When you leave a job, your 401(k) doesn’t disappear. But it does need a decision. You have four basic options: leave it where it is, roll it to your new employer’s plan, roll it to an IRA, or cash it out. One of these is almost always a bad idea.
Option 1: Leave It With Your Old Employer
Most plans let you leave your money in place after you leave, at least until your balance drops below a minimum threshold (often $5,000 or $7,000). You stop contributing, but the money keeps growing in whatever investments you chose.
When this makes sense:
- The old plan has genuinely good, low-cost investment options
- You’re between jobs temporarily and plan to move it to a new employer plan soon
- You’re close to 55 and want to preserve access to the funds without a penalty (the Rule of 55 applies to former employer plans, not IRAs)
The downsides:
- Harder to track over time, especially if you change jobs again
- You may lose access to participant loans
- Customer service from old plans can be slow
Option 2: Roll It to Your New Employer’s 401(k)
If your new employer has a 401(k) and the plan accepts incoming rollovers, you can move the old money there. Everything stays in one place and you keep the employer plan protections, which can be slightly stronger than an IRA’s in certain creditor situations.
When this makes sense:
- Your new plan has good low-cost funds
- You want simplicity, one account, one login
- You’re considering borrowing from your retirement account (you can’t borrow from an IRA)
- You want to preserve the Rule of 55 access option for this money
The downsides:
- New plan’s investment options may be limited or expensive
- Not all plans accept incoming rollovers, so check before assuming
Option 3: Roll It to an IRA
Rolling your old 401(k) into a traditional IRA at a brokerage like Fidelity, Vanguard, or Schwab is the most common choice. You get a broader investment menu, usually lower fees, and full control.
When this makes sense:
- Your new employer has a weak plan or no plan at all
- You want access to low-cost index funds not available in the old plan
- You want to consolidate multiple old 401(k)s into one IRA
- You’re self-employed or freelancing and don’t have a new employer plan
The downsides:
- IRAs have slightly weaker creditor protection than employer plans in some states
- If you plan to do a Roth conversion later, a large pre-tax IRA can complicate the pro-rata rule
- You lose the Rule of 55 option. IRA withdrawals before 59½ generally carry a 10% penalty.
To understand how a rollover works mechanically, see What Is a Rollover?
Option 4: Cash It Out
You can take the money as a distribution. The plan withholds 20% for federal taxes, you pay income tax on the full amount, and if you’re under 59½, you owe an additional 10% early withdrawal penalty on top of that.
On a $30,000 balance, someone in a 22% tax bracket under age 59½ could lose roughly $9,600 to taxes and penalties, keeping only about $20,400.
This almost never makes sense. The math is punishing, and the bigger cost is losing years of tax-deferred compounding that can’t be recovered.
The only situation where cashing out might be considered is an extreme emergency with no other options. Even then, a 401(k) loan or an IRA Roth contribution withdrawal may be less costly.
Side-by-Side Summary
| Option | Keeps Tax Deferral | Investment Choice | Access Rules |
|---|---|---|---|
| Leave it | Yes | Plan’s menu | Plan’s rules |
| New employer’s 401(k) | Yes | New plan’s menu | Plan’s rules |
| Traditional IRA | Yes | Broad | IRA rules |
| Cash out | No (taxed now) | N/A | Immediate, costly |
One Thing to Check Before Moving Anything
Before initiating a rollover, check whether your old 401(k) holds employer stock or has any unvested match remaining. Unvested contributions stay with the employer. You only keep what has vested. See What Is Vesting? for how that works.
Also check whether the old plan has any outstanding loans against it. A plan loan that isn’t repaid at separation typically becomes a taxable distribution.
Frequently Asked Questions
Q: How long do I have to decide?
There’s no federal deadline that forces an immediate decision, but some plans automatically cash out small balances (under $1,000 to $7,000 depending on the plan) after you leave. Larger balances can often stay indefinitely. Don’t wait so long that the account gets forgotten.
Q: Should I roll it to a Roth IRA instead of a traditional IRA?
You can, but rolling pre-tax 401(k) money into a Roth IRA triggers a tax bill on the full converted amount. It may be worth it in a low-income year or if you have a long time horizon. See What Is a Roth Conversion? for the full analysis.
Q: What if my old employer goes out of business?
Your 401(k) is held in trust separately from the company’s assets. If the company fails, your retirement savings are protected. They belong to you, not to the employer. Contact the plan administrator or the Department of Labor if you have trouble accessing the account.
Q: Can I roll over a Roth 401(k)?
Yes. Roth 401(k) money rolls into a Roth IRA without taxes, since contributions were already made after-tax. This is usually a smart move because Roth IRAs have no required minimum distributions during your lifetime, unlike Roth 401(k)s.
Learn More
- IRS: Rollover chart
- Department of Labor: What you should know about your retirement plan
- IRS: 401(k) resource guide, plan participants