New on FinoLib · Volume V: Personal Finance
I have added a new article to FinoLib, my finance education website: 401(k) Vesting and Rollovers When You Change Jobs, part of Volume V: Personal Finance. It is part 1 of a 2-part guide. This page gives you the core of the topic in expert but plain language; the full article goes much deeper.
The idea in plain words
Money you put into a 401(k) is always yours. The money your employer adds may take years to become fully yours, which is called vesting, so check your plan’s rules before you set a resignation date. When you leave, move the account by a direct rollover into an IRA or your new employer’s plan, or leave it where it is. Do not cash it out: taxes and a 10% extra tax can take about a third of the balance, and you lose all the growth it would have earned.
Key points
■A “year of service” for vesting is usually any plan year with 1,000 hours, about 25 full-time weeks, so the date you leave within a year can change what you keep.
■A check paid to you carries 20% mandatory withholding and a 60-day deadline; a direct rollover has neither.
■Rolling everything into an IRA is not automatically best: it can give up Rule-of-55 access, ERISA creditor protection, cheap institutional funds, a clean backdoor Roth and the company-stock tax break.
■Layoffs that remove 20% or more of a plan’s participants in a year are presumed to trigger full vesting for those let go.
A closer look
Your own contributions to a 401(k) are always 100% yours. Whatever the employer contributes — the match from 6.5 — is often subject to a vesting schedule, and federal law sets two maximums: a cliff (0% owned until a set date — by law no later than three years of service — then 100% all at once) or a graded schedule (by law at least 20% after two years, 40% after three, 60% after four, 80% after five and 100% after six). Plans may vest faster. Leaving early forfeits the unvested part. With the household’s $2,250 annual match, leaving after three years under the graded schedule keeps 40% × ($2,250 × 3) = 40% × $6,750 = $2,700 and forfeits $4,050 (growth ignored); under a three-year cliff, leaving after two years forfeits all $2,250 × 2 = $4,500. Check the date before you resign.
Direct vs indirect. A direct rollover, trustee to trustee, has no withholding and no deadline to miss. An indirect rollover — a check paid to you — triggers 20% mandatory federal withholding, and to avoid tax you must deposit the full balance in the new plan or IRA within 60 days, replacing the withheld 20% from other money. On a $30,000 balance the check is $24,000; deposit only that and the missing $6,000 is a distribution: $6,000 × 22% = $1,320 of tax plus $600 more under 59½ (the withholding counts toward the bill). Only one IRA-to-IRA indirect rollover is allowed in any 12 months across all your IRAs; direct transfers and plan-to-IRA rollovers do not count.
To find an old account, search the Department of Labor’s Retirement Savings Lost and Found database (private-sector employer and union plans; not IRAs or government plans).
A worked example
Worked Example — Compare the Scenarios: Choosing a Resignation Date
Illustrative assumptions: the running household joined in January 2024; its plan counts years of service by 1,000 hours in each calendar year and vests the match on the six-year graded schedule (20% after two years, 40% after three). The $2,250 annual match arrives evenly through the year, so each month adds $2,250 ÷ 12 = $187.50. Growth is ignored. A new job offer arrives in May 2026.
Under the hood
Under the Hood: Why the Check Comes With 20% Missing
The 20% is not a penalty; it is a design that pushes you toward the direct route. Under 26 U.S.C. §3405(c), a plan must withhold 20% from any distribution eligible for rollover, and the only exception is a distribution you elect to have paid directly to another plan or IRA. The plan cannot skip the withholding because you promise to roll the money over; it has no way to know you will.
Edge Cases: When the Standard Answer Changes
The four destinations and the rules above cover an ordinary resignation with an ordinary pre-tax balance. These situations change the answer, sometimes by thousands of dollars. Situation What changes Why Number or rule Laid off with many colleagues Your unvested match may become 100% vested A partial plan termination requires full vesting for every participant who lost their job in it A turnover rate of 20% or more of participants in the period creates a presumption of partial termination (Rev.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume V: Personal Finance
Read the full article on FinoLib
The complete article, 401(k) Vesting and Rollovers When You Change Jobs, with every worked example, diagram, quiz and source, is free to read in Volume V, Personal Finance on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance