Picture the last week at a job you are leaving. The laptop goes back to IT, the badge stops working, and a few weeks later a letter from the plan administrator arrives asking what you want to do with your 401(k). Most people set that letter aside. Some never pick it up again, and years later they have three or four orphaned accounts scattered across former employers, each with its own login, fee schedule and fund menu.
The decision is not hard once you see the choices side by side. There are only four, and for most people one or two of them are clearly better than the rest.
Your four options at a glance
| Option | Taxes and penalties | Best for | Main drawback |
|---|---|---|---|
| Leave it in the old plan | None | People happy with the plan’s low-cost funds, or those who may use the age-55 withdrawal rule | Another account to track; you can no longer contribute |
| Roll into your new employer’s plan | None if done directly | Anyone who wants one consolidated workplace account | Limited to the new plan’s fund menu; not every plan accepts roll-ins |
| Roll into an IRA | None if done directly | Investors who want broad fund choice and control over costs | Loses some workplace-plan features, such as the age-55 rule and plan loans |
| Cash it out | Ordinary income tax, plus a 10% additional tax before age 59½ unless an exception applies | Almost nobody; a true emergency with no other source of cash | Permanent loss of tax-deferred growth |
Option 1: Leave the money where it is
If your balance is above $7,000, the plan generally has to let you stay. SECURE 2.0 raised the old $5,000 threshold, so balances at or below $7,000 can be pushed out of the plan without your consent, usually into an IRA the plan opens for you. Below $1,000, the plan can simply mail you a check, minus withholding.
Staying put is a reasonable choice when the old plan offers institutional share classes with very low expense ratios, or when it gives you access to a stable value fund you like. It also matters for early retirees. If you leave a job in or after the year you turn 55, you can take withdrawals from that employer’s plan without the 10% early-withdrawal penalty. Move the money to an IRA and that exception disappears; IRAs generally make you wait until 59½.
The downside is drift. People forget about old accounts, miss address-change letters and lose track of beneficiary designations. If you leave money behind, update your contact details and beneficiaries before you walk out the door.
Option 2: Roll it into your new employer’s plan
Consolidating into the new 401(k) keeps everything under one roof and preserves workplace-plan features: the age-55 rule applies to the new plan once you leave that job, many plans allow loans, and federal law generally shields 401(k) assets from creditors more broadly than IRAs in some states.
There is another, less obvious benefit. If you plan to make backdoor Roth IRA contributions, having pre-tax money sitting in a traditional IRA triggers the pro-rata rule and makes the conversion partly taxable. Pre-tax money parked in a 401(k) does not count toward that calculation. Rolling old 401(k) money into the new 401(k) instead of an IRA keeps the backdoor clean.
Check two things first: whether the new plan accepts incoming rollovers (most do, but not all), and whether its funds are actually good. A plan full of high-fee target-date funds is not worth consolidating into.
Option 3: Roll it into an IRA
An IRA at a large brokerage gives you the widest choice: index funds and ETFs from any provider, individual bonds, Treasuries, and the ability to keep costs very low. You also get full control over when you take withdrawals and how you set up beneficiaries.
Match the account type to the money. Pre-tax 401(k) dollars go to a traditional IRA. Roth 401(k) dollars go to a Roth IRA. One wrinkle with Roth money: the Roth IRA has its own five-year clock for tax-free earnings, and if you have never had a Roth IRA, that clock starts with the year of your first contribution or rollover, not the year you started the Roth 401(k). Opening a Roth IRA with even a small contribution years before you need it is a cheap way to start the clock early.
If your old plan holds company stock that has grown a lot, talk to a tax professional before rolling it over. A strategy called net unrealized appreciation (NUA) can let you pay long-term capital gains rates on the growth instead of ordinary income rates, but it only works if the shares come out of the plan in kind rather than being rolled into an IRA.
Option 4: Cash out, and why it rarely pays
Take a hypothetical 35-year-old with a $40,000 balance in the 22% federal bracket. A cash-out would add $40,000 to taxable income for the year, costing roughly $8,800 in federal tax plus a $4,000 additional tax for early withdrawal, before any state tax. That leaves about $27,200, and it gives up decades of compounding on the full $40,000. If you are short on cash, a hardship plan or simply rolling over and leaving the money alone is almost always the better trade.
Direct vs. indirect rollovers: the 20% trap
How the money moves matters as much as where it goes.
- Direct rollover (trustee-to-trustee): the old plan sends the money straight to the new plan or IRA, sometimes as a check made payable to the new custodian “for the benefit of” you. Nothing is withheld and nothing is taxed.
- Indirect rollover: the plan pays you. By law it must withhold 20% for federal taxes. You then have 60 days to deposit the full original amount into an eligible account, which means making up the withheld 20% from your own savings. Whatever you fail to deposit is treated as a taxable distribution, and the withheld amount only comes back to you as a refund when you file your return.
Always ask for a direct rollover. The IRS keeps a rollover chart and rules page that shows which account types can roll into which.
A related rule causes confusion: the one-rollover-per-12-months limit applies to indirect IRA-to-IRA rollovers. It does not limit direct rollovers from a 401(k) to an IRA, or direct trustee-to-trustee transfers between IRAs.
Making the move
- Gather the details. Log in to the old plan and note your balance, how much is pre-tax, Roth and after-tax, and whether any company stock is involved.
- Open the receiving account first. If you are going to an IRA, open it at your chosen brokerage and get the exact payee name and account number for the check or electronic transfer.
- Request a direct rollover. Most plans handle this online or by phone. Many brokerages will initiate the request for you and stay on the line with the old plan.
- Watch for the money and invest it. Rollover funds usually land as cash. A surprising number of people forget this step and sit in a money market fund for years. If you do want cash for a while, our money market funds guide covers how they work.
- Keep the paperwork. You will get a Form 1099-R from the old plan showing the distribution with a code indicating a direct rollover, and the receiving IRA reports it on Form 5498. Rollovers still go on your tax return even when nothing is owed.
If you are self-employed now and wondering where old 401(k) money fits, a solo 401(k) can usually accept rollovers too.
Frequently asked questions
Is there a deadline to decide what to do with my old 401(k)?
No hard deadline if your balance is above $7,000; the plan must let you stay. Smaller balances can be moved out by the plan, so act sooner if you are near that threshold.
Can I roll over a 401(k) that has an outstanding loan?
Unpaid loan balances are usually offset against your account when you leave and treated as a distribution. You have until your tax-filing deadline, including extensions, for the year of the offset to deposit that amount into an IRA or another plan and avoid tax on it.
Can I split the money between options?
Yes. You can roll part of a balance to an IRA and leave the rest in the plan, or send pre-tax dollars to a traditional IRA and Roth dollars to a Roth IRA in the same transaction.
Will a rollover affect my required minimum distributions later?
It can. IRA owners must start RMDs at their required age even if they are still working, while a current employer’s plan may let you delay. See our required minimum distributions guide for the details.
