What Happens to Your 401(k) When You Leave a Job?

Aug 6

4 Options With Your 401(k) When Switching Jobs Planning financial planning investment management CFP independent RIA retirement planning tax preparation financial advisor Ridgewood Bergen County NJ Poughkeepsie NY fiduciary

If you’re like most Americans, you’ll likely change employers multiple times throughout your career. In fact, a recent World Economic Forum report revealed that American adults work an average of 12 jobs by age 55! The question is: what should you do with your 401(k) each time you move to a new one? This article explains your options in that respect and much more so you can make an informed decision.

How quickly after leaving your job must you move your 401(k)?

Fortunately, there’s no need to make decisions surrounding your 401(k) immediately after you swap your ID badge for another one at a different company as you typically have about 30 days to determine next steps. That month can pass quickly, though, so it's important not to leave your 401(k) in limbo. Here are some options to get you going…

Option #1: Leave your savings with your current employer

Most companies allow you to maintain your retirement account with them, provided you meet a minimum balance requirement (usually around $7,000). This gives you extra time to decide the best course of action. In choosing this option, you’ll no longer contribute to this retirement plan—which will remain separate from any other accounts you have with your new employer. Although managing multiple accounts can be cumbersome, it’s perhaps beneficial if your former employer offers better investment options than the 401(k) plan at your new job.

Option #2: Roll over your 401(k) balance into your new employer’s 401(k) plan

If you’re pleased with investment options, costs, and features at your new employer, rolling over your savings is often a smart choice. One advantage? The ability to consolidate your accounts and thus have one fewer account to manage. Another benefit is that if you retire or lose your job between age 55 and 59½, you can withdraw funds (from your most recent employer’s plan) without incurring any early withdrawal penalties per the rule of 55; the more money you have in your most recent 401(k) plan, the more money can access under this rule. Be sure to verify whether the new 401(k) plan accepts rollovers with your benefits department in advance.

Option #3: Roll over your 401(k) into an IRA

Many people choose to roll their 401(k) into an individual retirement account (IRA) as the latter offers a wider range of investment options than an employer-sponsored 401(k); you can therefore invest your savings however you want whether in real estate, stocks, bonds, mutual funds, or ETFs. Plus, if you anticipate changing jobs at least a few times over the remainder of your career, an IRA can serve as a single destination for your entire slate of retirement plan savings.

While you can roll over your 401(k) into either a Roth IRA or traditional IRA, choosing to convert your 401(k) into a Roth IRA will task you with paying taxes on funds converted since Roth IRAs are funded with after-tax dollars. The tradeoff? You’ll enjoy tax-free withdrawals in retirement, provided you’re over age 59½ and have held the account for at least five years. Unlike traditional IRAs and 401(k)s, Roth IRAs are exempt from required minimum distributions (RMDs): minimum amounts you must withdraw from some tax-deferred retirement accounts beginning at age 73 (increasing to age 75 in 2033).

Option #4: Cash out your 401(k) savings

Cashing out your 401(k) savings might seem appealing, especially via a lump-sum distribution, but this is often the least favorable choice given the need to pay income tax on the amount withdrawn (those under age 59½ will also incur a 10% early withdrawal penalty). Also consider the long-term consequences as cashing out your savings forfeits potential investment growth. For example, if you cash out $50,000 and won’t turn 59.5 until 10+ years, an average annual return of 6% means you could miss out on approximately $40,000 in additional savings. As some circumstances (e.g., the rule of 55) might exempt you from the early withdrawal penalty, it’s important to carefully evaluate whether cashing out is worth sacrificing a significant portion of your account's value and potentially jeopardizing your retirement plans in the process.

How to roll over a 401(k)

Should you choose to roll over your 401(k) into your new employer’s 401(k) or an IRA, be sure to understand the transfer process as mistakes are often costly. In a direct rollover—the simplest and oft-recommended way to do so—a plan administrator will send funds directly to your new 401(k) or IRA account without you ever needing to touch the money. Indirect (60-day) rollovers, meanwhile, give you direct custody of funds via a check your plan administrator will provide for you to deposit. While you can use these funds for any purpose for 60 days, you’ll need to eventually redeposit them into a new 401(k) or IRA by the end of this period to avoid paying income tax and a 10% early withdrawal penalty (assuming you’re under age 59½). This is precisely why indirect rollovers are usually only recommended if you have an urgent need for the money and can execute the transaction within the 60-day window in the absence of risk.

What happens to a 401(k) loan if you change jobs?

If you took out a loan from your 401(k) and are leaving your job—voluntarily or involuntarily—your plan may require you to repay it, typically within 60 to 90 days (see your plan administrator for specific details). A failure to do so within the specified timeframe can result in a “loan offset” whereby the remaining balance is deducted from your 401(k) balance: a taxable event, meaning you’ll owe income taxes on that amount as well as an additional 10% early withdrawal penalty if you’re under age 59½. Unlike with traditional bank loans, though, such debt won’t affect your credit score. Those unable to repay the loan within the required timeframe can sometimes transfer it to a 401(k) plan that allows rollovers (or a rollover IRA), extending the repayment period until the following year’s tax return deadline including any extensions (e.g., those leaving a job in January 2026 would generally have until April 2027 to fully repay the loan).

Other 401(k) considerations when changing jobs

Keep in mind you may not be entitled to all monies in your existing retirement account as many employer-sponsored retirement plans follow a vesting schedule, typically designed so employees must remain with a company for an extended period to realize the full value of employer-matching contributions. Take time to investigate your company’s vesting schedule; you may in fact find you’re only a few days or weeks away from the next vesting cliff and should thus consider staying a little longer.

The bottom line on your 401(k) when changing jobs

Shuffling retirement plans is perhaps not the most glamorous aspect of changing jobs, but the process can indeed significantly impact your golden years—which is precisely why it’s important to carefully consider your own individual situation and act accordingly. Most people find that speaking to a financial advisor gives them the clarity and guidance they need to feel confident in their decision.

Have questions about your 401(k) options when changing jobs? Schedule a FREE discovery call with one of our financial advisors to get them answered.

FAQs

The first step is to contact your plan administrator to inform him/her about the situation; the sooner you address the issue, the fewer penalties you’ll face. If you correct the error prior to the tax deadline (e.g., by April 15, 2026 to fix any excess 2025 contributions), you can simply file your taxes using an updated W-2 but will still need to pay taxes on the overcontribution and any earnings generated from that amount (considered income for that year). If you miss the deadline, you may face double taxation—once in the year you overcontributed and again in the year you withdraw the excess—and a 10% early withdrawal penalty on the amount.
No, an employer cannot do this once contributions are vested (but can retain any that aren’t).
Generally speaking, a company can do so indefinitely assuming the balance is over the specified amount (typically $7,000).