You have four options, not two: leave it in the old plan, roll it to an IRA, roll it into your new employer's plan, or cash it out. Cashing out is almost always the worst of the four — ordinary income tax, a 10% federal penalty under 59½, and California's own additional tax. Leaving it alone is frequently the best and is the option nobody is paid to recommend, because large plans have institutional pricing, ERISA creditor protection, and no pro-rata problem for a future backdoor Roth. An IRA wins on choice and consolidation.
Four options, not two
| Leave it in the old plan | Roll to an IRA | Roll to the new employer's plan | Cash it out | |
|---|---|---|---|---|
| Taxes now | None | None, if done as a direct rollover | None, if done as a direct rollover | Ordinary income tax on the whole amount |
| Penalty under 59½ | None | None | None | Generally 10% on top of the tax |
| Investment choice | The plan's menu | Nearly anything | The new plan's menu | — |
| Cost | Institutional share classes, often very cheap | Depends entirely on what you buy and who advises | Institutional share classes | — |
| Creditor protection | Strong — ERISA | Varies by state; generally weaker than ERISA | Strong — ERISA | — |
| Loans available | No, once you have left | No | Usually yes | — |
| Rule of 55 | Yes, if you left in or after the year you turned 55 | No | No | — |
| Backdoor Roth friendly | Yes | No — a pre-tax IRA balance triggers the pro-rata rule | Yes | — |
| Consolidation | No | Yes | Yes | — |
The case for leaving it alone, which no one makes
Large employer plans buy institutional share classes that individuals cannot access, so the same index fund frequently costs less inside the plan than in an IRA. Plan assets carry ERISA creditor protection, which is stronger than what an IRA gets in most states. And a pre-tax IRA balance can quietly disable a backdoor Roth contribution through the pro-rata rule for years afterward.
There is a reason you rarely read this advice: nobody is paid when you leave money where it is. That includes us. If your old plan is good, leaving it there is often the right answer, and it is the answer we give when it is.
The case against: plans you have left get forgotten, cannot be rebalanced alongside everything else, and sometimes force small balances out. Under $7,000, many plans can cash you out or move the money without your consent.
Cashing out, priced honestly
On a $40,000 balance for someone under 59½ in the 22% federal bracket, in California: roughly $8,800 federal tax, roughly $4,000 in the early-distribution penalty, plus California income tax and California’s own 2.5% additional tax on early distributions. More than a third is gone before the money reaches you, and the plan withholds 20% up front regardless.
The larger cost is the one that never shows up on a statement. $40,000 left invested for 25 years at a hypothetical 6% is about $172,000. That figure is arithmetic, not a projection, and it is the real price of the cash-out.
There are situations where cashing out is still the least bad option available. It is a decision to make with the number in front of you, not around it.
The mechanics that go wrong
- Direct, never indirect. A direct rollover moves plan-to-plan and nothing is withheld. An indirect rollover pays you, the plan withholds 20%, and you have 60 days to deposit the full amount — including the 20% you did not receive — or the shortfall is taxed and penalised.
- One indirect IRA-to-IRA rollover per twelve months. Direct trustee-to-trustee transfers are unlimited; the once-a-year limit applies across all your IRAs.
- Keep pre-tax and Roth separate. Roth 401(k) money goes to a Roth IRA. Mixing them creates a mess that is expensive to unwind.
- After-tax contributions are their own conversation. If the plan holds after-tax money, it may be eligible for a Roth conversion at rollover. Ask before you move anything.
- Company stock in the plan? Stop. Net unrealised appreciation treatment can be worth a great deal and is destroyed by a routine rollover. Get advice before the paperwork.
Run the numbers on your own balance → · The full rollover guide →
Common questions
How long do I have to decide?
Usually as long as you like, if the balance is above the plan's small-balance threshold (commonly $7,000). Below it, plans may move or distribute the money without your consent, so check the summary plan description rather than assuming.
Is a rollover a taxable event?
Not if it is done as a direct rollover into another pre-tax account. Converting pre-tax money to Roth is taxable in the year of conversion. Model a conversion →
Can I roll an old 401(k) into my new employer's plan?
Usually yes, if the new plan accepts incoming rollovers — most do. It keeps ERISA protection, keeps institutional pricing, and keeps the backdoor Roth open. It is an underrated option.
Do you charge to advise on a rollover?
The first conversation is free and fifteen minutes. If we manage the money afterwards our published fee is 1.5% to 2.0% a year. If the right answer is to leave it in the plan, we are paid nothing, and that is still the answer you will get.
Bring the statement before you sign anything
Fifteen minutes, free. Rollovers are hard to reverse and the paperwork rarely explains the trade-offs.