How to Roll Over a 401(k) When You Change Jobs
When you leave a job, you have to decide what to do with your 401(k). Here are your four options, how a rollover works, how to avoid taxes and penalties, and how to choose between rolling into an IRA or your new employer's plan.
By Pond.com editors Updated 3 min read
Quick answer
- When you leave a job, you can leave your 401(k), roll it into your new employer's plan, roll it into an IRA, or cash it out.
- A direct rollover, where the money moves straight between accounts, avoids taxes and withholding.
- Cashing out usually means income tax plus a 10% penalty if you're under 59½, and loses years of growth.
- Roth 401(k) money should go to a Roth IRA or Roth 401(k) to stay tax-free.
- Small balances may be moved out of your old plan automatically, so decide what you want before that happens.
Changing jobs means deciding what to do with the retirement savings you built at your old one. Getting it right keeps your money growing tax-free; getting it wrong can cost you taxes, penalties and years of growth.
This article is general information, not tax or investment advice. Plan rules vary; check with your plan and a tax professional if you're unsure.
Your four options
| Option | Pros | Cons |
|---|---|---|
| Leave it in your old plan | Easy; no action needed | One more account to track; you can't add to it |
| Roll into your new employer's plan | Everything in one place | Only if the new plan accepts rollovers; limited fund choices |
| Roll into an IRA | Wide choice of investments; combine old accounts | You choose and manage the investments |
| Cash it out | Money now | Income tax, usually a 10% penalty under 59½, and lost growth |
For most people, cashing out is the costliest choice.
How a rollover works
- Decide where the money will go: an IRA or your new 401(k).
- Open the account if you need to, such as a rollover IRA at a brokerage. See how to choose a brokerage account.
- Ask your old plan for a direct rollover. The money goes straight to the new account, sometimes as a check made out to the new provider.
- Invest the money once it arrives. It may land as cash.
- Check that it's arrived and that nothing was withheld for tax.
Avoiding taxes and penalties
- Choose a direct rollover, so no tax is withheld.
- Avoid indirect rollovers if you can. If you take a check, the plan usually withholds 20%, and you must deposit the full amount within 60 days, making up the withheld part from other money.
- Keep Roth money Roth. Roll Roth 401(k) money into a Roth IRA or Roth 401(k).
- Watch for loans. An unpaid 401(k) loan may become due when you leave, or be treated as a withdrawal.
IRA or new 401(k)?
An IRA can be better if: you want more investment choices, lower fees than your new plan or one place for several old accounts.
Your new 401(k) can be better if: it has low-cost funds, you like keeping things simple, or you might want to retire or take money out between 55 and 59½, since some plans allow penalty-free withdrawals from that age if you leave your job.
Don't forget old accounts
Many people leave small balances behind and forget them. Keep a list of every retirement account you have, and update your beneficiaries on each one.
Common questions
In a direct rollover, your old plan sends the money straight to your new plan or IRA, with no taxes withheld. In an indirect rollover, you get a check, the plan usually withholds 20% for taxes, and you have 60 days to deposit the full amount, including the withheld part, or it's treated as a withdrawal.
An IRA usually offers more investment choices and lets you combine old accounts in one place. A new 401(k) keeps things simple, may have low-cost institutional funds and offers stronger protection from creditors in some states. Compare fees and investment options.
There's usually no deadline if you leave the money in your old plan. But plans can move small balances out automatically, and if you take a check, you have only 60 days to complete an indirect rollover.