Here’s What Happens to Your Retirement Savings When You Lose Your Job

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Laid off? Read on to see what might become of your 401(k). 

It’s common for companies to offer workers the option to save for retirement in a 401(k) plan. In fact, in 2020, a good 67% of private sector workers had access to a workplace retirement plan, according to the Bureau of Labor Statistics.

If you made an effort to save in your company’s 401(k), you may have accumulated a nice nest egg already for retirement. But what if you’re laid off due to no fault of your own? Unfortunately, it’s the sort of thing that can happen even if you’re a dedicated employee. Does losing your job mean losing your 401(k)? Here’s what you need to know.

Your 401(k) contributions are yours, no matter what

When you put money from your own earnings into a 401(k) plan, that money cannot be taken away from you. So if you lose your job whether due to poor performance or not, you don’t forfeit that money. What you might lose, though, is your 401(k) match, or part of it.

Many companies that sponsor 401(k) plans also match worker contributions to different degrees. In some cases, when you get a match, you vest in full immediately. That means you’re entitled to those matching dollars right away. Other companies, however, subject workers to a vesting schedule that only has you gaining access to those matching dollars in full after a certain amount of employment.

So let’s say your employer matches up to $3,000 in 401(k) plan contributions a year but has you on a one-year vesting schedule. If you contributed $3,000 to your 401(k) but were only employed for nine months before getting laid off, you may not get 25% of your match, or $750. However, the $3,000 you put in is yours no matter what.

You can generally move your money or leave it

Many 401(k) plans will allow you to leave your money where it is, even if you’re no longer employed by the sponsoring company (though there may be a minimum balance requirement you have to meet in this situation). You may be inclined to leave your 401(k) alone. But that’s not necessarily the best idea.

If you go that route, you might forget about that money. Or, you may not forget about it, but you might neglect to go in and make strategic investment changes.

A better bet may be to roll your 401(k) into an IRA. That way, you have complete control over that account.

Now, if you decide to roll a traditional 401(k) into a Roth IRA, you’ll have to pay taxes on that money, since Roth IRAs are funded with after-tax dollars and traditional 401(k)s give you a tax break on your contributions. But you won’t face a tax bill if you roll a traditional 401(k) into a traditional IRA.

One thing you don’t want to do, though, is cash out your 401(k) and just put the money into a savings account. From there, you’ll lose out on tax-advantaged treatment. And if you’re not yet 59 1/2, you’ll face a penalty for an early 401(k) withdrawal. That penalty won’t apply if you move your 401(k) into another retirement plan.

Being laid off from a job can constitute a major blow. But rest assured that it doesn’t mean losing out on money you contributed to your 401(k) plan.

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