401(k) Rollover After a Job Change

Changed jobs? You usually have four options for your 401(k).

When you separate from an employer, the 401(k) you’ve built there doesn’t have to stay where it is. You have choices, and the right one depends on your tax picture, your new plan’s investment menu, your need for simplicity, and what comes next.

The wrong choice (or no choice at all) can quietly cost you thousands in fees, lost growth, or a surprise tax bill.

The four options

1. Leave it in your former employer’s plan. Usually allowed if the balance is large enough (often $5,000+ under SECURE 2.0). You keep the existing investments, but you’re now a “former employee” in someone else’s plan, with limited service and no ability to add new contributions.
2. Roll it into your new employer’s 401(k). A direct rollover into the new plan keeps everything consolidated and continues the tax deferral. Works only if the new plan accepts incoming rollovers (most do).
3. Roll it into an IRA. Direct rollover into a traditional IRA preserves tax deferral and typically opens up a much wider investment menu than a 401(k) offers. A Roth 401(k) balance rolls to a Roth IRA the same way.
4. Cash it out. Available, but usually the worst choice. You owe income tax on the full amount and a 10% early-withdrawal penalty if you’re under 59½. A $100,000 balance can easily lose $35,000+ to tax and penalty before the rest hits your bank account.

What to think through before you decide

A few factors usually drive the call:

• Fees. Pull the most recent 401(k) fee disclosure. Compare expense ratios and administrative fees side-by-side with what an IRA at a low-cost custodian would charge.
• Investment choice. Your old plan may have a great institutional-share-class S&P 500 fund. Or it may have an outdated, expensive menu. An IRA gives you the full universe.
• Roth vs. pre-tax. Roth dollars roll to Roth, pre-tax to pre-tax. Don’t accidentally mix them.
• Employer stock with NUA. If you held company stock with significant appreciation inside the 401(k), you may qualify for Net Unrealized Appreciation treatment, which can produce favorable tax outcomes. Get advice before rolling that piece.
• Simplicity. Three old 401(k)s scattered across former employers is three logins, three statements, and three sets of decisions you probably aren’t making. Consolidating into one IRA tends to clean that up.
• Creditor protection. ERISA-protected 401(k) plans generally have stronger federal creditor protection than IRAs. For high-asset households in litigation-exposed professions, this can matter.

Direct rollover vs. indirect rollover

This part matters. There are two ways the money can move:

• Direct rollover (trustee-to-trustee). The old plan sends the money straight to the new plan or IRA custodian. No tax withholding, no 60-day clock. This is almost always the right path.
• Indirect rollover. The old plan cuts you a check with 20% mandatory withholding. You then have 60 days to deposit 100% of the original balance into the new account, making up the 20% out of pocket, or that amount is treated as a taxable distribution. The opportunity to miss the deadline (or skip the makeup) is the main risk.

We strongly prefer direct rollovers in nearly every case.

How we usually approach this

The work isn’t complicated, but the order matters:

1. Pull the old 401(k) plan documents, fee disclosure, and current investment menu.
2. Compare to the new employer’s plan and to a likely IRA setup.
3. Identify any special features (after-tax balances, NUA-eligible stock, outstanding loans).
4. Recommend the option that fits your specific situation, with the actual numbers behind it.
5. Coordinate the trustee-to-trustee transfer paperwork.

If you’ve changed jobs in the last few years and you’re not sure where the old 401(k) ended up, you’re not alone. Bringing it together is one of the most common first projects we take on with new clients.