What to Do with Your 401(k) After a Layoff: Understanding Your Options

Deciding what to do with your 401(k) after a layoff requires careful planning. Should you leave your funds where they are or explore other options? Each choice comes with specific rules, benefits, and risks. Knowing your options helps protect your retirement savings and align with your financial goals.

Understanding how your 401(k) works is key to navigating these choices with confidence after a layoff.

How 401(k) plans work

A 401(k) is an employee-sponsored retirement plan funded with pre-tax dollars, allowing your contributions to grow tax-deferred until withdrawal. “This means you contribute money before being taxed on it as income,” says Michelle Taylor, financial educator and founder of Women and Wealth Initiative. “Typically, an employer offers a match [of up to a certain amount], and this is a great way to see an immediate 100% return on your investment.”

Employers usually provide a range of mutual funds—covering stocks, bonds, and money market options—for employees to invest in. While a 401(k) is designed to help workers build long-term retirement funds, navigating its rules and exploring your options becomes especially important after a layoff to ensure your financial future remains secure.

401k after layoff: Consider your options

Weighing the pros and cons of each option can help you safeguard your retirement savings while addressing your current financial needs.

Leave it with your former employer

You may have the option to keep your funds in your old employer’s plan. This allows your investments to continue growing, but you won’t be able to make additional contributions—which also means employer matching will end. Additionally, the service fee charged by the investment company may go up: “The fee you are charged increases because you are no longer covered under the plan,” Taylor says. Fee changes depend on your employer’s specific 401(k) rules, so review your plan’s terms carefully.

Roll it over to an IRA

Rolling your 401(k) into an Individual Retirement Account (IRA) gives you greater control over your investments and potentially lower fees. It’s treated the same way from a tax perspective, meaning you’ll be contributing pre-tax dollars. “But with an IRA, you gain more investment options and can continue contributing—up to $7,000 annually in 2024,” Taylor says. Rollover funds from your 401(k) do not count toward this annual contribution limit, so you can preserve your savings while continuing to grow your balance.

Transfer it to a new employer’s plan

If your next employer offers a 401(k) plan, you may be able to transfer your savings into it. This option simplifies account management by consolidating your retirement funds. Be sure to confirm that the new plan accepts rollovers and offers competitive investment options. Additionally, some companies have a mandatory waiting period before you can open a 401(k) account, so don’t initiate a rollover until you’re sure there’s an account to roll over into. 

Withdraw the funds

Most financial experts advise against this option. Withdrawing your funds may seem like a boost to your cash flow after a layoff, when you might be nervous about income—but early withdrawals (before age 59 and a half) typically incur a 10% penalty plus income taxes. That’s a lot of your hard-earned money flying out of your hands. Unless you’re facing a significant financial emergency, consider preserving your retirement savings through other options.

Do nothing—for now

If your account balance is on the small side, your employer may require you to move the funds. But if there is no rush, taking time to carefully evaluate your choices helps you make a more informed decision. A thoughtful approach ensures you avoid rushing into decisions that may not align with your long-term goals.

General rules for managing your 401(k)

Before managing your 401(k) after a layoff, understand the general rules of 401(k) investments to guide your decisions and avoid costly mistakes.

• Withdrawal penalties: Taking money out before age 59 and a half typically incurs a 10% early withdrawal penalty, along with regular income taxes.

• Required minimum distributions (RMDs): Starting at age 73, you must begin taking RMDs from your retirement accounts. This reflects the updated rule under the SECURE 2.0 Act.

• Employer balances: If your account balance is less than $1,000, your former employer may issue a check for the amount. To avoid taxes and penalties, you’ll have 60 days to reinvest the funds in a qualified account, like a new employer’s 401(k) plan or an IRA.

So, what to do with 401k after layoff? Choose the right path for you

Deciding what to do with your 401(k) after a layoff depends on your financial priorities and future plans. 

Assess your immediate financial needs and options

If you’re facing urgent expenses, explore penalty-free withdrawal options, such as the Rule of 55 or hardship withdrawals, which may help in specific circumstances. 

Think about your long-term goals

Consider how your retirement timeline and investment strategy factor into your decision. For example, rolling over your 401(k) to an IRA offers more flexibility, while transferring it to a new employer’s plan can simplify account management.

Understand tax implications

Evaluate how taxes and IRS rules will affect your choices, particularly for rollovers or withdrawals. A direct rollover to an IRA or another 401(k) avoids immediate taxes and penalties, preserving your retirement savings. In contrast, withdrawals are taxed as income and may include a 10% early withdrawal penalty. 

However, there are exceptions to this penalty, “including medical expenses, the purchase of a primary home, education expenses, funeral or final expenses, and preventing foreclosure,” Taylor says. Note that your plan administrator may require documentation to prove the hardship, so you have to confirm the requirements before moving forward.

Practical steps to manage your 401(k) after layoff

Navigating your 401(k) after a layoff can be challenging, but actionable guidance simplifies the process. William F. Davis, certified financial planner and managing partner at Vericrest Private Wealth offers these steps to help you manage your retirement savings effectively:

1. Review your 401(k) plan documents. Examine the summary plan description to understand your options and deadlines.

2. Avoid cashing out. Early withdrawals can significantly reduce your savings and incur steep penalties. To preserve your retirement funds, it’s wise to avoid cashing out 401k after layoff unless absolutely necessary.

3. Compare rollover options. Analyze the costs, investment choices, and tax implications to find the best fit for your goals.

4. Review your investment allocation. Ensure your investments align with your financial timeline and immediate cash needs.

“I have seen these methods attempted both successfully and unsuccessfully—so I strongly recommend consulting a financial professional to ensure everything is properly managed and fully compliant with IRS regulations,” Davis says.

Keep growing that money

A layoff is never easy, but making informed choices about your 401(k) can protect your retirement savings and provide much-needed financial stability. By understanding the rules, weighing your options, and seeking professional advice, you can navigate this transition with confidence and stay aligned with your long-term goals. Taking proactive steps today—whether rolling over your 401(k) or consulting a financial expert—ensures your retirement savings continue to grow and support your future.