When you leave a job, your 401(k) does not disappear — but you need to decide what to do with it. Making the wrong move can cost you thousands of dollars in taxes and penalties. Here are your four options and how to choose the right one.
Your Four Options When You Leave a Job
Option 1: Roll Over to Your New Employer’s 401(k)
If your new employer offers a 401(k) plan that accepts rollovers, you can move your old balance into the new plan. This keeps everything in one account, making it easier to manage.
Pros:
- Simplifies your retirement accounts into one place
- Maintains 401(k) protections (stronger creditor protection than IRAs in some states)
- Keeps you eligible for loans against the balance if the new plan allows it
Cons:
- Investment options are limited to what the new employer’s plan offers
- Fees may be higher than an IRA
- Not all plans accept incoming rollovers
Option 2: Roll Over to an IRA (Most Popular Choice)
Rolling over to an individual retirement account (IRA) at a brokerage like Fidelity, Vanguard, or Charles Schwab gives you the most investment flexibility and typically the lowest fees.
Pros:
- Access to thousands of investment options including low-cost index funds and ETFs
- Typically lower fees than employer plans
- Consolidate multiple old 401(k)s in one place
- More control over your investment strategy
Cons:
- Slightly less creditor protection than a 401(k) in some states
- No loan option
This is the most common and often the smartest choice for people changing jobs frequently or those who want maximum investment flexibility.
Option 3: Leave It in Your Former Employer’s Plan
You can usually leave your 401(k) with your former employer’s plan, as long as your balance is above $5,000. Below that, the employer may cash it out or roll it over on your behalf.
Pros:
- No action required immediately
- Keeps the money invested without interruption
Cons:
- You lose access to new contributions and may lose access to customer service
- You may forget about it over time (lost 401(k)s are a common problem)
- Fees may continue on an account you can no longer contribute to
This option makes sense if you are between jobs temporarily or if the plan has exceptional investment options you cannot replicate in an IRA.
Option 4: Cash It Out (Almost Always a Mistake)
You can withdraw your 401(k) balance as cash. This is almost always the worst option for people under 59½.
The cost of cashing out:
- The full amount is taxed as ordinary income
- A 10% early withdrawal penalty applies if you are under 59½
- Combined with income tax, you could lose 30–40% of your balance immediately
Example: Cash out a $30,000 401(k) at age 35 in the 22% tax bracket. You owe 22% income tax ($6,600) plus 10% penalty ($3,000) = $9,600 in taxes and penalties. You receive $20,400 instead of $30,000. And you lose all future tax-free compounding on that money.
The only exception: if you left your job in or after the year you turned 55, the 10% early withdrawal penalty does not apply. But income taxes still do.
How to Do a 401(k) Rollover to an IRA
A direct rollover is the safest method:
- Open an IRA at your chosen brokerage (Fidelity, Schwab, Vanguard)
- Contact your former employer’s 401(k) plan administrator and request a direct rollover
- Provide your new IRA account number and custodian information
- The plan issues a check made out to your IRA custodian (not to you)
- The custodian deposits the funds into your IRA — no taxes withheld
Important: Do not request an indirect rollover where the check is made out to you. The plan is required to withhold 20% for taxes. You then have 60 days to deposit the full original amount (including the withheld 20%) into an IRA or you owe taxes and penalties on the entire shortfall.
What About Roth 401(k) Balances?
If you have a Roth 401(k), roll it into a Roth IRA to preserve the tax-free status. Do not roll a Roth 401(k) into a traditional IRA — that would create a taxable conversion event.
How Long Do You Have?
Technically, you can leave a 401(k) with a former employer indefinitely (as long as the balance is over $5,000). There is no strict deadline to roll it over. However, acting quickly avoids the risk of forgetting about the account.
Bottom Line
For most people, rolling a former employer’s 401(k) into an IRA is the best move — more investment choices, lower fees, and easy consolidation. Avoid cashing out at almost all costs. If your new employer’s plan has excellent low-cost funds, rolling into the new plan is also a solid option. Whatever you do, make a decision and act on it rather than letting old 401(k)s accumulate across every job you have ever had.