Deciding What to Do With Your 401(k) When You Leave an Employer

When you leave a job, one of the first financial questions to address is what happens to your 401(k).

Because 401(k) plans are employer-sponsored, your options depend on both the balance in your account and the rules of the plan you’re leaving.

Whether you’re changing employers, retiring, or taking a career break, knowing how to manage your old 401(k) can help you avoid unnecessary taxes and keep your retirement strategy on track.

Americans change jobs frequently. According to the Bureau of Labor Statistics, people born between 1957 and 1964 held an average of 12.9 jobs between ages 18 and 58.⁵ Deciding what to do with an old 401(k) is therefore a common step in any career transition.

Understanding Your Choices

After leaving an employer, you typically have four main options for your 401(k):

1. Leave the funds in your former employer’s plan (if allowed)
2. Transfer the balance to your new employer’s 401(k) plan
3. Roll over the assets into an Individual Retirement Account (IRA)
4. Cash out the account

Each choice comes with trade-offs involving taxes, fees, and access to your savings.

Option 1: Leave It With Your Former Employer

Many employers allow you to keep your 401(k) in their plan after you leave, provided your balance exceeds $7,000 under the SECURE 2.0 Act. If your balance is between $1,000 and $7,000, your former employer may automatically roll your funds into an IRA in your name. Balances under $1,000 may be distributed by check.¹

Leaving the funds where they are might make sense if the plan offers low-cost institutional funds, strong performance, or protections unique to employer-sponsored plans, such as certain federal creditor safeguards.

However, there are downsides. Once you leave, you can no longer make contributions or receive employer matches, and many people simply lose track of old accounts. It’s also harder to manage a coherent investment strategy when retirement assets are spread across multiple plans.

Option 2: Transfer to Your New Employer’s 401(k) Plan

If your new employer’s plan allows rollovers, consolidating your 401(k)s into one account can simplify management and recordkeeping.

Transferring funds directly—known as a direct rollover—also helps you avoid the mandatory 20% tax withholding that applies when funds are distributed to you personally. A direct rollover keeps your savings tax-deferred and avoids the 60-day deadline to redeposit funds.

This route may be especially beneficial if your new plan offers a broad investment lineup or lower administrative fees. You’ll also retain loan privileges and strong ERISA creditor protections that apply to employer-sponsored retirement plans.

Option 3: Roll Over to an IRA

Rolling your old 401(k) into a Traditional IRA (or a Roth IRA, assuming you have a Roth 401k or if you qualify and prefer to pay taxes now) can give you greater flexibility in your investment choices and more control over your account.

IRAs typically offer wider investment options and may have lower administrative fees than some employer plans. However, funds in an IRA generally have less creditor protection than those in a 401(k) and you’ll lose access to plan loan provisions.

If you pursue an IRA rollover, aim for a trustee-to-trustee transfer (a direct rollover) to avoid tax withholding and penalties. If the distribution is made to you personally, your plan will withhold 20% for federal taxes, and you’ll need to redeposit the full amount—including the withheld portion—within 60 days to avoid taxes and possible penalties.²

Option 4: Cash Out the Account

While taking a lump-sum cash distribution might seem tempting, it often comes with significant costs.

If you’re under age 59½, withdrawals are typically subject to ordinary income tax plus a 10% early withdrawal penalty.³ In addition, taking funds out of a tax-deferred account interrupts the compounding growth potential that fuels long-term retirement savings.

For example, cashing out $10,000 today instead of keeping it invested in a tax-deferred account earning an average of 8% annually could cost you roughly $100,000 in potential growth over 30 years.

Unless you need immediate access to the funds, cashing out should generally be considered a last resort.

Special Considerations: Rule of 55

If you leave your job in or after the year you turn 55 (or 50 for certain public safety workers), you may be eligible to take penalty-free withdrawals from that employer’s plan under the Rule of 55.⁴

This rule applies only to the 401(k) associated with the employer you just left—not to previous plans or IRAs—and you’ll still owe ordinary income tax on withdrawals.

The Bottom Line

Your 401(k) represents years of effort and contributions toward your financial future. The decision of what to do with it after leaving an employer can have long-lasting implications for your tax situation, flexibility, and retirement readiness.

There’s no single “right” answer—it depends on your goals, account balance, and new employment situation. Before moving or withdrawing funds, it’s best to review fees, tax implications, and investment options and consider consulting a financial professional to help you evaluate your choices in context.

Schedule a consultation with a OneDigital advisor today. We’ll help you navigate the complexities of saving for the future with confidence and clarity.

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Investment advice offered through OneDigital Investment Advisors LLC.

1. National Archives: “Federal Register, Technical Amendments: Special Financial Assistance Withdrawal Liability Condition; SECURE 2.0 Act; and Other Updates” (November 2023)

2. FINRA: “401(k) Rollover Options”

3. IRS: “Retirement Topics — Tax on Early Distributions”

4. IRS: “Distributions from Individual Retirement Arrangements (IRAs)” – Rule of 55 Explanation

5. Bureau of Labor Statistics: “Number of Jobs, Labor Market Experience, and Other Characteristics, 1957–1964 Birth Cohort” (2025)