What to Do with Your 401(k) When You Leave a Job

Among the many things you need to do when you leave a job—whether you get a new one, retire, or are laid off—one of the most important is deciding what to do with your 401(k) account. You have four options:

• Cash it out.
• Leave it in your former employer’s plan.
• Roll it over into an Individual Retirement Account (IRA).
• Move it to your new employer’s 401(k) plan.

So what do most people do?

For accounts of all sizes, within three years of employees’ departures, about one-third leave the balance in the old plan, another third roll it into an IRA, and a third cash it out, according to Craig Copeland, director of wealth benefits research with the Employee Benefit Research Institute.

For larger accounts (over $5,000), about two-thirds keep the money in the plan for at least some time, and the other third moves it out. “Very, very few roll over into their new employer’s plan,” Copeland says.

How do you decide which option is right for you? Here are the pros and cons of each. 

Option No. 1: Cash it out

Unless you desperately need the money, cashing it out is rarely the best idea.

Any money you take out of a traditional, pretax 401(k) or IRA will be subject to federal and possibly state taxes. If you are younger than 59 1/2, you will also owe a 10% penalty (unless you qualify for an exception). Some states, including California, also impose penalties on early distributions. (Different tax and penalty rules apply to Roth IRAs and Roth 401(k) accounts.)

Most importantly, any cash you withdraw will no longer grow in a tax-advantaged environment.

Option No. 2: Leave the money in your former employer’s plan

The feasibility of this option depends on how much money you have in the 401(k). If your balance is under $7,000 (up from $5,000 before 2024), your former employer may force you out of the plan. If your balance is between $1,000 and $7,000, the plan will roll it over into an IRA established for you, after giving you notice. If your balance is less than $1,000, the plan can send you a check without your consent. Many employers force out smaller accounts because they can be costly to maintain.

If you’re not booted out, take time to compare your old plan’s investment options and fees (including expenses embedded in the fund options and any annual or quarterly administrative fees) to what you could get in an IRA or a new employer’s plan. Large employers typically have more options and lower fees than smaller ones.

Since you aren’t receiving a paycheck from your old employer, you can no longer contribute to its 401(k) plan, but you can still change your investment elections. Leaving it where it is can be a good option, at least in the short term, especially for those who don’t have a trusted financial adviser or the expertise to manage their own investments. 

Pros

Employer plans have two advantages compared with IRAs. If you turn at least 55 in the calendar year you leave a company or organization (or 50, in the case of most public-safety employees), you can withdraw money from that employer’s plan without paying the 10% penalty that usually applies to early distributions; you will, however, still owe income tax. 

By comparison, if you roll the balance into an IRA, you will have to wait until age 59 1/2 to avoid the penalty. (Again, somewhat different rules apply to Roth accounts.) If you’re at least 55 and think you might have to tap your retirement savings before 59 1/2, that could be a reason to keep your money in the 401(k). 

Depending on where you live, you could have more protection from creditors and civil lawsuits if the money is in a 401(k), compared with an IRA. That’s because most employer plans are covered by a federal law known as ERISA, while IRAs are covered by state laws, which may not be as protective. 

“If you are a doctor, lawyer, or contractor, the creditor protection may be important,” says Jeffrey Levine, chief planning officer with Focus Partners Wealth.

Cons

Your investment options are typically limited to a menu of mutual funds chosen by your former employer, which may not suit your needs. If you worked for a smaller company, the fees you pay could be more expensive than those for the funds you could get elsewhere.

If you change jobs often, you could end up with multiple small 401(k) accounts, which can be difficult to monitor. If you move from state to state, your former employer(s) could lose track of you. 

Some companies won’t allow former employees to take a partial distribution from the plan (except for the required minimum distributions people must take, usually at age 73); instead, they must take all or nothing. IRAs don’t have such restrictions.

Option No. 3: Roll it over into an IRA

Any departing employee can roll a 401(k) balance into an existing or newly established IRA at almost any bank, brokerage firm, or mutual fund company, generally without triggering taxes or penalties. 

It’s safest to do a direct rollover via a trustee-to-trustee transfer: You provide the IRA account information to your former employer’s plan, then it deposits the balance into your IRA; the money never touches your hands. In some cases, the old 401(k) plan might send you a check for the full amount made out to the new bank or brokerage firm "for your benefit.” If this happens, just send the check to your financial institution. This is still considered a direct rollover and no taxes will be withheld. 

