How to Handle Your 401(k) When You Change Jobs

Learn your four options for managing your old 401(k) when switching employers and which choice makes the most financial sense.

  1. Know your four options. You can leave your 401(k) with your old employer, roll it into an IRA, transfer it to your new employer's plan, or cash it out. Each option has different rules, costs, and tax consequences. Your old employer must allow you to keep the account if your balance is over $5,000.
  2. Compare fees between old and new plans. Look at the annual management fees (expense ratios) for similar investment options in your old plan, new plan, and potential IRA options. Fees typically range from 0.03% to 1.5% annually. Higher fees eat into your returns over decades, so this comparison matters more than convenience.
  3. Evaluate investment choices in each option. Count how many low-cost index fund options each plan offers and whether they cover the basics: total stock market, international stocks, and bonds. IRAs typically offer the widest selection, while employer plans may be limited to 10-25 funds. More options aren't always better if the core choices are solid.
  4. Rule out cashing out unless you're in crisis. Cashing out triggers immediate income tax on the full amount plus a 10% early withdrawal penalty if you're under 59½. A $20,000 withdrawal could cost you $7,000 in taxes and penalties, plus you lose decades of potential growth. Only consider this for genuine emergencies.
  5. Choose rollover to IRA for maximum control. Rolling into an IRA gives you the most investment options and often the lowest fees, especially with discount brokerages. Request a direct rollover to avoid the 60-day deadline and 20% withholding that comes with indirect rollovers. This process typically takes 2-4 weeks.
  6. Keep it simple if your new plan is excellent. Transfer to your new employer's 401(k) if it offers great investment options and low fees, and you want everything in one place. This also preserves your ability to take 401(k) loans if your new plan allows them. Some plans won't accept rollovers during your first 90 days of employment.