What you need to know about your 401(k) before you quit your job

You've made the decision to leave. Maybe it's a new opportunity, maybe it's a break, maybe it's time to start something of your own. Whatever the reason, your 401(k) is probably the last thing on your mind.

It shouldn't be. I spent years in retirement operations at a large wealth management firm, processing rollovers, distributions and beneficiary changes. From the paperwork side, I saw the same avoidable mistakes over and over, and most of them happened in the weeks right around someone's last day.

Here are seven things to check before you hand in your notice, plus a short checklist at the end.

1. Check your vesting schedule before you pick your last day

Every dollar you contribute to your 401(k) is always 100% yours. Your employer's contributions, like a match or profit sharing, may not be.

Many plans use a vesting schedule, which means you earn ownership of employer money over time. The two common types are:

• Cliff vesting: you own 0% until a set date (no more than 3 years of service), then 100%.
• Graded vesting: you own a growing percentage each year (fully vested within 6 years at most).

If you leave before you're fully vested, the unvested portion goes back to the plan.

What to do: Log in to your plan account or find your Summary Plan Description and look up your vested balance and your next vesting date. If that date is close, it may be worth factoring into when you leave. Also ask whether your plan makes a year-end "true-up" match, and whether you have to be employed on a certain date to get it.

2. Find out what happens to any 401(k) loan

If you have an outstanding 401(k) loan, leaving your job usually changes the repayment terms. Many plans require the remaining balance to be repaid shortly after you separate, or they'll offset it, meaning they subtract the unpaid balance from your account.

An unpaid loan offset is treated as a distribution. That means it can be taxed as ordinary income, and if you're under 59½, it may also face a 10% early withdrawal penalty.

The good news: when a loan is offset because you left your job, you generally have until your tax-filing deadline for that year, including extensions, to deposit the offset amount into an IRA or eligible plan and avoid the tax.

What to do: Call your plan administrator and ask: "What happens to my loan when I leave, and what's the deadline?" Get the answer in writing if you can.

3. Think twice before cashing out

When you leave, cashing out can look like the simplest choice. It's also usually the most expensive one.

Here's what typically happens when you take the money as cash:

• 20% mandatory federal withholding. The plan must withhold 20% for federal income taxes up front.
• Ordinary income tax. The full amount is added to your income for the year, so you may owe more than the 20% at tax time, plus any state tax.
• 10% early withdrawal penalty if you're under 59½, unless an exception applies.

On a $30,000 balance, it's easy to walk away with $20,000 or less, and you give up the years of tax-deferred growth that money would have had.

A note on the "Rule of 55": If you leave your job in or after the year you turn 55, withdrawals from that employer's 401(k) generally aren't subject to the 10% penalty (income tax still applies). This exception doesn't carry over if you roll the money into an IRA, so if it matters to you, think it through before moving the money.

4. Know your four options

When you leave an employer, you usually have four choices for your 401(k):

There's no single right answer. Fees, investment options, how creditor protection works in your state, and whether you want access to things like the Rule of 55 all play a role.

Don't forget Roth money. If you have Roth 401(k) contributions, they should go to a Roth IRA or another plan's Roth account, not a traditional IRA. Ask the plan to keep them separate.

5. If you move the money, ask for a direct rollover

How you move the money matters as much as where it goes.

• Direct rollover: The money goes straight from your old plan to the new plan or IRA (sometimes as a check made out to the new account, "for the benefit of" you). No taxes are withheld, and nothing is taxable.
• Indirect rollover: The check is made out to you. The plan withholds 20%, and you have 60 days to deposit the full original amount into the new account. To do that, you have to make up the withheld 20% from your own savings. Whatever you don't deposit becomes taxable, and possibly penalized.

From my operations days: the indirect rollover is where well-meaning people get caught. A check sits in a drawer, the 60 days pass, and a rollover turns into a taxable distribution.

What to do: Open the receiving account first, then ask your old plan for a direct rollover and confirm exactly how the check should be made out and where it should be mailed.

6. Review and update your beneficiaries

Your beneficiary designation decides who inherits your retirement account, and it generally overrides your will. When you move money to a new account, your old beneficiary choices don't automatically come along.

A few things to keep in mind:

• Set beneficiaries on any new IRA or plan account as soon as you open it.
• In a 401(k), if you're married, your spouse is generally the required beneficiary unless they sign a written waiver. IRAs follow different rules, which can vary by state.
• Life changes like marriage, divorce or a new child are a good reason to review every account, not just the one you're moving.

What to do: Before you leave, download or screenshot your current beneficiary information. After any rollover, confirm the new account shows the right people.

7. Own company stock in your 401(k)? Pause before you roll it over

If your 401(k) holds shares of your employer's stock, there's a tax strategy you should know about before moving anything: net unrealized appreciation (NUA).

In simple terms, NUA can let you take company shares out of the plan and into a regular brokerage account. You pay ordinary income tax only on the shares' original cost basis. The growth (the "net unrealized appreciation") is taxed at long-term capital gains rates when you eventually sell, which are often lower than income tax rates.

The catch: NUA has strict rules. It generally requires a lump-sum distribution of your entire plan balance within one tax year after a qualifying event like leaving your job. And if you roll the company stock into an IRA first, the NUA opportunity is gone for good.

NUA isn't right for everyone. It depends on your cost basis, your tax bracket and your timeline. But it's worth asking about before you sign rollover paperwork.

What to do: Ask your plan for the cost basis of your company stock, then talk to a tax professional or financial advisor.

A few more things worth checking

• Contribution limits across jobs. The annual 401(k) employee contribution limit applies to you, not to each employer. If you change jobs mid-year, add up what you've contributed at both so you don't go over.
• Your last paycheck. Find out whether contributions (and any match) come out of your final check, including payouts for unused PTO.
• Old accounts. If you've left other jobs, now is a good time to track down and consolidate forgotten 401(k)s.
• Keep your contact info current. Plans send important notices by mail and email. An old address is how accounts get lost.

Your before-you-quit 401(k) checklist

• Look up your vested balance and next vesting date
• Ask about any year-end or true-up match and its eligibility rules
• Ask what happens to any outstanding loan, and the deadline
• Decide between leaving it, rolling to a new plan, rolling to an IRA or cashing out
• Request a direct rollover if you move the money
• Keep any Roth money in a Roth account
• Save your current beneficiary info and set beneficiaries on new accounts
• If you own company stock in the plan, ask about NUA before rolling over
• Update your address and email with the old plan

The bottom line

Leaving a job is a big transition, and your 401(k) deserves a few minutes of attention before you go. Most expensive mistakes come from rushing: cashing out on autopilot, letting a loan default, missing a 60-day window or rolling over company stock without knowing about NUA.

Slow down, ask your plan the right questions, and get professional advice for anything specific to your situation.

This article is for general educational purposes only and is not investment, tax or legal advice. Plan rules vary, and the right choice depends on your personal situation. Tax rules can change. Please consult a qualified financial, tax or legal professional before making decisions about your retirement accounts.