Deciding What to Do with Your 401(k) Plan When You Change Jobs

Changing jobs is often a moment of optimism and renewed purpose. New responsibilities. Better compensation. Maybe even a new city. But amid the excitement of offer letters and onboarding checklists, there’s one often-overlooked question that can quietly shape your retirement future: What happens to your 401(k) when you change jobs?

You’ve spent years contributing, watching your balance grow, and benefiting from employer matches. Now, with a career shift underway, the real question is, what should you do with that money?

Should you move it or leave it untouched?

Convert it?

Cash it out?

Every choice carries long-term consequences, not just for returns, but also for taxes, fees, flexibility, and even your risk exposure.

This guide is designed for mid-career professionals and individuals focused on retirement. We’ll walk you through how a 401(k) actually works when you switch jobs, what 401(k) job-changers should consider, and guide you step-by-step on how to transfer a 401(k) to a new job.

Understanding the basics

Your 401(k) is a long-term, tax-advantaged growth engine, and how you manage it during transitions can either accelerate your retirement plan or erode it. When you leave a job, your 401(k) doesn’t follow you automatically. It stays right where it is until you decide what happens next. And that decision carries weight.

According to Vanguard’s 2024 research, the average worker experiences a 10% income boost when changing jobs, but their retirement contribution rate often drops by a full percentage point.

Want to know something even more alarming?

If the new employer lacks auto-enrollment or sets it at a lower default rate, 1 in 4 workers stop saving altogether.

That’s just the behavioral side. On the structural front, nearly 30% of job switchers forfeit a portion of their employer match due to unvested contributions, resulting in an average loss of 40% of their 401(k) account balance.

The result is a quiet but cumulative dent in retirement readiness, which doesn’t stem from reckless spending but from inaction.

What can you do with your 401(k) at the time of switching jobs?

There are really only four ways you can go, and your decision depends on fees, investment options, flexibility, and your long-term goals.

You can:

• Leave it where it is
• Transfer 401(k) to a new job
• Roll it into an IRA
• Cash it out (strongly discouraged unless there’s no other choice)

Let’s explore each route in detail:

1. Leave the plan with your former employer

In many cases, you’re allowed to leave your 401(k) exactly where it is, particularly if your account balance is between $5,000 to $7,000. Plans differ, so check with your provider.

Pros:

• No rush: You avoid making quick decisions under pressure.
• Continued tax-deferred growth: Your money keeps working for you.
• Access to institutional-grade funds: Some legacy plans offer lower fees or exclusive investment vehicles.
• Penalty-free withdrawals from age 55 (if retired): A benefit unique to 401(k)s (subject to certain conditions).
• Federal creditor protection: 401(k)s typically have stronger protection than IRAs in bankruptcy cases.

Cons:

• No new contributions allowed: The account stays static.
• Future plan changes are out of your hands: Your old employer may switch custodians or restructure funds.
• Account sprawl: One more financial login to manage and possibly forget.
• Higher fees over time: Some plans charge more once you’ve left the company.

Pro Tip:

If the plan has excellent fund choices and low costs, it may be worth keeping. But ask your provider: “Will I still have access to all plan benefits after separation?” That particular answer could sway your decision.

2. Transfer 401(k) to your new job

So, how does a 401(k) work when you change jobs?

Ideally, your new employer’s plan accepts roll-ins, allowing you to transfer the funds directly. This option, known as a trustee-to-trustee rollover, keeps everything tax-deferred and straightforward.

Pros:

• Simplifies your portfolio: One less account to track.
• Maintains tax advantages: No penalties, no taxes if rolled directly.
• Unlocks new plan features: Access to loans, Roth options, or better fund menus.
• Delays RMDs if still working after age 73: 401(k)s allow this; IRAs don’t.

Cons:

• Not all employers accept rollovers: Some plans are closed to external contributions.
• Limited investment choices: You’re stuck with what the plan offers.
• Possibly higher fees: Especially if the new plan isn’t well-managed.

How to transfer a 401(k) to a new job

Below are the steps involved in transferring your 401(k) to a new job:

• Confirm your new employer’s plan accepts inbound rollovers.
• Request a direct rollover from your former plan (do not take a distribution as cash).
• Complete the required paperwork from both custodians.
• Keep a close eye until the transfer is complete and reinvested again.

