How 401(k) and pension plans work, and what happens when you leave a job

This page explains how these plans work. It is general information, not tax, legal or investment advice. Your plan's own papers decide many details.

What is the difference between a 401(k) and a pension?

A 401(k) (or a 403(b) at a school or nonprofit) is your own savings account at work. You choose to put part of each paycheck in. Your employer may add a match. The money is invested, so it can go up or down. What you have at the end depends on what went in and how the investments did.

A pension (also called a defined benefit plan) promises you a set monthly payment when you retire. The amount usually depends on your years of work and your pay. In private and union plans, the employer usually pays for it. Government pensions usually take money from your paycheck too.

Many workers have only a 401(k). Some union and government workers have both.

How much of it is mine?

The money you put in from your paycheck is always 100% yours (IRS, vesting). This is true no matter how long you worked or why you left.

Money your employer adds may need time to become yours. This is called vesting. A 401(k) plan can use, for example:

• Cliff vesting: none of the employer money is yours until 3 years of work, then all of it is.
• Graded vesting: 20% after 2 years, then 20% more each year, until 100% at 6 years.

Some plans vest you right away. If you leave before you are fully vested, you may lose the part that is not yet yours. Everyone must be fully vested at the plan's normal retirement age, or if the plan ends.

Does my immigration status change any of this?

No. A plan pays what you earned under its own rules. The IRS rules on vesting, rollovers and payouts described on this page do not depend on immigration status.

Two real issues to know about:

• The plan knows you by a number. Most plans use the Social Security number on your payroll. If you have an SSN or a new one from DACA or a green card, make sure the plan has the right number and address.
• If your account was opened under a number that is not yours, stop before you call the plan or ask for a payout. Talk first with an immigration attorney and a tax professional. Contacting the plan or signing forms could create problems in an immigration case. See Free legal help in the Bay Area.

What are my choices when I leave?

The IRS lists four main choices for a 401(k):

1. Leave it in the old plan. This can make sense if the fees are low and you like the investments. Keep your address updated with the plan.
2. Move it to your new job's plan, if that plan accepts it.
3. Move it to an IRA, an individual retirement account you open at a bank or investment company.
4. Cash it out. This is usually the most expensive choice. It counts as income, and you may owe extra taxes.

If your balance is under $5,000, the IRS says your employer may require you to move it. Read every letter the plan sends after you leave, so you choose instead of the plan choosing for you.

How do I move it without paying tax?

Ask for a direct rollover. The old plan sends the money straight to the new plan or IRA. No tax is held back (IRS, rollovers).

If the plan pays you instead:

• It holds back 20% for federal income tax.
• You have 60 days to put the money into another plan or IRA.
• To avoid tax on the full amount, you must add the missing 20% from your own savings. If you cannot, the part you did not roll over is taxed, and may get the extra early withdrawal tax.

Some money cannot be rolled over, such as hardship withdrawals and required yearly payouts after a certain age. Your plan's notice will tell you which part qualifies.

What does cashing out really cost?

More than most people expect. If you take the money before age 59½, you usually pay:

• Regular federal income tax on it
• A 10% extra federal tax for early withdrawal (IRS, exceptions to the early tax)
• California income tax, plus a 2.5% extra state tax on early withdrawals (Franchise Tax Board, Form 3805P instructions)

Add it up and a cash out can lose a quarter or more of its value to taxes, depending on your income.

The IRS lists exceptions to the 10% tax. For a 401(k), some of the most common are:

• You left the job during or after the year you turned 55
• Total and permanent disability, or a doctor's certification of terminal illness
• One emergency withdrawal a year, up to $1,000
• Up to $5,000 per child for a birth or adoption
• Being a victim of domestic abuse by a spouse or partner, up to $10,000 or half your account, whichever is less
• Medical bills over 7.5% of your adjusted gross income

California does not follow every federal exception. Ask a tax preparer before you count on one.

What if I have a 401(k) loan?

If you owe on a plan loan when you leave, the plan may subtract what you owe from your account. This is called a loan offset, and it counts as a payout. The good news: if it happened because you left the job, you have until your tax return due date, including extensions, to roll that amount into an IRA and avoid the tax (IRS, plan loans).

What happens to my pension?

If you are vested, your pension usually stays with the plan until you reach its retirement age. Then you apply for it. Some plans offer a lump sum instead. Keep:

• The plan's name and the employer's name
• Your benefit statements and the summary plan description
• An updated mailing address on file, even if you move

Private sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC). If a covered plan ends without enough money, PBGC pays benefits up to limits set by law. PBGC does not cover 401(k) plans.

What if I leave the United States?

Your money does not disappear when you move. You can usually leave it in the plan, roll it to an IRA, or take it out. What changes is the tax.

• Early withdrawal taxes can still apply after you move.
• If you become a nonresident for U.S. tax purposes, the IRS says pension payments are generally subject to 30% federal withholding, unless a tax treaty with your new country lowers it. To claim a treaty rate, you give the plan Form W-8BEN (IRS, income paid to nonresident aliens). The plan reports the payment on Form 1042-S.
• Ask whether your plan or IRA company will keep your account if you live abroad. This is our suggestion: get the answer in writing before you move.
• Your new country may tax it too. Ask a tax preparer there.

Before you go, update your address and email with the plan, save your login and statements, and name a beneficiary. If you are leaving because of an immigration case, see Legal ways to move to another country, or leave and talk with an immigration attorney first.

How do I find an old plan?

• Call the old employer's HR or the plan company named on old pay stubs or statements.
• Search the Retirement Savings Lost and Found database from the U.S. Department of Labor. It finds private employer and union plans linked to your Social Security number. You need a verified Login.gov account with a Social Security number and an active driver's license. It does not find IRAs or government plans. DOL says it will never call, text or email you for your password or passcode.
• No Social Security number? Contact the employer or plan directly, with your pay stubs and the dates you worked.

Questions people ask

I was fired. Do I lose my 401(k)? No. Your own contributions are always yours. Only unvested employer money can be lost.

Can my employer keep my money because I quit without notice? Not your own contributions. The plan's rules, not your boss, decide vesting.

Should I cash out to pay bills? Look at the full cost first, and at other help. See Lost your job and can't get unemployment? Other help and Where to get free, trusted help with money and credit.

My employer has no plan. Can I still save? California runs CalSavers, a state retirement savings program for workers whose employers do not offer a plan. If you have an ITIN and no Social Security number, ask CalSavers whether you can join before you sign up.

Who can help?

Contact them to confirm hours, languages and openings. Being listed here is not a referral or a promise of service.

• Your plan administrator: the only one who can confirm your balance and options. The phone number is on your statement.
• U.S. Department of Labor, Employee Benefits Security Administration: questions and complaints about private plans. lostandfound.dol.gov
• Legal Aid at Work: free workers' rights clinic for lower income workers. East Palo Alto line: (415) 404-9093. legalaidatwork.org
• Free tax help: VITA sites can explain the tax on a withdrawal. See Free tax help to file with an ITIN.