How To Cash Out a 401K Matched by a Previous Employer

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Investing in a 401k plan is an excellent way to save for retirement, but it can be confusing when understanding the rules and regulations surrounding the plan. For example, one of the most common questions employees ask in a 401k plan is whether they will receive part of the company match if they quit their job and take their money in a lump sum. In this guide, we will explore the answer to this question and provide a clear understanding of what happens to the company match when you leave your job.

What is a 401k Plan?

To understand the answer, knowing what a 401k plan is is essential. A 401k plan is a retirement savings plan that an employer sponsors. Employees can contribute a portion of their salary to the plan on a pre-tax basis, and the funds are invested in various investment options. Employers may also match a portion of the employee’s contribution up to a certain percentage of the employee’s salary.

How does the company match work?

When an employer offers a company match, they will contribute a certain amount to an employee’s 401k plan based on their contribution. For example, an employer may offer a 50% match on the first 6% of an employee’s salary that they contribute to the plan. If the employee contributes 6% of their salary to the plan, the employer will contribute 3% of the employee’s salary.

What Happens When You Leave Your Job?

If you leave your job and take your money in a lump sum, you may wonder what happens to the part of the company match you received while employed.

Cashing Out A 401K Matched By A Previous Employer

Do You Get the Part the Company Matched?

The answer to this question depends on the vesting schedule of the 401k plan. Vesting refers to when an employee must work for the company before they have the right to the employer’s contributions to their 401k plan. Some plans have immediate vesting, meaning the employee has the right to the employer’s contributions as soon as they are made. Other plans have a vesting schedule, which means that the employee needs to work for a certain number of years before they have the right to the employer’s contributions.

What Happens if You Are Fully Vested?

If you are fully vested in your 401k plan, you have the right to the employer’s contributions as soon as they are made, regardless of whether you quit your job. If you take your money in a lump sum, you will receive the total amount of the employer’s contributions.

What Happens if You Are Not Fully Vested?

If you are not fully vested in your 401k plan, you will only be entitled to a portion of the employer’s contributions when you leave your job. The number of employer contributions you are entitled to will depend on the plan’s vesting schedule. For example, if you have worked for the company for two years and the plan has a four-year vesting schedule, you may only be entitled to 50% of the employer’s contributions.

Should You Take Your Money in a Lump Sum?

There are a few things to consider if you consider taking your money in a lump sum when you leave your job.

Taxes and Penalties

You will be subject to taxes and penalties if you take your money in a lump sum. The amount of taxes and penalties you will owe will depend on your age, the amount of the distribution, and the amount of pre-tax contributions you have made to the plan.

Related Reading: At what age can you withdraw from 401k without paying taxes?

Other Retirement Savings Options

If you don’t need the money right away, it may be beneficial to roll your 401k balance over to an IRA or your new employer’s retirement plan. This will allow your money to grow tax-free, and you won’t be subject to taxes and penalties.

Financial Planning

It’s essential to consider your overall financial situation and goals before deciding on your 401k plan. If you have other retirement savings, taking your money in a lump sum may not be the best option. Speaking with a financial advisor is essential to make the best decision for your situation.

Cashing Out A 401K Matched By A Previous Employers

Next Steps

In conclusion, if you leave your job and take your money in a lump sum from your 401k plan, you will receive the part of the company match you are entitled to based on the plan’s vesting schedule. If you are fully vested, you will receive the total amount of the employer’s contributions. If you are not fully vested, you will only be entitled to a portion of the employer’s contributions based on the vesting schedule. It’s essential to consider your overall financial situation and goals before deciding on your 401k plan, and speaking with a financial advisor can help you make the best decision.

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frequently asked questions

How can I withdraw money from my 401k without penalty?

According to IRS regulations, you can withdraw money from your 401k without being penalized only if you’re 59 and a half years old; you’re permanently disabled or incapable of working.

Can I transfer my 401k to my checking account?

Is it possible to transfer money from a 401k to a bank account after reaching 59 ½? If you are over 59 ½, you can transfer funds from a 401k to your bank account without incurring the 10% penalty. However, you will still have to pay the ordinary income tax on the withdrawn amount at both the Federal and State levels.

How much is my 401k worth if I cash out?

If you withdraw from a traditional 401k after the age of 59.5, you will receive your entire balance minus state and federal taxes. On the other hand, if you withdraw from a Roth 401k after 59.5, you will receive your entire balance without any taxes. If you withdraw before age 59.5, you will face a 10% penalty and any taxes you owe.

Can an employer take back their 401k match?

According to federal law, if an employee does not stay with the company long enough to pass the “vesting period,” the employer can withdraw the matching funds they had deposited into their retirement account. 401k plans are necessary for employer matching programs to exist.

Can a company refuse to give you your 401k?

To clarify, it’s important to note that while companies are not allowed to refuse to give you the 401k funds you are entitled to, they can determine if they will provide 401k plans to employees and how they will be managed. Additionally, in certain situations, companies may be permitted to withdraw funds from your 401k account after you have left the company.

How long does it take to cash out 401k after leaving a job?

Depending on who manages your account, it may take three to 10 business days for you to receive a check after cashing out your 401k.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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