What to Do With Your 401(k) When You Leave a Job
Updated: Oct 11
Key points
When you leave a job, your 401(k) has five possible paths: leave it, roll it into your new employer's plan, roll it into an IRA, convert it to a Roth IRA, or cash it out.
Pre-tax, Roth, and after-tax money in the same 401(k) can go to different places. Decide for each type separately.
If you move the money, ask for a direct rollover. A check paid to you has 20% withheld for taxes. To roll over the full amount within 60 days, you have to make up that 20% from your own money, and you get it back only when you file your taxes.
Rolling pre-tax 401(k) money into a traditional IRA can make a future backdoor Roth IRA (an after-tax IRA contribution converted to Roth) partly taxable, because of the pro-rata rule.
If you leave your job in or after the year you turn 55, money left in that employer's 401(k) can come out without the 10% early-withdrawal penalty. That exception doesn't carry over to an IRA.
When I left my first job in Chicago and started at Google, I rolled my old 401(k) into Google's 401(k) right away. I didn't have an IRA yet, and I wanted everything consolidated in one place, for simplicity. It did take some action on my side, like requesting the rollover, but it was pretty straightforward, and it was worth it compared to keeping accounts with different plan providers. I don't even know what fees my previous plan charged. I just wanted everything in one place.
Leaving a job comes with a long to-do list, and the old 401(k) is easy to push to the bottom of it. There's usually no deadline to act. But the choice you make, or the default you end up with, affects your taxes, your fees, your access to the money, and whether strategies like the backdoor Roth IRA still work for you.
Here's how each option works, what it's good for, and the mechanics that cost people money when they get them wrong.
Before You Decide: Four Things to Check
Your vested balance. "Vested" means the part that's yours to keep. Your own contributions are always fully vested; employer contributions vest on the plan's schedule. Unvested employer money usually goes back to the plan when you leave.
What kinds of money you have. Your 401(k) statement shows separate balances for pre-tax (traditional), Roth, and, if your plan allows them, after-tax contributions. Each type has its own best destination.
Any outstanding 401(k) loan. Leaving a job often makes an unpaid loan due. More on this below.
Whether you use, or plan to use, a backdoor Roth IRA. This changes which options make sense for your pre-tax money.
Your Options at a Glance
Option | Pre-tax money | Roth money | Pros | Cons |
|---|---|---|---|---|
1. Leave it | Stays in the old 401(k) | Stays in the old Roth 401(k) | No effort; strong creditor protection; keeps the age-55 rule | Small balances can be forced out; old plan's fees and funds |
2. Roll into new 401(k) | New plan's 401(k) | New plan's Roth 401(k) | One account; strong creditor protection; backdoor Roth stays clean | Limited to the new plan's menu; plan must accept rollovers |
3. Roll into an IRA | Traditional IRA | Roth IRA | Widest investment choice; one account across jobs | Can make a backdoor Roth taxable; loses the age-55 rule |
4. Roll pre-tax into a Roth IRA (Roth conversion) | Roth IRA, taxed this year | Roth IRA, no tax | Tax-free growth; no lifetime required withdrawals | Large tax bill now; can't be undone |
5. Cash it out | Taxed, plus 10% under 59½ (see note) | Earnings part taxed, plus 10% (see note) | Cash now | Large tax cost; 20% withheld |
About the 10% penalty: it applies if you're under 59½ and no IRS exception covers you. With Roth 401(k) money, only the earnings are penalized, never your contributions, and there's no penalty at all once the withdrawal is qualified (you're 59½ or older and the five-year rule is met).
Sources: IRS, Rollovers of retirement plan and IRA distributions; IRS Publication 575; IRS Publication 590-A; IRS, Topic 558; IRS, Designated Roth account.
Option 1: Leave It in the Old Plan
This is the default if you do nothing, and for many people it's a reasonable choice. Your money stays invested, stays tax-advantaged, and keeps the creditor protection most employer plans have under federal law (ERISA).
