When you leave a job, your 401(k) doesn't disappear — the money is always yours. You have four main options for what to do with it.
Your four options:
1. Leave it in your old employer's plan: - Allowed if your balance is above a certain threshold (usually $5,000–$7,000). - Simple, but you can't make new contributions, and you're managing an account separate from your life.
2. Roll it over into your new employer's 401(k): - Consolidates your retirement savings in one place. - Keeps the money in a tax-advantaged account with no taxes or penalties if done correctly.
3. Roll it over into an IRA (Individual Retirement Account): - Often the most flexible option — IRAs typically offer far more investment choices than employer plans, and often lower fees. - No taxes or penalties if done as a direct rollover.
4. Cash it out: - Almost always a mistake. If you're under 59½, you'll typically pay income tax PLUS a 10% early withdrawal penalty. A significant chunk of your savings can be lost to taxes and penalties, plus you lose decades of potential growth.
The critical mistake to avoid — indirect rollovers: - Always do a DIRECT rollover (the money moves directly from one account to another). - If the check is made out to you instead (an indirect rollover), 20% may be withheld for taxes, and you must redeposit the full amount within 60 days or it counts as a taxable withdrawal.
What most experts suggest: - Rolling into an IRA or your new 401(k) is usually best — it keeps the money growing tax-advantaged and consolidates your accounts. - Never cash out unless it's a genuine emergency, given the taxes, penalties, and lost growth.
Also check vesting: Your own contributions are always 100% yours, but employer matching contributions may be subject to a vesting schedule — if you leave before fully vested, you could forfeit some of the match.