You have four options: leave the money in the old plan, roll it into your new employer's plan, roll it to an IRA, or cash out (usually the costly one). If you move it, always request a direct trustee-to-trustee rollover — a check made out to you triggers mandatory 20% withholding under IRC §3405(c) and starts a strict 60-day clock. And leaving a cheap old plan alone is sometimes the best move of all.
Your four options when you leave a job
Every departing employee with a 401(k) balance has the same four choices. None is universally right; each is right for somebody.
- Leave it in the old plan. Usually allowed if the balance is over $7,000. You keep the plan's investments, pricing and strong federal creditor protection — you just can't contribute anymore. (Below $7,000, the plan may force you out; below $1,000 it can cash you out, so small balances shouldn't be left unattended.)
- Roll it to your new employer's plan. Keeps everything in one place, preserves the ability to take future plan loans, and keeps the money out of IRAs — which matters if a backdoor Roth is in your future. Requires the new plan to accept roll-ins (most do).
- Roll it to an IRA. Maximum investment choice and cost control, one account that follows you through every future job. The trade-offs: IRA money can't use the Rule of 55, and pre-tax IRA balances complicate backdoor Roth strategies.
- Cash it out. Almost always the expensive option: ordinary income tax plus, generally, a 10% additional tax before 59½ (IRS Topic No. 558), and the permanent loss of the compounding. It exists as an option; it's rarely a plan.
One more legitimate wrinkle: if you hold appreciated employer stock in the plan, a special treatment called net unrealised appreciation (NUA) can make a partial move to a taxable account worth evaluating before any rollover — see mistake #3 in seven costly rollover mistakes.
Direct transfer vs the 20% withholding trap
If you roll over, there are two mechanical routes, and the difference is not cosmetic.
- Direct rollover (trustee-to-trustee): the money moves from plan to plan, or plan to IRA, without ever being payable to you. No tax withholding, no deadline, nothing to remember. The check, if there is one, is made out to the receiving custodian for your benefit.
- Indirect rollover: the plan cuts a check to you. Federal law — IRC §3405(c) — then requires the plan to withhold 20% for federal income tax. To complete a full rollover you must redeposit 100% of the distribution within 60 days, which means replacing that withheld 20% from your own pocket and waiting until tax filing to recover it. Anything not redeposited is a taxable distribution, with the early-withdrawal addition if you're under 59½.
Concretely: on a $100,000 balance taken indirectly, you receive $80,000. To avoid tax you must deposit $100,000 into the new account within 60 days — finding $20,000 elsewhere in the meantime. This single mechanic is why the near-universal guidance is: always request a direct rollover.
The 60-day rule, precisely
An indirect rollover must be completed within 60 days of receiving the distribution (IRC §402(c)(3); IRS Publication 590-A). Miss the deadline and the distribution is taxable. Three things worth knowing:
- The IRS permits self-certification of a waiver for certain hardships — a lost check, serious illness, an institution's error (Rev. Proc. 2020-46 lists the qualifying reasons) — but that's a safety net, not a plan.
- IRA-to-IRA indirect rollovers are additionally limited to one per 12 months across all your IRAs (IRS Announcement 2014-32, following the Bobrow Tax Court decision). Direct trustee-to-trustee transfers have no such limit.
- None of this applies to direct rollovers — which is the third independent reason to use them.
The step-by-step, if you decide to roll
- Decide the destination first — new plan or IRA — and, if an IRA, open it before you start. Pre-tax 401(k) money goes to a traditional IRA to avoid tax now; Roth 401(k) money goes to a Roth IRA. (Converting pre-tax money to Roth in the process is possible but is a taxable event — a deliberate decision, not a default.)
- Check for the special cases before initiating: employer stock (NUA), an outstanding plan loan, after-tax balances, and whether you're 55+ and might retire early (Rule of 55 only works from a plan, not an IRA).
- Call the old plan's recordkeeper and request a direct rollover. Have the receiving account number and custodian's payee instructions ready. Many plans still mail a physical check — made out to the custodian, which is fine — often to you, for you to forward.
- Forward or deposit promptly and confirm the money landed, then invest it. Rolled cash sitting uninvested is one of the quietest costs in this process.
- Keep the paperwork. You'll receive a Form 1099-R for the distribution; a proper direct rollover is coded as such and reported, not taxed. Keep the statements until the tax return showing it is filed and accepted.
When leaving it in the old plan is the right call
Rolling over is a choice, not a duty — and the industry that earns fees on IRA assets tends to forget to mention that. Leaving the money often makes sense when:
- The old plan is genuinely cheap. Large-employer plans often carry institutional share classes priced below anything retail investors can buy.
- You're 55 or older and may retire before 59½. The Rule of 55 allows penalty-free withdrawals from the plan of the employer you separated from at 55+ — a flexibility a rollover to an IRA extinguishes.
- You want maximum creditor protection. ERISA plan assets enjoy strong federal protection; IRA protection outside bankruptcy depends on state law.
- A backdoor Roth is in your plans. Keeping pre-tax money in a plan rather than an IRA keeps the pro-rata rule clean — see the Roth vs traditional guide.
A note on advice you'll get elsewhere: when any adviser — including us — recommends a rollover that they would then manage, that recommendation involves a conflict of interest, and regulators require it to be acknowledged and the comparison documented. Ask whoever advises you to show you the old plan's costs next to the proposed alternative. If they won't, that's your answer. Our rollover cost comparison tool is a place to start that arithmetic yourself.
Common questions
How long does a 401(k) rollover take?
Commonly two to four weeks end to end: a phone call to initiate, processing time at the old recordkeeper, often a mailed check, then deposit and investment at the destination. Direct rollovers have no deadline pressure — the 60-day clock only applies when the money is paid to you.
Will I owe taxes on a direct rollover?
A properly executed direct rollover of pre-tax money to a traditional IRA or new plan is not a taxable event — no withholding applies, and the Form 1099-R reports it with a rollover code. Taxes arise if you convert pre-tax money to Roth, take cash, or miss the 60-day window on an indirect rollover.
What happens if my old employer's plan won't cooperate?
Recordkeepers must process valid distribution requests, but paperwork requirements vary — some require notarised spousal consent or plan-specific forms. Persistence, exact payee instructions from the receiving custodian, and a three-way call between you, the old recordkeeper and the new custodian resolve most stalls.
Should I roll my old 401(k) into my new job's plan or an IRA?
It depends on the costs and menus of each, whether you'll want a backdoor Roth (favours the plan), whether you may retire at 55–59½ (favours a plan, for the Rule of 55), and how much you value one consolidated account. There is no universal answer — compare the actual fee schedules side by side.
Deciding what to do with an old 401(k)?
Bring the old plan's fee disclosure. We'll put the options side by side — including the option where you don't hire us.