A few things to know:
Small balances can be forced out. Plans can set a cash-out threshold of up to $7,000, so check your plan's rules (SECURE 2.0 summary). Balances of $1,000 or less can be paid to you as a check, which is taxable and may carry the 10% penalty. Larger balances up to the threshold are generally moved into an IRA opened in your name, often sitting in a low-yield, principal-protected investment until you act. Money you rolled into the plan from earlier jobs may not count toward the threshold, so an account that looks larger can still be forced out. Pre-tax money forced out this way lands in a traditional IRA, which matters for the backdoor Roth (see below).
You can't contribute anymore. The account just grows or shrinks with its investments.
Fees and fund choices stay the old plan's. Some plans are excellent and cheap; others aren't. Check the expense ratios of your funds and any administrative fees for former employees.
Traditional 401(k) money still has required withdrawals later in life. Roth 401(k) money doesn't, during your lifetime (IRS).
Old accounts are easy to lose track of. Keep your contact information current with the plan.
Option 2: Roll It Into Your New Employer's 401(k)
If your new plan accepts incoming rollovers and has good, low-cost funds, this keeps everything in one place and keeps the employer-plan advantages: creditor protection under federal law and, if the plan offers them, loans.
Pre-tax money goes into the new plan's traditional 401(k).
Roth 401(k) money should move by direct rollover into the new plan's Roth 401(k). A direct rollover keeps your contributions tracked as already taxed and carries over your Roth 401(k) five-year clock: the new plan counts from the year you first made Roth contributions to the old plan, if that's earlier. If the money is paid to you first, only the earnings part can be rolled into the new plan within 60 days, and the clock doesn't carry over (Treasury regulation). A check paid to you can still go into a Roth IRA within 60 days.
It keeps a backdoor Roth IRA clean (see below).
The trade-off is that you're limited to the new plan's investment menu.
Option 3: Roll It Into an IRA
An IRA gives you the widest investment choice and an account that stays with you through every future job change.
Pre-tax money goes into a traditional IRA. No tax is due on a direct rollover (IRS).
Roth 401(k) money goes into a Roth IRA. The part that was your contributions counts as Roth IRA contributions, which can come out first without tax or penalty. The rest counts as earnings (Treasury regulation). If you're already 59½ and your Roth 401(k) met its five-year rule, the whole rollover counts as contributions (Treasury regulation). One catch: the years in the Roth 401(k) don't count toward the Roth IRA's five-year clock. If you already have a Roth IRA, its clock is already running. If not, it starts with the rollover year (Treasury regulation). I cover this in Roth IRA or Roth 401(k)? How They Differ and Which One to Fund First.
Creditor protection works differently. In bankruptcy, money rolled over from an employer plan into an IRA is generally protected without the dollar cap that applies to other IRA money (federal bankruptcy law). Outside bankruptcy, IRA protection depends on your state's law, while most employer plans are protected under federal law.
The once-a-year IRA rollover limit doesn't apply here. It covers indirect rollovers from one IRA to another, not rollovers from a 401(k) to an IRA (IRS).
You lose the age-55 exception for that money, because it applies only to employer plans.
Option 4: Roll Pre-Tax Money Into a Roth IRA (Roth Conversion)
You can roll pre-tax 401(k) money straight into a Roth IRA. That's a Roth conversion: the full amount is added to your taxable income for the year (IRS). After that, growth and qualified withdrawals are tax-free.
This can make sense in a year when your income is unusually low, which is sometimes the year you leave a job, take a break, or retire early. It can also make sense if you expect a higher tax rate later. The logic is the same as choosing Roth over traditional, covered in Roth vs Traditional: How to Decide When You Pay the Tax.
Three cautions:
The tax bill can be large. A big conversion can push part of your income into a higher bracket (IRS). You may need to raise your withholding or make estimated tax payments to cover it.
It can't be undone. Since 2018, a conversion can't be recharacterized back (IRS).
You don't have to convert everything at once. Partial conversions over several lower-income years can keep more of it in lower brackets. But if you do that by first rolling the money into a traditional IRA, that IRA balance affects a backdoor Roth in the meantime.
