus crisis, those who have been laid off can withdraw up to $100,000 from their IRAs without penalty or taxes as long as they pay back what they borrow within three years.

Roll it over into your new company’s 401(k)

If you value the simplicity of having all of your retirement assets in one place—or you prefer the offerings of your new employer’s plan—you can roll your old 401(k) into your next job’s 401(k). Your old and new 401(k) providers will probably have forms you can submit for an easy transfer between providers. If your old provider issues you a check to give to your new provider, make sure you deposit it into your new account within 60 days. Otherwise, you may be subject to the same taxes and penalties you’d face if you’d cashed out the account.

Roll it over into an IRA

Much like rolling your 401(k) into a new employer-sponsored retirement plan, you can also move your retirement assets into an Individual Retirement Account (IRA). You might choose to do this if your old plan’s offerings are limited or its administrative fees are high, or if you want to keep your accounts centralized.

IRAs provide you the maximum amount of investment flexibility, meaning you can choose investment options that best suit your situation and you can find a brokerage with low fees. Most experts recommend a diversified portfolio of low-cost index funds that becomes more conservative as you age. (Acorns Later, Acorns’ IRA, offers a preconstructed portfolio of low-cost index funds that adjusts automatically based on your age. Visit acorns.com/support for help rolling your 401(k) over.)

IRAs also have the added advantage of letting you contribute regardless of your employment status. While there are maximum contribution limits—the annual limit for 2020 is $6,000, or $7,000 if you're age 50 or older—you can continue to make contributions to this account no matter who your current employer is.

As with 401(k) rollovers, if you are issued a check from your old 401(k) provider, make sure to deposit it in your new IRA within 60 days to avoid penalties and taxes.

The bottom line

While layoffs can be disheartening and financially stressful, they don’t mean you won’t be able to retire on time. With careful planning and budgeting, you can continue to meet your retirement goals, whether through your next company’s 401(k) or an IRA. Aim to continue regular retirement contributions as long as you’re financially able to, and be sure to resume them as normal once you find your next job.

Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. This information is being provided for informational purposes only, and is not intended to provide, and should not be relied on, for accounting, legal or tax advice. You should consult your tax or legal adviser regarding such matters.