The best thing to do with your 401k when you change jobs is to roll it over into an IRA or your new employer’s plan – but the right choice depends on your specific situation. Let me break it down clearly.
First, understand your options: you can leave the money in your old employer’s plan (if the balance is over $5,000 and the plan allows it), roll it into an Individual Retirement Account (IRA), roll it into your new employer’s 401k, or cash out. Cashing out is almost always a mistake because you’ll pay income tax plus a 10% early withdrawal penalty if you’re under 59½, plus you lose decades of compound growth.
For most people, rolling into a traditional IRA gives you the most control and low-cost investment choices. However, if you want to keep the option of taking a loan from your 401k later (which IRAs don’t allow), or if you value the creditor protection that federal law gives to employer plans, rolling into your new employer’s 401k might be better. Also, if you have a Roth 401k, you can roll that into a Roth IRA tax-free.
Here is a quick comparison of the three main options:
| Option | Pros | Cons |
|---|
| Leave in old employer’s plan | No action needed, maintains creditor protection | Limited investment options, may lose access if balance under $5,000 |
| Roll into new employer’s 401k | Consolidation, potential for lower fees, loan availability | Plan may have higher fees or fewer investment choices |
| Roll into a traditional IRA | Wide investment freedom, low fees possible, no RMDs until 73 | No loan feature, less creditor protection in some states |
One more thing: if you have a high-cost old plan or you’re unhappy with the investment lineup, moving to an IRA is usually the smartest move. And always do a direct rollover – the money goes from one custodian to another – to avoid withholding and taxes. So, start by checking your new employer’s plan details, then compare with an IRA from a reputable brokerage. Act within 60 days of leaving your job to avoid any tax surprises.
