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What options are available for terminated employees?

Published

Terminated employees have several options for managing their existing 401(k) vested balance:

  • Leave the funds in the current plan – Some plans allow former employees to keep their funds in the plan, though balances under $7,000 may be subject to mandatory distribution if your plan has a force-out provision.
  • Rollover to an Individual Retirement Account (IRA) – Funds may be transferred to an IRA to maintain tax advantages and investment growth at Betterment or another institution.
  • Rollover to a new employer’s 401(k) plan – If the new employer offers a 401(k) or similar qualified plan, employees may be able to transfer their funds to consolidate retirement savings with their new employer.
  • Cash out the balance – Employees can withdraw their funds, but this will result in additional tax liability and early withdrawal penalties (both federal and potentially state depending on their residency) if they are under the normal retirement age defined by your Plan.

Each option has different tax implications and potential penalties, so employees should review their choices carefully with a tax advisor or investment professional.