Direct answer: When you change jobs, you have four options for your old 401(k): leave it in the former employer's plan, roll it to your new employer's plan, roll it to an IRA, or cash it out. Cashing out is strongly discouraged because the distribution is taxed as ordinary income and subject to a 10% early withdrawal penalty if you are under 59.5. Use a direct rollover to avoid 20% mandatory withholding that applies to indirect rollovers.

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Job Change: What to Do With the Old 401(k)

What are the four options for an old 401(k) after a job change?

When you leave an employer, you have four choices for your 401(k) balance:

  1. Leave it in the former employer's plan. This is the simplest short-term option if the plan has good fund options and low fees. Your money keeps growing tax-deferred. The downside is that you lose the ability to make new contributions, and managing multiple accounts across former employers becomes complex over time. Former employers are generally allowed to distribute accounts under $1,000 without consent and to roll accounts between $1,000 and $7,000 into a default IRA if you leave without instructions.
  2. Roll it to your new employer's plan. This consolidates retirement assets in one place, keeps the money in a 401(k) (which has better creditor protection in many states than an IRA), and maintains access to plan-specific loan provisions if the new plan allows them. The new plan must accept rollovers, and the fund lineup must be acceptable. Request a direct rollover to avoid withholding.
  3. Roll it to an IRA. This gives you the widest investment selection and full control over fund choice, brokerage, and fees. The rollover is non-taxable if done as a direct (trustee-to-trustee) transfer. An IRA does not have the same creditor protection as a 401(k) under ERISA, though federal law protects IRA assets up to $1 million in bankruptcy.
  4. Cash it out. This triggers ordinary income taxes on the full amount plus a 10% early withdrawal penalty if you are under 59.5. The plan is required to withhold 20% for federal taxes on any distribution not rolled directly to another qualified account. This option permanently removes tax-advantaged growth from the balance and is rarely the right choice. The only common exception is a severe financial emergency with no other resources.

What is the difference between a direct rollover and a 60-day rollover?

A direct rollover (also called a trustee-to-trustee transfer) moves money directly from the old plan to the new account without the money passing through your hands. The old plan sends a check payable to the new institution (not to you), or wires funds directly. No taxes are withheld, and there is no deadline pressure. This is the safest method and is strongly preferred.

A 60-day rollover (also called an indirect rollover) works differently. The old plan sends you a check for your account balance, but is required by law to withhold 20% for federal income taxes. You then have 60 days to deposit the full original amount (not just what you received, but the full pre-withholding amount) into a new qualified account. If you deposit only the net check, the 20% withheld is treated as a taxable distribution. You must come up with the withheld amount out of pocket, then reclaim it when you file your taxes.

Example: Old 401(k) has $50,000. Plan withholds $10,000 and sends you a check for $40,000. You have 60 days to deposit $50,000 into the new account. If you deposit only $40,000, $10,000 is treated as a distribution and taxed (plus the 10% penalty if applicable). You then receive the $10,000 withholding back as a tax refund, but the penalty is not refunded.

The IRS allows only one indirect rollover per 12-month period across all IRAs combined (per IRS Notice 2014-54 and Rev. Rul. 2014-9). This limit does not apply to direct rollovers.

When does rolling to an IRA make more sense than rolling to the new employer's plan?

Rolling to an IRA is usually better when the new employer's plan has limited fund options, high-expense funds, or administrative restrictions that limit your investment strategy. An IRA at a major brokerage gives access to nearly any publicly traded fund, including the lowest-cost index funds available (e.g., Fidelity ZERO funds, Vanguard Admiral shares, Schwab index funds with expense ratios at or near 0.03%).

Rolling to the new employer's plan may be better in several specific circumstances:

Frequently Asked Questions

What happens if my old 401(k) balance is under $7,000?

If your balance is between $1,000 and $7,000, federal law allows your former employer to roll it into an IRA on your behalf without your consent if you do not take action. If the balance is under $1,000, the employer may simply send you a check (a cash-out), resulting in taxes and a 10% early withdrawal penalty if you are under 59.5. Act before leaving if your balance falls in either range.

Can I roll a traditional 401(k) into a Roth IRA?

Yes, but the rollover is a taxable event. The converted amount is added to your gross income for the year of conversion and taxed at your ordinary income rate. No 10% early withdrawal penalty applies, but the tax bill can be substantial for large balances. A conversion may make sense if you expect to be in a higher tax bracket in retirement or if you want tax-free growth and withdrawals in the future.

What is the 60-day rollover rule and what happens if I miss the deadline?

In an indirect rollover, you receive a check for your balance (minus 20% withheld for taxes) and must deposit the full original amount into a new qualified account within 60 days. If you miss the deadline, the entire distribution is treated as income and subject to taxes, plus a 10% penalty if you are under 59.5. The IRS rarely grants waivers for missed deadlines. A direct rollover avoids this risk entirely.