What Happens to Your 401(k) When You Leave a Job?
Left a job and not sure what to do with your 401(k)? Here are your four options — and which one is usually best.
3 min read · By John G. Ziesing, FRC
Your Four Options
When you leave an employer, you have four choices for your 401(k): leave it with your former employer, roll it into your new employer's plan, roll it into an IRA, or cash it out. Each has different tax implications and consequences.
Option 1: Leave It Where It Is
You can usually leave your 401(k) with your former employer if the balance is over $5,000. The downside: you can't contribute more, you're limited to the plan's investment options, and it's easy to forget about. Many people have 'orphaned' 401(k)s at former employers.
Option 2: Roll to New Employer's Plan
If your new employer allows rollovers, you can consolidate. This keeps everything simple but limits you to the new plan's investment options.
Option 3: Roll to an IRA (Usually Best)
A rollover IRA gives you the most flexibility — you can invest in almost anything, including annuities that provide guaranteed income. The rollover is tax-free when done as a direct (trustee-to-trustee) transfer. This is what we recommend most often.
Option 4: Cash Out (Worst Option)
Cashing out triggers immediate income tax (22-37% federal) plus a 10% early withdrawal penalty if you're under 59½. A $200,000 401(k) could shrink to $130,000 or less after taxes and penalties. We almost never recommend this option.
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