Quick answer: When you leave a job, you have four choices for your old 401(k): leave it in the old plan, roll it into your new employer’s plan, roll it into an IRA, or cash it out. For most people, a direct rollover to an IRA or new 401(k) is best, because no taxes are withheld. Cashing out before 59½ usually means income tax plus a 10% penalty.
Americans change jobs often, and many leave a trail of old 401(k) accounts behind. Moving the money the right way keeps it growing tax-deferred. Moving it the wrong way can cost you thousands. Here’s how to choose and how to do it step by step.
Your 4 options compared
| Option | Taxes now? | Best for | Watch out for |
|---|---|---|---|
| Leave it in the old plan | No | Plans with very low fees or good funds | Small balances may be moved or cashed out by the plan; easy to lose track |
| Roll into new employer’s 401(k) | No (direct rollover) | Keeping everything in one place; Rule of 55; backdoor Roth plans | New plan must accept rollovers; fund choices may be limited |
| Roll into an IRA | No (direct rollover) | More investment choices; consolidating old plans | Fees at some providers; loses Rule of 55 access |
| Cash out | Yes, plus 10% penalty if under 59½ | Rarely the best choice | 20% withheld right away; big tax bill |
How to do a direct rollover: step by step
- Open the receiving account first. Either an IRA at a brokerage, or confirm your new 401(k) accepts rollovers.
- Match account types. Pre-tax 401(k) money goes to a traditional IRA or pre-tax 401(k). Roth 401(k) money goes to a Roth IRA or Roth 401(k).
- Call your old plan (the number is on your statement) or log in to its website. Ask for a “direct rollover.”
- Give them the receiving account details. The check should be made payable to the new provider “FBO” (for the benefit of) you, not to you personally.
- Forward the check if it’s mailed to you. Send it to the new provider quickly.
- Confirm the money arrived and invest it. Rolled money often lands in cash until you pick funds.
- Keep the paperwork. You’ll get a Form 1099-R. A direct rollover shows code “G” and isn’t taxable.
Direct vs. indirect rollover: why it matters
In a direct rollover, money moves straight from plan to plan. Nothing is withheld, and nothing is taxed.
In an indirect rollover, the plan pays you. It must withhold 20% for federal taxes. You then have 60 days to deposit the full amount, including the 20% from your own pocket, into an IRA or plan. Any part you don’t redeposit is taxed and may get the 10% penalty.
Made-up example (for illustration):
Kevin, 35, has $40,000 in an old 401(k). He asks for a check made out to himself. The plan withholds 20%, so he gets $32,000. To avoid tax, he must put the full $40,000 into an IRA within 60 days, finding $8,000 from savings. He only deposits the $32,000.
Result: the missing $8,000 counts as income. In the 22% bracket, that’s about $1,760 in federal tax plus an $800 early withdrawal penalty. A direct rollover would have cost him nothing.
Also read: Roth IRA vs. traditional IRA: which is better?
What happens if you do nothing?
If your balance is large enough, the money usually stays in the old plan. But plans can move small balances without your consent:
- $1,000 or less: the plan may simply cash you out and send a check, minus withholding.
- Over $1,000 up to $7,000: the plan may move it to an IRA in your name (a “forced” or “safe harbor” rollover). The SECURE 2.0 Act raised this ceiling from $5,000 to $7,000 starting in 2024.
These default IRAs often sit in low-yield cash. If you lose track, you can search the Department of Labor’s Retirement Savings Lost and Found database.
The Rule of 55: a reason to keep money in a 401(k)
If you leave your job in or after the year you turn 55, you can take money from that employer’s 401(k) without the 10% penalty. (Some public safety workers can do this at 50.) Income tax still applies.
This only works while the money stays in that plan. If you roll it into an IRA, you’d generally have to wait until 59½ to avoid the penalty. So if you’re 55 to 59 and might need the money soon, think twice before rolling it to an IRA.
Other things to check before you move it
- Outstanding 401(k) loans. If you leave with a loan, you may have until your tax filing deadline (with extensions) for the year the loan is treated as distributed to repay it or roll the amount over. Otherwise it’s taxed as a withdrawal.
- Company stock. If your 401(k) holds your employer’s stock, ask a tax pro about “net unrealized appreciation” before rolling it. It can save on taxes.
- Vesting. Employer matching money may not be fully yours if you leave early. Check your vested balance.
- Fees. Compare the old plan’s fees with an IRA’s. Low-cost index funds can save thousands over decades.
- Creditor protection. 401(k)s generally have strong federal protection from creditors. IRAs are also protected in bankruptcy up to a high limit, but state rules vary for other lawsuits.
Common mistakes
- Taking a check made out to you instead of a direct rollover.
- Missing the 60-day deadline on an indirect rollover.
- Mixing Roth and pre-tax money. Rolling pre-tax money into a Roth IRA is a Roth conversion, and it’s taxable.
- Cashing out a “small” balance. $10,000 at age 30 could grow to more than $100,000 by retirement at a 7% average return (a projection, not a promise).
- Forgetting the account. Keep a list of every old plan with login details in a safe place.
What about a Roth conversion?
Some people use a job change to move pre-tax 401(k) money into a Roth IRA. This is allowed, but it’s a Roth conversion: the amount you convert counts as taxable income that year. In return, future qualified withdrawals are tax-free.
A conversion can make sense in a low-income year, such as a year between jobs. It usually doesn’t make sense if you’d have to pay the tax from the retirement money itself or if it pushes you into a much higher bracket. Consider talking to a tax professional before you convert a large amount.
How long does a rollover take?
A direct rollover often takes 1 to 3 weeks, depending on the old plan. Some plans send money electronically; others mail a check. Your money may be sold to cash first, so it can be out of the market for a short time. Ask the old plan how it handles that, and invest the money as soon as it lands.
If you have several old 401(k)s, you can roll them all into one IRA. That makes it easier to see your full balance, rebalance and, later, plan withdrawals.
Finally, update your beneficiaries on the new account. Rollover paperwork often skips this step, and an old form won’t carry over to an IRA automatically.
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FAQ
Should I roll my old 401(k) into an IRA?
Often yes, for more fund choices and lower fees. But keep it in a 401(k) if you’re 55–59 and may need the money, or if your new plan has very low costs.
How long do I have to roll over a 401(k)?
There’s no deadline for a direct rollover. For an indirect rollover, you have 60 days from the day you receive the money.
Is a 401(k) rollover taxable?
A direct rollover between the same account types isn’t taxable. You’ll get a Form 1099-R, but it shows no tax due.
What happens to my 401(k) if I get fired?
The same as quitting. Your money and your vested employer match are yours, and you have the same four options.
Can I lose my 401(k) if I leave a job?
No. Your own contributions are always yours. Only unvested employer money can be lost.
Bottom line
When you leave a job, ask for a direct rollover to an IRA or your new 401(k). Avoid cashing out, which can cost you income tax plus 10%. If you’re 55 to 59, think about the Rule of 55 before moving the money. A few phone calls now can protect years of savings.
Last reviewed: Nov. 11, 2026. Investment growth figures are projections, not guarantees.
Sources: IRS: Rollovers of retirement plan distributions, IRS: Exceptions to tax on early distributions, IRS: Plan loans, U.S. Department of Labor (EBSA), DOL Retirement Savings Lost and Found, FINRA: 401(k) rollovers.
Featured image: Ceramic piggy banks. Photo: Abraham / Wikimedia Commons, CC0; edited by Nexgen Headlines.
