Key Takeaways
- You have four choices when you leave a job: leave the money, roll to an IRA, roll to a new 401k, or cash out.
- Balances under $7,000 can be force-distributed by the old plan.
- Cashing out is almost always the most expensive option by far.
Your Four Options, Ranked by Control
Leave it. The old plan keeps managing your money; you can no longer contribute, but the balance keeps growing tax-deferred. This works if the plan has excellent institutional funds and low fees — and it preserves ERISA creditor protection. The risk is becoming a "stuck" former participant if the plan later adds fees or changes providers. Roll to an IRA. The most popular choice: full investment freedom, often the lowest costs, and no forced distributions. Roll to your new employer's 401k. Consolidation keeps everything in one place, preserves ERISA protection, and keeps the backdoor Roth clean — but you inherit whatever menu and fees the new plan offers. Cash out. The worst option in almost every case: full income tax plus a 10% penalty if you are under 59½.
The $7,000 Force-Out Rule
Many people do not realize their old employer can move their money without asking. Under IRS rules, a plan may distribute balances between $1,000 and $7,000 to a default IRA without your consent, and may cash out balances below $1,000 entirely (the threshold was raised from $5,000 to $7,000 for plan years beginning after 2023). If you have a small balance and care where it ends up, initiate the rollover yourself before the plan acts. A default IRA is often invested in a conservative money market or target-date fund with fees you never chose — easy to lose track of for decades.
How to Decide
- Great funds, low fees, no plans to use backdoor Roth: leaving it in place is defensible.
- Mediocre menu or high fees: roll to an IRA and buy low-cost index funds.
- Multiple scattered accounts: consolidate into the new 401k or a single IRA to simplify tracking.
- Any temptation to spend it: roll it — the friction of a separate account protects you from yourself.
Action Steps
- Get the fee disclosure and fund list from the old plan before you leave.
- Check the new plan's menu and fees as soon as you are eligible.
- If rolling, use a direct rollover and keep the 60-day rule in mind for any indirect path.
- Never cash out without running the true-cost numbers in the calculator.
Worked Example: Three Savers, Three Answers
Scenario A: Dana, 45, has $120,000 in an old plan charging 0.35% all-in with excellent index funds, and her new employer's plan charges 0.80%. She leaves the money where it is — the fee gap of $540 per year is not worth disrupting, and she keeps ERISA protection. Scenario B: Marcus, 31, has $8,000 in a plan charging 1.4% with poor fund choices; he rolls to an IRA at 0.05% — saving roughly $100 per year today, and far more as the balance grows. Scenario C: Priya, 52, plans to retire at 57; she rolls her old 401k into her current employer's plan so that when she leaves at 57, the consolidated balance qualifies for the rule of 55 penalty-free withdrawals. Same question, three different right answers — the deciding factors are fees, protection, and your exit timeline.
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Use the Calculator →How to Decide in Five Steps
Run this checklist in order. (1) Check the fees on your old plan's 404a-5 disclosure — if all-in cost is under 0.3%, staying is defensible. (2) Check the new plan — if it has better funds or lower fees, a direct rollover into it consolidates your accounts. (3) Check your age — if you will retire between 55 and 59½, keeping money in a 401k unlocks the rule of 55. (4) Check for after-tax basis — if you made after-tax contributions, roll the pre-tax portion to a Traditional IRA and the after-tax portion to a Roth to keep the tax records clean. (5) Never cash out unless the balance is under about $1,000 and you genuinely need the money — the 20% withholding plus 10% penalty makes it the most expensive source of cash available. Set a reminder to complete the rollover within 60 days if you choose the indirect route.