What to Do With Your 401(k) When You Leave
Got a new job? Congrats — now what about that old 401(k)? This is one of the most common "I don't want to mess this up" questions on r/personalfinance. The good news: moving it without triggering tax is easy if you do it the right way. Here's how.
Best option
Roll to IRA
More control, lower fees
Safe method
Direct transfer
Trustee-to-trustee
Indirect window
60 days
To redeposit
Worst option
Cash out
Tax + 10% penalty
Your Four Options
- Leave it in your old employer's plan (fine if the fees and funds are decent).
- Roll it to your new 401(k) (keeps everything in one place, and 401(k)s have strong creditor protections).
- Roll it to an IRA — usually the best: you control the provider, get lower fees and more investment choices.
- Cash it out — almost always the worst. Income tax on the whole amount, plus a 10% penalty before 59½.
See your tax picture
Understand your income and tax situation.
Direct Rollover: The Safe Way
A direct (trustee-to-trustee) rollover is the right way to do it: the money moves straight from your old plan to the new account without ever touching your hands. You never see a check, there's no withholding, and there's no tax. You simply open an IRA (or arrange the new 401(k) transfer), and the two institutions handle the transfer directly.
The 60-Day Rule
The alternative is an indirect rollover: the old plan sends you a check, and you have 60 days to deposit it into the new account. This is riskier for two reasons: the plan is usually required to withhold 20% for taxes (which you then have to make up out of pocket to avoid a tax hit), and miss the 60-day window and the whole thing becomes a taxable distribution. Avoid this route unless you have no choice.
The Mistake to Avoid
The classic error: someone changes jobs, gets a check from their old 401(k), and spends it — thinking they'll "figure it out later." That's a taxable distribution (plus a 10% penalty if under 59½), and you permanently lose the tax-deferred growth. The move is to initiate a direct rollover immediately, before the money even has a chance to sit in your checking account.
Frequently Asked Questions
Does a rollover trigger tax?
No, if it's a direct rollover to a traditional IRA or 401(k) — it's a tax-free transfer. Rolling a traditional 401(k) into a Roth IRA is a conversion and is taxable.
Can I roll a Roth 401(k) into a Roth IRA?
Yes, and that's generally tax-free and a good idea — it moves the money to an account with no required minimum distributions during your lifetime.
How long does a rollover take?
A direct rollover typically takes one to three weeks, depending on the institutions. Initiate it from the receiving side (the new IRA or 401(k) provider) — they'll pull the money for you.
Should I roll to an IRA or my new 401(k)?
Most people prefer the IRA for lower fees and more choices. But if you plan to do backdoor Roth conversions, keeping money in a 401(k) avoids the pro-rata rule. There's no one-size answer.
Sources
- IRS — Rollovers of retirement plan and IRA distributions.
- IRS — 60-day rollover rule and mandatory withholding.
- IRS Publication 590-A — IRA rollover rules.
This is informational, not tax or investment advice. Rollover rules depend on account types.