What Happens to Your 401(k) When You Change Jobs?

You have four options, and it's worth knowing them before HR hands you paperwork with a deadline.

Leave it where it is. Often permitted if the balance is above a plan threshold. Fine if the plan has good, low-cost options — though accumulating forgotten accounts across several employers is a real phenomenon.

Roll it into your new employer's plan. Keeps things consolidated. Notably, it also keeps that money out of an IRA, which matters if you use the backdoor Roth strategy — pre-tax IRA balances trigger the pro-rata rule, and 401(k) balances don't.

Roll it into an IRA. Usually the widest investment choice and often lower costs. The trade-off is the pro-rata interaction above, plus some plan-specific protections you may give up.

Cash it out. Almost always the expensive choice — income tax on the full amount, plus a 10% early withdrawal penalty if you're under 59½, and the compounding you permanently forfeit.

The mechanism that matters more than the choice

If you're moving the money, ask specifically for a direct rollover — funds going institution to institution, never passing through your hands.

Here's why. With an indirect rollover, where the check comes to you, employer plans must withhold 20% for federal tax. You then have 60 days to deposit the full original amount into the new account — including the 20% you never received, which you have to make up from your own money.

Fidelity's example is clear: roll over $100,000 and you receive $80,000, but must still deposit $100,000. Fail to make up the difference and that $20,000 becomes a taxable distribution, potentially with a 10% penalty on top.

A direct rollover avoids both the withholding and the 60-day clock entirely. If you receive a cheque made out to you rather than the new custodian, don't cash it — call the plan and have it redone.

Two things worth checking first

Vesting. Any unvested employer contributions may be forfeited on departure, and the timing of your exit can matter.

And if you're separating from service at 55 or older, leaving money in that employer's plan can preserve penalty-free access before 59½ under a provision commonly called the rule of 55 — access you'd lose by rolling to an IRA.

Worth a conversation with a professional before moving anything, particularly for larger balances.

References

• What is the 60-day rollover rule? — Fidelity
• Why You Should Reconsider an Indirect 401(k) Rollover — The Motley Fool
• Rollover IRA taxes and the 60-day rule — Empower

This article is for general education only and is not tax or investment advice. Plan rules, cash-out thresholds, creditor protections, and the rule of 55 have conditions not fully described here. Consult a qualified tax professional or your plan administrator before moving retirement funds.