How to Cash Out a 401k When Terminated

By Frank Bass – Updated May 3, 2025 at 8:42 PM

Key Points

Many 401(k) plans let you keep your money invested after you leave your job, but you can't make additional contributions.
Vesting terms dictate ownership of employer-matched 401(k) funds; leaving before you're fully vested could mean you forfeit some funds your employer contributed.
Rolling over a 401(k) to a new employer's plan or into an IRA within 60 days avoids taxes and penalties.

It might not be the first question you ask when you've lost a job, but it's an important one: How do I cash out my 401(k)? More than 20 million Americans were laid off in 2024, according to the Bureau of Labor Statistics. But whether you're laid off, terminated, restructured, fired, or have just plain quit, it's important to read about your options for dealing with a significant part of your retirement nest egg.

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An infographic explaining three options for cashing out a 401k account when terminated from a job. — Image source: The Motley Fool.

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About the Author

Frank Bass is a contributing Motley Fool stock market analyst and editor covering energy, healthcare, consumer, and financial sectors. Frank has decades of experience in financial journalism, holding reporting and editing roles at The Wall Street Journal, The Associated Press, and Bloomberg. He also currently edits research on the global energy transition. He holds a bachelor’s degree in journalism from Texas Tech University and is a graduate student at the University of Alaska Fairbanks. Fun Facts: Frank has hiked The Long Trail in Vermont from end to end, and currently lives in a semi-dry cabin in Interior Alaska.

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Cashing out your 401(k) if you're fired

Quitting a job with another one lined up is one thing; you probably have your retirement planned or a new job lined up. Being fired -- laid off, terminated, restructured, or any other form of unexpected job loss -- can cause even the most prepared former employee to take a hard look at their financial situation.

Let's assume you don't yet know what you're going to do for work after losing your job. Fortunately, you have a few options here, as well:

Keep your money in the 401(k). Many employers allow former employees to keep their money in their plans. But if you have less than $1,000 in your account, some employers will cut you a check for your balance. If your balance is less than $7,000 (previously $5,000), your old employer may move your money into an IRA with ultra-conservative investments.
Roll your money into an IRA. For many former employees, this is likely the best option. It preserves your nest egg, gives you a bit more flexibility in directing any future savings, and remains tax-free. It's usually best to do a 401(k) rollover by having your former employer's plan sponsor transfer the money directly to your IRA provider, which is known as a direct rollover. You can also do an indirect rollover, where you cash out your 401(k) and deposit the money into an IRA within 60 days. But your plan sponsor will withhold a mandatory 20% for taxes, and you'll only have 60 days to deposit your funds into a new retirement account. Otherwise, the IRS will consider it a 401(k) distribution.
Take the money and run. Most people younger than 59 1/2 who cash out their 401(k) and withdraw all their money will owe a substantial tax penalty that can wipe out months, if not years, of savings. There are, however, a few exceptions. Some of the ways that you can withdraw money from a 401(k) without penalty include:
- You're older than 55.
- You're disabled.
- You have medical expenses that exceed 7.5% of your income.
- You're a reservist called to active duty.
- You cash out in equal installments spread out over your remaining life.
- The IRS has specifically waived penalties for disaster areas.
- You have a terminal illness.

How to Cash Out a 401k When Terminated

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