What to Do With a 401(k) From a Former Job
Changing jobs is a big move, and while most people focus on salary, benefits, or adjusting to a new workplace, there’s another crucial financial decision to make: what to do with your 401(k).
Too often, people leave their old 401(k) behind, lose track of it, or even cash it out without understanding the consequences. Each choice has long-term financial implications, affecting not just retirement but also taxes, penalties, and investment growth.
This guide breaks down what happens to your 401(k) when you leave a job, how different age groups and situations affect your options, and what you should consider before making a decision.
First Things First: Don't Panic!
Your 401(k) money is still yours when you leave your job. Your employer can't take it away, and you have time to decide what to do with it. However, you'll need to make some decisions to ensure your retirement savings continue working hard for you.
Your Main Options
1. Roll It Over to Your New Employer's Plan
Think of this like transferring your money from one bank account to another. Many participants choose this option because it keeps all their retirement money in one place.
Benefits:
- Easier to manage one account instead of several
- Your new employer's plan might have better investment options
- You can still contribute to the account at your new job
- Loan options may be available if you need them
How to do it: Contact your new employer's HR department or 401(k) provider. They'll help you with the paperwork for a "direct rollover." This is important – you want the money to go straight from your old plan to the new one without passing through your hands.
2. Roll It Into an IRA (Individual Retirement Account)
This is like moving your money to your own personal retirement account that you entirely control.
Benefits:
- More investment choices than most employer plans
- Often lower fees
- Easier to manage if you change jobs frequently
- More flexible withdrawal options in retirement
Watch out: If you're considering this option, look for low-fee providers like Vanguard, Fidelity, or Charles Schwab. Make sure to request a "direct rollover" here too.
3. Keep It With Your Old Employer
Yes, you can leave your money where it is if your balance is over $7,000. Under $7,000, your old employer might force you to move it.
Benefits:
- No immediate action required
- Familiar investment options
- Might work well if you like the current plan's options
Drawbacks:
- Can't make new contributions
- Might forget about it over time
- Could miss out on better investment options elsewhere
4. Cash It Out (Warning: Think Twice!)
While you can take the money and run, this is usually the worst choice for your financial future.
Here's why:
- You'll pay a 10% early withdrawal penalty if you're under 59½
- The money is taxed as regular income (expect to lose 20-30% to federal taxes)
- You lose out on future growth potential
- Example: Cashing out $50,000 could leave you with only $32,500 after penalties and taxes
Special Situations to Consider
If You Have a 401(k) Loan
This is important: if you leave your job with an outstanding 401(k) loan, the remaining balance typically becomes due within 60-90 days. If you can't pay it back:
- The unpaid amount is treated as a distribution
- You'll owe taxes and possibly penalties
- Your credit score won't be affected (it's not reported to credit bureaus)
If You're Retiring
Different rules apply if you're 59½ or older:
- No early withdrawal penalties
- Can start taking distributions
- Might want to consider rolling into an IRA for more flexible withdrawal options
- Required Minimum Distributions (RMDs) start at age 73 as of 2025
Common Questions Answered
"How long do I have to decide?"
While there's no immediate rush, it's best to decide within 60 days of leaving your job to avoid any complications.
"What if my new employer has a waiting period for their 401(k)?"
You can still roll over your old 401(k) even if you can't contribute to the new plan yet. Or, consider an IRA rollover until you're eligible.
"Will this affect my taxes?"
Not if you do a direct rollover. The money moves between retirement accounts without triggering taxes.
Action Steps
1. Get a list of your current investments and fees
2. Compare options at your new employer or IRA providers
3. Request rollover paperwork from your chosen destination
4. Consider consulting a financial advisor for large balances
5. Keep all documentation for your tax records
Remember, your 401(k) represents your financial future. Take time to understand your options, but don't leave this decision on the back burner too long. The best choice usually depends on your personal situation, investment options, and fees in each plan.
Have questions? Your HR department, 401(k) provider, or a financial advisor can help you make the best choice for your situation.
