Your Old 401(k): Leave It, Roll It, or Cash It Out

Leaving a job doesn't mean leaving the 401(k) behind. The money is still mine, and there are 4 things that can happen to it. Three of them keep it growing for retirement. One of them, cashing out, usually costs more than people expect.

A few words first

• 401(k): a retirement account through an employer, funded from the paycheck before income tax (or after tax, for a Roth 401(k)).
• IRA (individual retirement account): a retirement account opened on my own, outside any employer.
• Rollover IRA: an IRA that holds money moved from an old employer plan.
• Direct rollover: the old plan sends the money straight to the new account. Nothing is withheld.
• Indirect rollover: the plan sends me a check, withholds 20%, and I have 60 days to deposit the full amount.
• Vesting: the schedule for when the employer's contributions become fully mine. My own contributions always are.

The 4 options

1. Leave it in the old plan. Most plans allow it when the balance is above $7,000. It keeps growing, and nothing has to be done.
2. Roll it into an IRA. One account to manage, and the full menu of funds the brokerage offers.
3. Roll it into the new employer's plan, if that plan accepts rollovers. Retirement money stays in one place, with the protections and options only employer plans have.
4. Cash it out. A check, minus withholding, and a tax bill.

The 401(k) basics, like how the match works, are in the 401(k) guide.

What cashing out costs

Say someone cashes out $40,000 at age 35. The plan withholds 20%, or $8,000, right away. The full $40,000 counts as income for the year, and the IRS usually adds a 10% additional tax before 59½, another $4,000. In the 22% federal bracket, the income tax is about $8,800. Before any state tax, close to a third of the balance is gone.

The larger cost is the growth that never happens. Left invested at 7% a year after inflation, $40,000 at 35 becomes about $300,000 by 65, in today's dollars ($40,000 × 1.07³⁰ ≈ $304,000). The Compound Interest Calculator runs other versions of that math.

Direct vs. indirect rollover

In a direct rollover, the money moves from the old plan to the new account without passing through my hands. No tax is withheld and none is owed.

In an indirect rollover, the plan pays me and withholds 20%. To avoid tax, the full original amount has to land in the new account within 60 days, which means covering the withheld 20% from other savings. Whatever isn't deposited counts as a distribution, with income tax and possibly the 10% additional tax.

That's why most people moving a 401(k) ask the old plan for a direct rollover.

What I did with mine

I rolled my old workplace 401(k)s into rollover IRAs. For me it came down to consolidation and control: one place to look, a full menu of low-cost funds instead of whatever each old employer offered, and no plan administrator to deal with for a company I left years ago.

A rollover IRA has 2 trade-offs.

It can make a backdoor Roth more expensive. When income is too high to contribute to a Roth IRA directly, the usual workaround is a nondeductible contribution to a traditional IRA, converted to Roth. The IRS treats all of a person's traditional, SEP and SIMPLE IRAs as one pot when it figures the tax on that conversion. With $200,000 in a rollover IRA and a $7,500 nondeductible contribution (the 2026 limit), only about 3.6% of the conversion is tax-free ($7,500 ÷ $207,500). The rest is taxable. A 401(k) isn't counted in that pot, so some people roll an IRA into a current employer's plan, if the plan accepts it, before converting.

It gives up the age-55 rule, which is below. That exception applies to the plan I left, not to an IRA.

Leaving it in the old plan

Often this is fine. Three things to check:

• Fees. Some plans charge more once someone is no longer an employee.
• Fund choices. Whether a low-cost index fund is on the menu.
• Tracking. The login and mailing address, so the account doesn't get lost.

Small balances work differently. A plan can move a balance under $7,000 into an IRA on its own, and can send a check for a balance under $1,000.

The age-55 rule

Someone who leaves a job during or after the year they turn 55 can generally take money from that employer's 401(k) without the 10% additional tax. Income tax still applies. It covers that one plan only, not IRAs, so rolling the money to an IRA first gives it up.

For everything else in the first month after a job ends, see The First 30 Days After a Layoff.

Frequently Asked Questions

What happens to a 401(k) after leaving a job?

It stays mine. It can stay in the old plan, roll to an IRA or a new employer's plan, or be cashed out. My own contributions are always mine, and the employer's follow the vesting schedule.

What is the 60-day rollover rule?

When a plan pays the money to me, I have 60 days to deposit it into another retirement account. The plan withholds 20%, so that amount has to come from other savings to avoid tax on it.

Is there a way to withdraw without the penalty after a layoff?

Leaving the job during or after the year of turning 55 generally avoids the 10% additional tax on withdrawals from that employer's plan. Income tax still applies.