How long can a company hold your 401(K) after you leave?
When you change jobs, it might be unclear how long a company can hold your 401(k) after you leave. Learn more about your 401(k) waiting period.
When you leave your job, your employer can choose to hold or disburse your 401(k) money depending on your age and the amount of retirement savings you have accumulated. How long a company can hold your 401(k) depends on how much asset you have in the account: the company can hold for as long as you want unless you decide to rollover to a new plan or take a cash out. However, you must have at least $5000 in your 401(k) if you want the company to continue managing your plan. For amounts below $5000, the employer can hold the funds for up to 60 days, after which the funds will be automatically rolled over to a new retirement account or cashed out.
If you have accumulated a large amount of savings above $5000, your employer can hold the 401(k) for as long as you want. However, this may be different for small amounts, which the employer can cash out and send in a lump sum, or rollover your 401(k) into an Individual Retirement Account (IRA).
What Determines How Long a Company Can Hold Your 401(k) After Leaving a Job?
The retirement money you have accumulated in your 401(k) is your money. This gives you the freedom to change jobs without worrying that your savings may get lost in the process. The money can stay in your employer’s retirement plan for as long as you want, but there are certain cases when an employer may force a cash out or rollover the funds into another retirement account.
These factors may determine how long an employer can hold your 401(k) money after you leave the company:
The amount of contribution
The amount of money in your 401(k) plan may determine how long your employer takes to make a distribution. Here are the rules for different 401(k) amounts:
- Less than $1000
If your 401(k) balance is less than $1000, your employer will automatically cash out the funds and send you a check with your lump sum amount. In this case, the check will take a few days to reach your mail from the date when you leave your job.
- $1000 to $5000
If you have saved up more than $1000 but below $5000, your employer cannot force a cash out. Instead, it is required by law to transfer the funds to a new retirement plan, usually an IRA associated with your employer. The transfer can be completed in a few weeks up to 60 days.
If you don't want the employer to decide for you, you should act quickly before your retirement savings are transferred to an unwanted retirement plan. You can ask your 401(k) administrator to rollover to an IRA of your choice, which generally takes about 5 days to two weeks to complete. This way, your distribution will not be subjected to income taxes and penalties.
- More than $5000
If your 401(k) balance exceeds $5000, your former employer cannot force a cash out or transfer the funds to another retirement plan without your instructions. In this case, the employer must leave your retirement savings in your 401(k) for an indefinite period until you provide instructions on what to do with the retirement money.
Valuation involves assessing the balance of 401(k) participants. Generally, most employers assess 401(k) plans annually, while others value their accounts quarterly.
Valuation is a necessary process before a payout is made, and it helps the employer know your actual balance by considering factors such as 401(k) loans, early withdrawals, recent contributions, past rollovers, etc. The time it takes to conduct a valuation dictates the period you have to wait to receive your funds.
How Long Can a Company Hold Your 401(k) Funds When You Withdraw?
When you leave a job, you can decide to cash out your 401(k) money. Generally, when you request a payout, it can take a few days to two weeks to get your funds from your 401(k) plan. However, depending on the employer and the amount of funds in your account, the waiting period can be longer than two weeks.
Each company has different time frames for making distributions when you request a payout. Check the waiting period of your employer’s 401(k) plan by checking the summary plan description (SPD) given by the company. The waiting period starts when you request a payout up to when you receive the cash distribution, or funds are rolled over to an IRA or 401(k).
Options for Your 401(k) After You Leave
If you want to continue growing your retirement savings, you should decide what to do with your 401(k) money after you leave your job.
Here are the options you have with your old 401(k):
If your 401(k) balance is more than $5000, you can leave the retirement savings in your employer’s plan. Make sure to keep track of your old 401(k) account to know any events that would impact your retirement savings such as a merger or if the company files for bankruptcy.
Rollover over to a new 401(k)
You can ask your former employer to transfer your 401(k) money to your new 401(k) account with your new employer. Compare the fees charged in the new plan and the investment options available to determine how it compares with your former employer’s retirement plan.
Rollover over to an IRA
If you want to diversify your investments, you can transfer your savings to an IRA to enjoy more investment options. You can also find better-performing investments that pay higher returns than the investment options available in a 401(k).
If you have other old 401(k) plans with former employers, you can do a direct rollover to your IRA to make it easier to manage your retirement savings in a single account. A direct rollover helps you avoid paying taxes and penalties on the distribution.
Take a lump sum
Withdrawing your 401(k) is an option, but it will cost you a sizable portion of your retirement savings due to income tax and penalty. The distribution will be subjected to income tax, and another 10% penalty tax if you are below 59 1/2. For example, if you withdraw $10,000, you will receive $7000, and the other $3000 will be used to pay taxes (20% withheld taxes) and early withdrawal penalty tax (10%). A direct rollover to an IRA can keep your retirement savings intact, and you will receive the entire distribution without any tax or penalty tax implications.