What to Do With Your 401k When You Change Jobs
You left your job — now what? Your 401k doesn't just disappear, but you have four choices: leave it with your former employer's plan, roll it to an IRA, roll it to your new employer's 401k, or cash it out. The right answer depends on your balance, your new plan's fees and investment options, and how close you are to retirement. This calculator shows the long-term numbers so you can compare apples to apples.
Option 1: Leave It In Your Old 401k
If your old 401k has good institutional-class funds with low expense ratios, leaving it there can be fine. You can't make new contributions, but the money continues to grow tax-deferred. The downside: you'll have another account to track, and if your old employer changes providers or adds fees, you become a "stuck" former employee with limited options.
Option 2: Roll to a Traditional IRA
This is the most popular choice, and for good reason: an IRA gives you total control over investments, often lower fees than any 401k, and no RMDs until age 73 (vs. the new 401k if you continue working). The tradeoff: if you ever need to use the backdoor Roth IRA strategy, a large Traditional IRA balance creates a pro-rata tax problem.
Option 3: Roll to Your New 401k
Consolidation for the win. Rolling into your new employer's plan keeps everything in one place and preserves the creditor protection that 401ks have under ERISA (better than IRAs). It also keeps the backdoor Roth free and clear. The downside: you're stuck with whatever investment options your new plan offers, which may be expensive or limited.
Option 4: Cash Out — The Worst Move (Usually)
Cashing out triggers ordinary income tax plus a 10% early withdrawal penalty if you're under 59½. For a $50,000 balance in the 22% bracket, you'd lose ~$16,000 to taxes and penalties. Over 30 years at 8%, that $50,000 would have grown to over $500,000. Cashing out is rarely the right financial decision, but people do it — often because they think the balance is "small" or they need the money urgently.
The Bottom Line
For most people: roll it to an IRA for lower fees and maximum flexibility. Roll to the new 401k if you want consolidation and maximum asset protection. Leave it in place if the funds are great and you don't mind the extra account. Never cash out unless it's truly a last resort.