Roth 401(k) money moving to a Roth IRA isn't a conversion. It's already Roth, so there's no tax.
Option 5: Cashing Out, the Expensive Option
Cashing out gives you money now, but it's usually the costliest choice.
Income tax. The pre-tax amount is added to your taxable income for the year.
The 10% penalty. If you're under 59½, an additional 10% applies unless an exception covers you, such as the age-55 rule below (IRS).
20% withheld up front. The plan withholds 20% for federal tax before sending the check (IRS). That's a prepayment, not the final bill. You may owe more at tax time.
State income tax, in most states.
For example, say you cash out $50,000 of pre-tax money, the whole amount falls in the 24% federal bracket, and you're under 59½ with no exception. That's $12,000 in federal income tax plus a $5,000 penalty, before state tax: $17,000, or 34%. The plan withheld only $10,000, so you'd still owe about $7,000 more when you file. You also lose decades of tax-advantaged growth on the money.
For a Roth 401(k), the part that was your contributions comes out tax-free. Unless the withdrawal is qualified, the earnings part is taxed, and the 10% penalty applies only to that earnings part. Early withdrawals come out as a proportional mix of the two (IRS).
If you need cash after leaving a job, it's worth looking at every other source first: your emergency fund, contributions in a Roth IRA, or a partial withdrawal rather than the whole balance.
How to Move the Money Without Losing Any
Ask for a direct rollover
In a direct rollover, the old plan sends the money straight to the new plan or IRA. No tax is withheld, and there's no deadline to meet (IRS). Sometimes the "direct" rollover arrives as a check made out to the new account provider "for the benefit of" you. That still counts as direct.
In an indirect rollover, the check is made out to you. The plan withholds 20%, and you have 60 days to deposit the full amount into the new account, including the 20% that was withheld, using other money to make up the difference (IRS). Whatever you don't deposit in time is taxed as a distribution, and possibly penalized.
For example, on a $50,000 indirect rollover, you receive $40,000. To roll over the full $50,000, you have to add $10,000 of your own money within 60 days. You get the $10,000 back as a tax credit when you file.
If you have an outstanding 401(k) loan
When you leave, the plan may reduce your balance by the unpaid loan amount. This is called a loan offset, and it's treated as a distribution. If the loan was in good standing and the offset happened because you left your job, within 12 months of leaving, you have until your tax filing deadline for that year, including extensions, to put that amount into an IRA or another plan and avoid the tax (IRS Notice 2018-74, Treasury regulation). Otherwise, the usual 60 days apply. Some plans let former employees keep repaying the loan, so check your plan before assuming an offset. More on how 401(k) loans work in Borrowing From Your 401(k): How a 401(k) Loan Works and When It Makes Sense.
Splitting money by type
Pre-tax money can go to a traditional IRA, a new 401(k), or a Roth IRA as a conversion.
Roth 401(k) money can go only to a Roth IRA or another plan's Roth 401(k) (IRS).
After-tax (non-Roth) contributions can go to a Roth IRA tax-free, while the earnings on them, which are pre-tax, go to a traditional IRA or are converted and taxed (IRS). This is the same money the mega backdoor Roth works with.
If You Use the Backdoor Roth IRA
This is a common way people accidentally break their backdoor Roth. The pro-rata rule looks at all your pre-tax money in traditional, SEP, and SIMPLE IRAs on December 31 of the year you convert (IRS). Rolling a pre-tax 401(k) into a traditional IRA, or having a small balance forced into one, puts that money into the pool. Your next backdoor conversion becomes mostly taxable.
Pre-tax money in a 401(k) doesn't count. So if you do a backdoor Roth, leaving pre-tax money in the old plan or rolling it into your new employer's plan keeps the backdoor clean. If the money is already in an IRA, moving it into your current employer's plan before December 31 fixes it, if the plan accepts incoming rollovers. Only the pre-tax part can move into the plan; your after-tax basis stays in the IRA, which is exactly what makes the fix work (IRS). I walk through this in The Backdoor Roth IRA: Why I Use It and How It Works, Step by Step.
