Life happens in chapters. And sometimes, a new chapter involves getting a new job or losing your current one. There can also be some cliffhangers from the preceding chapter—like what should you do with your retirement accounts, such as a 401(k) from your old job.

What’s a 401(k)?

A 401(k) is a type of retirement savings account that is sponsored by an employer–so, only employees of a company that offers one can contribute. Employees who enroll in a company’s 401(k) plan automatically contribute money to an account through payroll deductions.

There are two different types of 401(k). One is called a traditional 401(k), the other is called a Roth 401(k).

You usually fund a traditional 401(k) with pre-tax earnings, which is the gross pay you earn each month before taxes and other deductions have been taken out. By contrast, you usually fund a Roth 401(k) with post-tax earnings, known as your net income. This is the money you take home after taxes and other deductions have been taken out.

There is an annual contribution limit of $18,500 for individuals under the age of 50, and $24,500 for those over 50, as of 2018. Contributions over these limits are subject to income taxes.

Some employers also offer matching contributions, which means that a company will match the funds an employee contributes to a 401(k) every pay period, usually up to a certain percentage, for example up to 3% of your contribution.

Employment and your 401(k)

To reiterate, you can’t contribute to a 401(k) unless your employer offers one. That doesn’t’ mean you can’t save for retirement—in that case, you can open an individual retirement account or IRA.

But what happens to your 401(k) if you lose your job, or change jobs?

What happens to your 401(k) when you leave your job?

You can rest easy, because your money isn’t going anywhere—it’s your money, and you have control over what happens to it. And you have several options.

  • Roll the funds over to a 401(k) account with your new employer. If you’re offered a 401(k) plan at your new job, you can set up a 401(k) rollover transfer from your old provider to your new one. Depending on your provider, you may be able to initiate the transfer online—or, your old provider may send you a check with the funds, that you must deposit into your new account.
  • Roll the funds over to an IRA. You can initiate a 401(k) rollover into either a traditional IRA or Roth IRA. To do this, you’d choose an IRA provider and open an account, and then ask your 401(k) provider to roll over the funds into your new account.
  • Take a distribution. You can “cash out” your account, but you’ll be subject to taxes and early withdrawal fees, depending on your age. If you’re under age 59½, early withdrawal penalties can be as high as 10%, and the income tax due will depend on your federal and state tax brackets.
  • Do nothing. You can leave the money in your old employer’s account, as long as it meets a certain threshold (typically, a minimum of $5,000 must be in the account). It’s possible that your old employer could close your account after a period of time, and make you take a distribution of the funds. You will also no longer be able to contribute to the old account, as you won’t be working for the company that sponsors the plan.

The best move will depend on your individual situation. But even if you do find yourself without a job, try your best to keep saving—it’s tough to play catch-up when it comes to your retirement savings.

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