What to Do With Your 401(k) When You Change Jobs: 4 Options
Short answer: with your 401(k) when you change jobs, you have four choices: leave it in the old plan, roll it into your new employer's plan, roll it into an IRA, or cash it out. Cashing out is usually the costly one. A $20,000 cash-out before age 59 and a half in the 22% bracket loses about $6,400 to tax and penalty, leaving $13,600, and gives up what the money could have grown to.
Key takeaways
- You have four options. Three keep the money growing tax-deferred, and one (cashing out) usually does not.
- Ask for a direct rollover, where the money moves from plan to plan or plan to IRA without passing through your hands.
- Check vesting before you leave. Employer match money you have not vested in may be forfeited.
- A $20,000 balance left invested for 25 years at an assumed 7% could reach about $108,549. After a cash-out, $13,600 would reach about $73,813.
What are the four options?
| Option | How it works | Main upside | Main catch |
|---|---|---|---|
| 1. Leave it in the old plan | Keep the account where it is | No action, possibly low-cost funds | You may forget it, and rules and fees apply to former employees |
| 2. Roll into the new plan | Transfer to your new employer's 401(k) | One account, keeps loan options | Limited to the new plan's funds and fees |
| 3. Roll into an IRA | Move to an IRA you open | Wide choice of investments | Fewer legal protections in some states, and no loans |
| 4. Cash out | Take the money as cash | Cash in hand now | Income tax, a 10% penalty if under 59 and a half, and the loss of growth |
Which of the first three is better depends on the fees and fund choices in each plan, whether you want one account, and whether you may want to borrow from it. None of them triggers tax when done correctly.
What does a cash-out really cost?
Taking the balance as cash adds it to your taxable income, and if you are under 59 and a half a 10% early-withdrawal penalty usually applies, with exceptions. Here is $20,000, in the 22% federal bracket, ignoring state tax:
| Item | Amount |
|---|---|
| Balance | $20,000 |
| Federal income tax at 22% | -$4,400 |
| 10% early-withdrawal penalty | -$2,000 |
| Left in your hands | $13,600 |
That is 68% of the balance. The plan will also withhold 20% ($4,000) at the time as a prepayment, so the cheque is smaller than the $13,600 and the rest settles at tax time. The larger cost is lost growth. At an assumed 7% over 25 years, $20,000 left invested becomes about $108,549, while $13,600 becomes about $73,813, a difference of about $34,700 from the cash-out alone, and that is before counting the retirement you gave up. These are illustrations at a steady return.
How does a rollover work, step by step?
- Decide where it goes: the new plan or an IRA. Compare fees and funds. See how fund fees add up.
- Open the destination account if it is an IRA, or confirm the new plan accepts rollovers.
- Ask the old plan for a direct rollover. The money goes straight to the new account, with no tax withheld.
- Invest it. Moved money often arrives as cash. You still have to choose investments.
- Keep the paperwork for tax time (Form 1099-R and the rollover confirmation).
If the old plan sends you a cheque instead (an indirect rollover), it withholds 20% for tax. You have 60 days to deposit the full amount into the new account, including the 20% from your own pocket, or the missing part counts as a withdrawal. A direct rollover avoids this.
What is worth checking before you leave?
- Vesting. Your own contributions are always yours, but the employer match may vest over time. If a plan vests 20% a year over five years and you leave after three years with $5,000 of match, $3,000 is yours and $2,000 may be forfeited. Sometimes a few more months of service is worth waiting for.
- Outstanding loans. A 401(k) loan often comes due when you leave. Unpaid, it can be treated as a withdrawal.
- Small balances. Plans can move small balances (often under $7,000) out automatically, so watch for notices.
- Roth money. A Roth 401(k) rolls into a Roth IRA or the new Roth 401(k), keeping its tax treatment. Check the five-year rules.
Which option is best for most people?
There is no single answer, but a rollover to the new plan or to a low-cost IRA is a common pattern, because both keep the money growing and avoid tax. Cashing out is the one to treat with most caution. If you are in a bind, look at alternatives first: a smaller loan, a hardship plan, or an emergency fund built before the next move. For the basics, see what a 401(k) is, and to compare account types, Roth IRA vs 401(k).
Sources and further reading: the IRS explains rollovers and early-withdrawal rules, and SEC Investor.gov has guidance on retirement accounts and fees.
General education, not tax or investment advice. Reviewed October 2026. The cash-out example uses a 22% federal bracket and ignores state tax. Penalty exceptions, plan rules and limits vary, so confirm them with your plan and a qualified professional. Growth figures assume a constant 7% annual return and are illustrations only.
Frequently asked questions
What should I do with my 401(k) when I change jobs?
You can leave it, roll it into your new employer's plan, roll it into an IRA, or cash it out. A direct rollover keeps the money growing tax-deferred, and cashing out usually triggers tax and a penalty.
Is it bad to cash out a 401(k) when changing jobs?
It is usually the costliest option. A $20,000 cash-out before 59 and a half in the 22% bracket leaves about $13,600 after federal tax and the 10% penalty, and it gives up decades of potential growth.
What is a direct rollover?
A direct rollover sends the money from your old plan straight to the new plan or IRA, with no tax withheld and no deadline to meet. An indirect rollover pays you first, withholds 20% and gives you 60 days to deposit it all.
Do I lose my employer match if I leave?
Your own contributions are always yours. The employer match may vest over time, so leaving early can forfeit part of it. Check the vesting schedule, since a few more months can sometimes pay off.
Can I leave my 401(k) with my old employer?
Often yes, if the balance is above the plan's minimum, which is commonly around $7,000. Small balances may be moved out automatically. Check the old plan's fees, fund choices and rules for former employees.