If You're 55 or Older
If you leave your job in or after the calendar year you turn 55, withdrawals from that employer's 401(k) are free of the 10% early-withdrawal penalty (IRS). Income tax still applies to pre-tax money.
A few details matter:
It applies only to the plan of the employer you just left. It doesn't cover 401(k)s from earlier jobs unless that money was rolled into this plan before you left.
It doesn't apply to IRAs (IRS). If you might need the money between 55 and 59½, rolling it into an IRA gives up this option.
Check how your plan pays it out. Some plans allow only a full lump-sum withdrawal after you leave, not partial withdrawals.
Cash withdrawals still have 20% federal tax withheld (IRS).
For qualified public safety employees in governmental plans, the age is 50 (IRS).
How to Think About It
There's no single right answer, but a few situations point clearly in one direction:
If your old plan has low-cost funds and you're happy with it, leaving the money there is a reasonable default.
If you want fewer accounts and your new plan is good and accepts rollovers, rolling into it keeps things simple.
If you use, or plan to use, a backdoor Roth IRA, keeping pre-tax money in a 401(k), old or new, avoids the pro-rata problem.
If you want the widest investment choice and don't use a backdoor Roth, an IRA fits.
If you left in or after the year you turned 55 and may need money before 59½, keeping it in that employer's plan preserves penalty-free access.
If this year's income is unusually low, converting some pre-tax money to Roth may be worth considering.
If several of these apply, splitting is fine. Different types of money can go to different places, and you don't have to decide everything on your last day.
Summary
When you leave a job, your 401(k) has five paths, and each type of money can take its own. Keeping pre-tax money in a 401(k), old or new, preserves federal creditor protection, the age-55 rule, and a clean backdoor Roth; an IRA gives more investment choice; a Roth conversion trades tax now for tax-free money later; cashing out usually costs the most. Whatever you choose, move money by direct rollover.
FAQs
Do I have to move my 401(k) when I leave my job? Generally no, if your vested balance is above your plan's cash-out threshold, which can be up to $7,000 (SECURE 2.0 summary). Check your plan's rules: smaller balances can be paid out or moved to an IRA without your consent, and money you rolled in from earlier jobs may not count toward the threshold.
What's the difference between a direct and an indirect rollover? A direct rollover goes straight from the old plan to the new account, with no tax withheld. An indirect rollover is paid to you with 20% withheld, and you have 60 days to deposit the full amount (IRS).
Will rolling my 401(k) into an IRA affect my backdoor Roth? Yes, if the money is pre-tax and goes into a traditional IRA. It counts in the pro-rata rule and can make your backdoor conversions mostly taxable (IRS).
Can I roll my Roth 401(k) into a Roth IRA? Yes. Your contributions become Roth IRA contributions, but the Roth IRA's own five-year clock applies to earnings (Treasury regulation).
What happens to my 401(k) loan when I leave? The plan may offset your balance by the unpaid amount, which is treated as a distribution. If the offset happened because you left, within 12 months of leaving, you have until your tax filing deadline, including extensions, to roll that amount over and avoid the tax (IRS Notice 2018-74).
Can I withdraw from my 401(k) without penalty if I leave at 55? Yes, from the plan of the employer you left, if you left in or after the year you turned 55. Income tax still applies, and the exception doesn't extend to IRAs (IRS).
Transparency Note: I'm the human behind the keyboard — the ideas, stories, and decisions here are mine. I collaborate with AI throughout the writing process: brainstorming, drafting, smoothing out grammar and flow, assisting with research, and creating the visuals you see throughout my posts.
Disclaimer: The information provided in this blog post is for educational and informational purposes only. I am an AFC® (Accredited Financial Counselor) Candidate, not a Certified Financial Planner (CFP®), Certified Public Accountant (CPA), tax advisor, attorney, or Investment Adviser Representative (IAR). The content herein is not intended to be a substitute for investment, tax, or legal advice from a licensed professional. Always seek the advice of a qualified professional with any questions you may have regarding your individual financial situation. The opinions expressed are my own and do not represent the views of my current or former employer.
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