Avoid indirect rollovers unless absolutely necessary. These trigger mandatory 20% tax withholding and must be redeposited into another plan within 60 days to avoid penalties.

3. Roll it into an IRA

If your new employer’s plan doesn’t accept roll-ins, or if the fund options and fees look disappointing, consider taking your 401(k) elsewhere. An IRA (Individual Retirement Account) offers more freedom, broader investment choices, and fewer restrictions. And it’s often the go-to choice when a new job’s 401(k) doesn’t meet the mark.

You have two primary options: a Traditional IRA or a Roth IRA. The Traditional route keeps your savings tax-deferred. No immediate tax bill, just continued compounding.

A Roth, on the other hand, flips the script: you pay taxes now, but your withdrawals in retirement are tax-free.

That trade-off?

It can be a powerful advantage if used strategically.

Let’s break it down further.

A Traditional IRA gives you control that most workplace plans simply don’t. You can choose your provider. You can invest in index funds, ETFs, mutual funds, individual stocks, and even real estate in some cases. You’re not tied to whatever fund options your employer happens to offer.

If you’ve worked at multiple companies, consolidating all those old 401(k)s into one IRA also makes life easier. One account, one strategy, one set of fees. Fewer things to track, fewer things to forget.

But it’s not all upside. IRAs don’t allow loans, so if you need access to cash, you’re out of luck. And unlike 401(k)s, which delay Required Minimum Distributions (RMDs) if you’re still working, Traditional IRAs force you to start withdrawing at age 73, whether you’re retired or not. There’s also the matter of protection; 401(k)s generally offer stronger safeguards against creditors than IRAs do, especially in states with weaker asset protection laws.

Now, what about a Roth IRA?

A Roth is a tax decision. When you roll over from a 401(k) or Traditional IRA to a Roth IRA, you’ll owe income tax on the converted amount that year. No loopholes. No shortcuts.

So why do it?

Because Roth IRAs grow tax-free, and more importantly, they let you withdraw your funds tax-free in retirement. No RMDs. No tax surprises. And if you expect to be in a higher bracket down the road, this move can lock in today’s lower rate.

Timing is everything. If you’re in a gap year, between jobs, or facing lower income for any reason, that may be your best chance to convert with minimal tax pain.

Here’s how to do it right:

• Choose a provider with low fees and strong investment tools.
• Request a direct rollover from your old 401(k) to the IRA.
• Decide whether you’ll keep it Traditional or convert it to Roth.
• If you’re converting, calculate the tax bill in advance and be ready to pay it.
• Once the funds land, reinvest them promptly. Don’t let them sit idle in the account.

In short?

IRAs offer flexibility, customization, and long-term value, but they also ask more from you. They don’t come with built-in rules or automatic escalation. You’re the one at the wheel now. Make sure you’re driving toward a retirement that fits your vision, not just your employer’s default.

4. Cash it out (but only in emergencies)

This is technically an option, but for someone planning for retirement, it’s rarely a wise one.

Below are some consequences:

• Taxes: You’ll owe ordinary income tax on the full amount.
• Early withdrawal penalty: If you’re under 59½, you’ll lose an additional 10% to the IRS.
• Mandatory 20% withholding: Even before you see the money.
• Loss of growth: You’re pulling the plug on decades of compounding.

Unless you’re facing a genuine financial emergency and have exhausted all other avenues, don’t do this. Even hardship withdrawals (if allowed by your plan) come at a steep cost.

Special considerations for 401(k) job‑changers

Changing jobs isn’t just about comparing paychecks and titles; it also means stepping into a new retirement framework. And unless you pause to examine the finer details, you could lose value without even realizing it.

Vesting schedules

Employer contributions often vest over time. If you leave too soon, you might forfeit a significant portion of your employer contributions. In some cases, that’s 100% of your match, gone. Before making any final decision to resign, review your plan’s vesting schedule. Even a few extra months might protect thousands of dollars you’ve technically already earned.

De minimis rules

Here’s something that catches many job-changers off guard: If your 401(k) balance is below $1,000, your former employer can simply cash out your account and mail you a check, which could come with taxes and penalties.

If your balance falls between $1,000 and $7,000, it might be automatically rolled into an IRA chosen by the plan provider. You may not even be notified in advance. That IRA might come with limited investment options and high administrative fees.