Alternatively, you can do an indirect or 60-day rollover. In this case, your old employer sends you a check made out to you, minus 20% for federal tax withholding. (Some states also withhold taxes.) Then, you have 60 days to deposit the amount received, plus the amount withheld, into an IRA; you will get back the withheld amount when you file your taxes. If you miss the deadline, you will owe taxes and a possible penalty (minus the taxes withheld) on the entire distribution.

Note that if you move money from a regular, pretax 401(k) account to a Roth IRA, it will be treated as a Roth conversion and subject to tax on the pre-tax portion of the conversion. That might not be a problem, if your tax rate is lower now than you expect it to be in the future; in that scenario, the conversion can be favorable, Levine says.

There’s no compelling reason to keep funds rolled over from an employer plan segregated in a dedicated rollover IRA. It’s OK to mix multiple rollovers into a single IRA, unless you want to keep them separate for your own recordkeeping.

Pros

With an IRA, you have more control over your money and more access to personalized advice, says Ed Slott, a CPA and founder of IRAhelp.com. You can also consolidate all of your retirement money in one place.

“If you are working with a financial adviser, it might make sense to roll it over so you have a more holistic view of your assets,” Copeland says.

With an IRA, you can invest in a wide range of investments, including individual stocks, bonds, mutual and exchange-traded funds, and certificates of deposit. If you want to invest in alternative assets—such as real estate, precious metals, cryptocurrencies, or privately held companies—you generally need to open a self-directed IRA with a specialty custodian. These tend to be more expensive, complex, and riskier than regular IRAs, Levine says.

With this option, you won’t be subject to a former employer’s partial distribution rules. You can take out any amount at any time, although it will be subject to taxes and a possible early withdrawal penalty. “If you are in a leave-it-or-take-it 401(k) plan, you probably want to move into an IRA,” Copeland says.

Your beneficiaries also might have more control over an inherited IRA. Some employers limit who you can name as a beneficiary and how they can access the money, says Lindsay Theodore, thought leadership senior manager with T. Rowe Price, a global investment management firm.

Cons

You will have to wait until age 65 to withdraw your money without penalty, unless you qualify for an exception.

You might have less creditor protection than in a 401(k).

Along with greater investment freedom comes greater risk. “If you are an unsophisticated investor, be very careful about being convinced to roll over your 401(k) into some investment vehicle you don’t understand,” Theodore says.

Option No. 4: Roll it over into a new employer’s plan

Relatively few people choose this option, in part because many employers don’t accept roll-ins from other plans. Levine would strongly suggest it for someone who is still working and doesn’t have time to deal with a lot of different accounts. “They have a million things on their mind,” he says. “They need simplicity.”

Pros

A direct rollover into a new employer’s plan won’t trigger immediate taxes or penalties. 

If you are moving from a small to a large company, the fees for the new plan could be lower.

Cons

Plan-to-plan rollovers involve additional paperwork, which can be a hassle, Copeland says. “However, there are some companies that are streamlining the process, so it may grow in the future.”

Some employers have a waiting period before they let new employees into the 401(k) plan. 

Money rolled into the new plan will be subject to your new employer’s withdrawal rules.

Additional considerations

• Some employers allow people who are still on the job to withdraw funds from their 401(k) once they reach 59 1/2. This is known as an in-service distribution and is another point at which employees might consider an IRA rollover, Levine says.
• Most exceptions to the 10% early withdrawal penalty apply to 401(k) and IRAs alike, but some apply to one only. If you might need your money before age 59 1/2, the IRS has a table of exceptions to the 10% additional tax.
• If you purchased your company’s stock in your 401(k) plan and it’s worth far more than you paid, investigate a potentially large tax break called net unrealized appreciation before deciding what to do with your 401(k), Slott says.
• Most of these rules also apply to 403(b) plans for schools and nonprofit employers, and to 457(b) plans offered by government employers. One notable exception: Departed employees won’t be hit with a 10% penalty on early distributions from a 457(b) plan, Slott says.

As with any significant financial decision, check with any financial advisers you work with before making the call on which of the four main 401(k) alternatives makes the most sense for you and your finances.