What Happens to Your Roth 401(k) After Leaving a Job

You have four options: You just have to choose

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

Your Roth 401(k) Options

A Roth 401(k) works like a traditional 401(k) plan in that contributions are made through paycheck deferrals and assets held within the plan are tax-deferred until they are withdrawn in retirement. However, a Roth 401(k) plan is a post-tax option; contributions provide no upfront reduction to taxable income. Instead, Roth 401(k) contributions and earnings are tax-free when taken out after age 59½.

Once you leave your job with an employer offering a Roth 401(k) plan, you potentially have four options about what to do with your plan:

• You can maintain it with the original plan sponsor, depending on plan rules.
• You can transfer it to a new employer plan.
• You can roll it over into an individual Roth IRA.
• You can take a lump-sum cash distribution.

Key Takeaways

• If you leave your job, you may be able tol maintain your Roth 401(k) account with your old employer.
• Under some circumstances, you can transfer your Roth 401(k) to a new one with your new employer. You can also choose to roll over your Roth 401(k) into a Roth IRA.
• You can cash out your Roth 401(k) and take it as a lump-sum payment, but this may have tax implications and penalties.

1. Leave It

The majority of Roth 401(k) plan sponsors allow you to maintain your account with them after leaving your job. However, you no longer have the option to contribute directly to the plan, and you are limited to the investment options the plan provides.

This option is not always available, depending on your plan’s rules. If your Roth 401(k) balance is low (typically under $7,000) your plan administrator may force you out of the plan, and either roll the balance into an IRA or send you the balance as a taxable distribution.

Warning

If the balance of your Roth 401(k) plan is low, your plan administrator may force you to take a distribution. When this happens, you will have 60 days to roll the balance into a new plan or face taxes and penalties.

2. Transfer It

In some cases, you can transfer your Roth 401(k) plan balance to a new employer’s plan. This option is only available if your new employer offers a Roth 401(k) plan that allows transfers. Once a transfer is complete, the previous employer’s Roth 401(k) is closed, and your entire balance is held within the new plan. You will then be limited to the investment options of the new plan.

3. Roll It Over

A rollover is an option for your Roth 401(k) balance, either with the initial plan sponsor or with a new financial institution of your choice. A rollover transitions the Roth 401(k) balance into an individually held Roth IRA through a tax-free transfer. Under this option, you gain more control over your investment selections and have the opportunity to contribute additional funds if your annual income is below the legal threshold.

Important

If you choose to cash out your Roth 401(k), you are reducing the amount of money available to you during your retirement.

4. Cash It Out

You may also take a lump-sum cash distribution from your Roth 401(k) once you leave your job. There are, however, tax implications with distributions if you are under age 59½. You may also face a 10% early withdrawal penalty, except for certain cases—such as medical emergencies, childbirth expenses, or buying a first home. And, of course, if you cash out, you will lose the tax-free money your funds would have continued to earn until withdrawal and no longer have these Roth assets available to you in retirement.

What Is a Force Out Distribution?

A “force out” distribution can occur when an employee continues to hold a 401(k) or Roth 401(k) from an old employer after changing jobs. If the balance is below a certain threshold (typically $7,000), the plan administrator can force you to take a distribution for the entire balance. If that happens, you have 60 days to roll the funds over to a new plan. Otherwise, you may be liable for taxes and a 10% early withdrawal penalty.

What Happens to Your 401(k) When You Change Jobs?

You can normally keep a 401(k) or Roth 401(k) plan, even after you move on to a new job. However, if your balance is less than $7,000, the plan administrator may terminate your plan and send you a check for the balance. This counts as a taxable distribution, so it is your responsibility to roll or transfer the balance to a new plan in order to avoid taxes and penalties.

What Are the Disadvantages of Rolling a 401(k) into an IRA?

An IRA or Roth IRA has a larger universe of investments to choose from than a 401(k), making them an attractive target for rollovers. However, there are some disadvantages: 401(k) plans have greater creditor protections than IRAs, meaning that a lender may be able to pursue your IRA funds during a future bankruptcy. In addition, you may also have stock in your old employer in your 401(k) account, which gets special treatment for net unrealized appreciation. If you roll these shares to an IRA, this benefit disappears.

The Bottom Line

When you leave a job, you have the option of leaving your Roth 401(k) in place, moving to a new Roth 401(k) or Roth IRA, or cashing out the balance. It is important to understand the tax implications before making your choice.