Small balance?

Big consequences if you’re not paying attention.

Tax timing and escalations

One of the most overlooked risks?

The default contribution rate at your new job.
Studies show that average retirement contributions drop by 0.7% after switching employers, and that tiny drop adds up. Over time, it can result in hundreds of thousands of dollars in lost savings and compounding interest. Always check the default rate of your new plan. Re-establish, or better yet, increase your previous contribution level as soon as you’re eligible.

Plan features you might lose

In addition to fees and fund choices, some employer plans offer unique perks. They include:

• Low-fee institutional funds
• Access to company stock
• 401(k) loan options

When you leave, you might be leaving those benefits behind, too. Before making the move, compare both plans side by side. Sometimes, staying in your former plan temporarily is the smarter financial play.

Step-by-step execution: How to transfer 401(k) to your new job

• Check eligibility: Confirm that your new employer’s plan accepts incoming rollovers.
• Choose rollover type: Opt for a direct (trustee-to-trustee) rollover to avoid taxes and penalties.
• Complete paperwork: You’ll need forms from both your old and new plan providers.
• Execute the transfer: The old plan sends the funds directly to the new one, with no personal handling.
• Confirm the deposit: Monitor your account until the funds are deposited and reflected.
• Reinvest promptly: Allocate the money according to your desired investment mix.

Avoid indirect rollovers unless absolutely necessary. If you receive a check made out to you, you’ll face 20% tax withholding, and just 60 days to deposit it, or it becomes a taxable distribution.

When to roll over to an IRA vs leave or transfer

Not all rollovers are created equal. Here’s when each path makes strategic sense:

a. Choose an IRA if:

• You want wider investment choices like ETFs, index funds, or real estate
• You’re fine without the option to borrow from your plan
• You want to convert to a Roth for tax-free growth, or prefer not to take RMDs from a Roth IRA

b. Choose a new employer 401(k) if:

• You want to keep everything in one place for easier tracking
• You plan to use 401(k) loan features
• You expect to keep working past age 73 and want to delay RMDs

c. Stay in former employer’s 401(k) if:

• The plan has very low fees or exclusive fund access
• You’re over 55 and retired, which makes early withdrawals penalty-free
• Your new plan isn’t active yet, or you’re between jobs

Common pitfalls to avoid while making the choice

Too many retirement missteps don’t come from bad choices, but from a lack of choices. Watch out for these:

• Letting your balance fall below thresholds: It could get automatically cashed out or rolled into a low-performing IRA.
• Forgetting the 60-day rule on indirect rollovers: You’ll owe taxes and possibly penalties if you miss it.
• Leaving funds in cash: Roughly 28% of IRA rollovers sit in cash for years, losing out on market growth.
• Not resetting your contribution rate: A default 3% contribution won’t get you to retirement. Ensure you’re contributing enough, and ideally, more.

Checklist to avoid missteps

To avoid missteps, walk through this checklist:

• Confirm your options – Stay in your current plan, transfer to a new employer, or roll into an IRA
• Check vesting – Don’t lose employer contributions by leaving too early
• Compare costs and investment options
• Verify whether your new plan accepts roll-ins
• Choose a direct rollover to avoid taxes
• Restart or increase contributions once enrolled in the new plan

Conclusion: More than a checkmark

Reevaluating your 401(k) during a job transition is a pivotal moment. Fees, flexibility, contribution momentum, and future access all depend on your choice now. Done right, your decision can save thousands. Done passively, it can cost just as much.

Consult with a financial advisor before transferring your money. A good advisor can model out the tax impact, compare plan features, and help you align your rollover with your broader retirement goals. Sometimes, the best decision isn’t the most obvious one.

Job transitions are moments of change, but also moments of clarity. Take this opportunity to review and refine your portfolio, correct past oversights, and optimize your retirement strategy.

Thinking about your next employer, or already in the middle of a switch?

Make time to meet with a qualified financial advisor. At a career crossroads, the right guidance can help you:

• Evaluate which rollover option fits your retirement strategy
• Spot hidden fees in your old or new plan
• Reset your contribution rate with confidence
• Navigate vesting and RMD rules without missteps

Because when you change jobs, your retirement strategy should evolve, too. Don’t leave your savings behind, or let them lose momentum. Bring them with you, thoughtfully, strategically, and with expert help if needed.