Laid off: what to do with your 401(k)

This is the least urgent decision you face and the one most often made in a panic. Doing nothing for a while is a legitimate option.

Last checked against primary sources: 2026-08-09

Trap one: the 60 day rule and the 20 percent that vanishes

Three sentences from IRS guidance, which do something unpleasant when combined:

• "You have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA."
• "A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later."
• "Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA."

Source: IRS, Rollovers of Retirement Plan and IRA Distributions

Work it through. Suppose you have $50,000 and ask for a cheque intending to roll it over yourself. The plan must withhold 20 percent, so $10,000 goes to the IRS and $40,000 arrives. To complete a full rollover within 60 days you must deposit $50,000, which means finding the missing $10,000 from your own pocket at the exact moment you have lost your income. Deposit only the $40,000 and the rest is treated as a distribution, taxable and potentially subject to the additional 10 percent tax.

A direct trustee-to-trustee rollover avoids all of this, because the money never passes through your hands. The difference between the two routes is a form.

Trap two: the age 55 exception, and how a rollover destroys it

The additional 10 percent tax on early distributions generally applies before age 59 and a half: "Generally, early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 59½." IRS Topic No. 558

There is an exception that exists for people in exactly your situation. The IRS lists an exception for distributions made "to you after you separated from service with your employer after attainment of age 55."

The one-rollover-per-year rule, and when it does not bite

The one-rollover-per-year limitation applies to IRA-to-IRA rollovers. Per the IRS it does not apply to trustee-to-trustee transfers or to direct rollovers from an employer plan. Another reason the direct route is the low-risk one: it sidesteps the 60 day clock, the withholding, and this limitation at once.

Two things that do deserve attention now

• Check whether you have an outstanding 401(k) loan. Separation frequently accelerates repayment, and an unpaid balance can be treated as a distribution. This one does have a deadline, it varies by plan, and it is in your plan documents.
• Check your plan's automatic cash-out threshold. Plans may force out small balances after separation, so find out the threshold rather than assuming inaction is safe.