Key takeaways

• After leaving a job, typical options are: leave assets in the old plan, roll to a new employer’s plan, roll to an IRA, take a cash distribution, or start taking withdrawals ).
• Under SECURE 2.0, plans may force out small balances up to $7,000; between $1,000–$7,000 must be auto-rolled to an IRA; under $1,000 may be cashed out by check.
• Direct rollovers avoid the 60-day clock and mandatory 20% withholding that apply to most plan distributions paid to you.

After leaving a job, assets in a 401(k) retirement account can usually stay in the old plan, be rolled to a new employer plan or rolled to an IRA, or be cashed out (taxes and, if under 59½, a 10% additional penalty may apply). Plans can force out small balances up to $7,000. Direct rollovers avoid 20% mandatory withholding and the 60-day redeposit clock; the “Rule of 55” may allow earlier penalty-free withdrawals.

If you quit your job at your current company, there are a few options for what to do with your 401(k). Unlike an Individual Retirement Account (IRA), 401(k)s are sponsored by employers. And if you are one of the millions of Americans who contribute a portion of your salary each pay period to a 401(k) retirement savings plan, you’re probably wondering: What happens to my 401(k) when I quit my job or leave my company?

Americans change jobs frequently — Labor Department data shows that those born in 1957 to 1964 held an average of 12.9 jobs from ages 18 to 58 — so deciding what to do with old 401(k)s is common.¹

If the average person participates in a 401(k) plan at just a few of the jobs where they work, then they’ll have to decide what to do with the 401(k) assets held in accounts each time they leave one job to start a new one.

What happens to your 401(k) when you leave a job?

Unfortunately, many people choose not to make a decision about what to do with their 401(k) funds. Instead, they simply leave the funds behind in their former employer’s 401(k) plan.

Many plans allow former employees to leave funds in their account if the account contains more than $7,000, in line with the SECURE 2.0 Act.² If there’s between $1,000 and $7,000, the plan sponsor may automatically roll the account to an IRA in the former employee’s name or, if the account is less than $1,000, issue the former employee a check in order to close out the account.

While leaving money behind in a former employer’s 401(k) might be the easiest thing to do, it may not always be the best option. People often fail to monitor accounts held at former employers as closely as they should — the money becomes “out of sight, out of mind.” This problem can worsen if an individual ends up leaving money behind in several different former 401(k)s.

Also, one of the benefits of a 401(k) plan is an employer match if the company offers one. Once you leave a job where you have a 401(k), you can no longer make contributions to the plan and no longer receive the match. 401(k) plans may have higher fees, limited investment options and strict withdrawal rules than other options.

Quick answer: If you decide to leave your employer’s plan and want to keep your savings tax-advantaged and avoid hassles, you can request a direct rollover to your new employer’s plan or to an IRA. Checks paid to you (indirect rollovers) generally face 20% mandatory withholding and a 60-day rollover deadline to avoid taxation.

Consider all your options, including taxes, fees and expenses, before moving money between accounts. Assess all benefits of current accounts before moving money.

Other options to consider

There are several options available to you in addition to staying in your former employer’s plan, including the following:

Roll over the money into your new employer’s 401(k) plan

If your new employer offers a 401(k) plan with low costs and a wide variety of investment options, this might be a viable option to consider.

If you are interested in rolling the money over into your new employer’s 401(k), meet with the HR department or retirement plan representative to find out more about your new company’s plan. See whether you will be allowed to participate as soon as you’re hired or will have to work for a certain number of days before you’re eligible.

To accomplish this rollover, instruct the administrator of your former employer’s 401(k) to roll over your assets to your new employer’s plan once you are eligible. Alternatively, you can instruct the former employer’s 401(k) administrator to send you a check — but you’ll generally have 60 days to rollover the full amount, and 20% will be withheld for taxes unless you do a direct rollover.

Roll over your old 401(k) money into an IRA

If your new employer doesn’t offer a 401(k), or you’re not pleased with the plan’s costs or investment options, this may be a good option because it will give you flexibility and control to stay on track with your retirement savings goals. IRAs generally have more investment options, no or low administration fees and greater withdrawal flexibility.

In order to execute a rollover to an IRA, your first step is to open a new IRA with a financial institution if you don’t already have one. The rollover process is similar to the one described above except that you have to instruct the administrator of your former employer’s 401(k) to rollover your plan assets to your IRA.

Conversely, you can have a check sent directly to you. The former plan administrator will withhold 20% of the amount for the payment of taxes and you will have 60 days to rollover the full balance, including the 20% withheld, into your IRA. Failure to deposit the entire amount into your IRA could result in current tax liabilities plus a 10% penalty if you’re younger than 59½ on the amount that was not deposited in your IRA.

Take a lump-sum distribution

You can also choose to simply cash out some or all of the account by receiving a lump-sum distribution of the money in your former employer’s 401(k). However, you should be aware that you’re not going to receive the full balance in your account because you will have to pay not only income taxes, but also a 10% penalty if you are under a certain age. In fact, taxes and penalties could consume up to half of the account’s value, depending on your tax bracket.

This is one reason why many advise against taking a lump-sum distribution from a former employer’s 401(k) plan. This strategy could also jeopardize your retirement financial security by diverting funds from retirement savings where any investment growth will continue to be on a tax-deferred basis.

Start taking distributions

If you meet the age requirement, you can begin taking distributions from your former employer’s 401(k) plan without incurring a 10% premature distribution tax penalty. While you won’t be assessed the 10% penalty on these distributions, you will have to pay income taxes at your current ordinary income tax rate if the distributions are made from a traditional 401(k). This is the “Rule of 55”: if you separate from service in or after the year you turn 55 (50 for certain public safety employees), withdrawals from that employer’s plan may avoid the 10% additional tax.

The bottom line

If you have an old 401(k) plan or are about to leave a job where you contributed to a 401(k), give some thought now to how you will handle the money in your account. A rollover to an IRA may be a good option for many people, but a financial professional can help you determine what’s right for your specific situation.