What to do With a 401(k) When Leaving a Job

When you change jobs, you have to figure out what to do with your 401(k) savings. You have several options, and each of them has advantages and disadvantages. Once you know what all the options are, choose the best one for your needs.

So, what can you do with your 401(k) when you leave your job? You can:

  • Roll the money over into an IRA (or your new job’s 401(k))
  • Leave the money where it is
  • Cash out and spend the money

Roll to an IRA


Last day on the job.

A good choice for most people is to transfer your 401(k) to an IRA after leaving a job. This allows you to have full control over the money (you control the IRA – not your former employer), and avoid any tax consequences (because you will transfer the funds directly from one retirement account to another retirement account, a process that’s called a “rollover”).

Using an Individual Retirement Account (IRA) puts you in the driver’s seat. You can choose which investments to use, and if you’re a do-it-yourself investor, you can usually save on fees when you move out of your 401(k) after you leave your job. While you’re still working, you don’t have much choice, but the universe opens up after you leave.

There are one or two situations in which you might not want to move your money right away. First, if you’re between the ages of 55 and 59 1/2, it might be a little bit easier to pull money out of your 401(k) and avoid income tax penalties (for most employees – make sure you verify this before you pull the trigger). Also, it could be the case that you have an excellent 401(k) plan, and you’ll have a hard time doing any better with an IRA. If you work for a large, stable, operationally efficient company with extremely low fees, you might not need to hurry.

To give this topic the attention it really deserves, start by reading How and Why to Transfer Your 401(k) to an IRA.

Rolling the money to your new job’s 401(k) plan is similar, but you don’t have nearly as much control as you would have in an IRA. That doesn’t make it a bad idea – you can just take your retirement savings with you from job to job – but at some point you’ll probably need an IRA anyway.

When this option makes the most sense: rolling your 401(k) to an IRA after leaving your job makes the most sense if you want to take control of your money (manage it yourself or have somebody do that for you). If you’re relatively young and you might change jobs several more times throughout your life, your IRA can become a “holding account” for all of your retirement savings. Sometimes it’s nice to have everything in one place where it’s easier to keep track of.

Leave the Money Where It Is

Another option is to leave your money in your former employer’s 401(k) plan after you leave your job. This is of course the easiest option because you don’t have to do anything. It’s not the worst option in the world if you need some time to figure things out (or if you’re over the age of 55 and thinking of taking money out), but there are a few issues you’ll want to keep an eye on.

Many employers will allow you to leave your money in a 401(k) as long as you want, but some employers don’t. If you have more than $5,000 in the plan, you can stay as long as you want, but if you have less than that, they can eventually kick you out. Keep your mailing address up to date if you’ve got less than $5,000 saved, and it might not hurt to ask your former employer if they make a habit of removing small accounts from the plan.

Another issue with staying put is that you’re done with your former employer, but your money is still connected to that company. To get your money out, you might need approval from somebody at the company. It’s unlikely that anybody would intentionally drag their feet on letting you get your money out (they’d be asking for serious legal trouble if they did) but administering the 401(k) might not be as high of a priority for them as it is for you. Or, the company could go out of business and you might have a hard time finding somebody who can make your distribution happen.

When this option makes the most sense: leaving your 401(k) with a former employer makes the most sense if it’s just a temporary thing (you’re just waiting to move it to your next job’s 401(k), or you just have a few years before you turn 59 1/2). It also helps if the company is stable and generally efficient about handling paperwork. At some point, it’s best to take control of the money yourself.

Cash out and Spend the Money

Your final option is to cash out your 401(k) after you leave your job. At that point, the money is yours to do with as you please. You don’t have to save it for retirement, and you don’t even have to spend it wisely. You can use it for a vacation, a fancy car, some new clothes, or a fun toy. However, it’s not like you won the lottery – there is a price to pay for cashing out your 401(k).

One of the biggest problems with cashing out is that you have to start over. Think how hard it was to accumulate whatever balance you have in your 401(k) plan. If you were ahead of the curve (if you saved more than you need) that’s great – but most people are far behind on their retirement savings. Once you start saving again, you’ll be even farther behind, and a few years older.

Another issue is taxes. If your 401(k) savings are all pretax savings, you may have to pay tax on all of that money as if it was paid to you as income. In addition, you may have to pay a 10% penalty tax to the IRS if you cashed out “early” and don’t qualify for an IRS exception. When you combine income tax (including state tax) with a penalty tax, you may find that you don’t have as much to spend as you would have hoped – not to mention the fact that you’ll have to start over.

In some cases, you just need the money. If you have no other options (you have to pay for a health procedure, for example), it may be worth it to cash out your 401(k) after leaving your job. But make sure that you evaluate your options carefully before doing so. That lump sum of cash can be awfully tempting, but you might enjoy it even more if you save it for retirement.

When this option makes the most sense: cashing out your 401(k) and spending it makes the most sense if you are truly out of options and you need cash. That money can provide a life raft – just make sure you use it wisely.

Photo credit: ekelly89