December 2022
November 28, 2023

What to do with your 401(k) plan when you quit or retire to make the most of your savings


When moving from one employer to another or leaving the workforce entirely for retirement, you may have an employer-sponsored 401(k) account that needs to be moved as well. 

There are several options for what to do with the money in a 401(k), including rolling the funds into a new employer’s 401(k) plan, transferring the money to an individual retirement account (IRA), taking distributions, and cashing out entirely. Some of these choices have tax consequences, while others do not, making it important to carefully review your next steps. 

What is a 401(k) rollover? 

A 401(k) rollover involves transferring the funds out of your current 401(k) account and into a new 401(k) plan or other retirement account. The rollover could involve transferring the money to your new employer’s 401(k) if they offer one. But that’s not the only choice. The options vary depending on how much money you have in the account, the rules associated with your current 401(k) plan, your future financial needs, and more. 

“Before starting a rollover, it’s important for workers to explore their options. The considerations may vary depending on age, employment status and financial goals, and preferences,” says Nathan Voris, director, investments, insights, and consultant services at Schwab Retirement Plan Services.

It’s also important to understand as you review options, that some choices trigger tax consequences including penalties if you opt to withdraw or cash out funds prior to retirement age.

Leave money with previous employer 

Depending on the amount of money in your 401(k), you may be able to simply leave the funds in your previous employer’s program. This is typically allowed by plan administrators if you have accumulated $5,000 or more.

While this approach may seem like the simplest way to deal with the money, there are a few drawbacks to keep in mind. To begin with, you will no longer be able to contribute to that 401(k) plan once you leave an employer.

“Letting funds sit might feel like the easier choice in the near term, but it can become complicated to manage multiple plans, and you run the risk of losing track of your funds,” adds Voris. “The biggest financial mistake many workers make when parting ways with an employer is losing track of their 401(k), which can add up to a significant loss of retirement income over time.”

It’s also important to understand that when you leave the money in a previous employer’s plan, you will be required to begin taking distributions at age 72—even if you’re still working and have not yet retired.

“If you consolidate the money into your new employer’s plan and continue working past 72, you will not have to begin taking required minimum distributions,” explains Katherine Tierney, a senior strategist for Edward Jones. “But you can only defer the distributions for the employer’s plan where you’re currently working.”

Additionally, when leaving the money with a previous employer’s plan, you may not be able to take a 401(k) loan or withdrawal from the account, should you need to do so at any point in the future.

Roll your 401(k) money into a new employer’s plan 

Depending on the benefits package available with your new employer, you may have the ability to simply transfer your money to a new 401(k) plan. To do this, you would contact the administrator for your old plan and complete the required paperwork to disburse the funds to the new employer’s plan. 

By choosing this option, 401(k) funds that were originally deducted from your paycheck on a pre-tax basis can continue to grow tax-deferred because you’re keeping it in a qualified retirement program, says Rita Assaf, vice president of retirement products for Fidelity Investments. 

There are other benefits to this option as well, including not losing track of the account by leaving it with a previous employer, says Assaf.

“Having only one 401(k) can make it easier to manage your retirement savings in one consolidated account,” says Assaf. “In addition, many plans offer lower-cost or plan-specific investment options.”

Before taking this step, however, carefully read and understand the new plan rules. And consider the range of investment options available through the new plan to ensure they meet your financial goals and needs. 

There may also be differences in the fees associated with one employer’s plan versus another. The user experience between plans may also vary—all of which is worth considering.

“The customer service experience and website experience may be different. You’ll want to consider how usable the plan’s website experience is and how easy it is to navigate, as that can vary a lot between an old plan and a new employer’s plan,” says Tierney. 

Roll the funds into an Individual Retirement Account (IRA) 

If your new employer doesn’t offer a 401(k) plan or you simply prefer to manage your money on your own, the money can be transferred to an IRA. Similar to rolling the funds to a new employer’s 401(k) plan, you would need to contact the administrator of your previous 401(k) program and ask them to disburse the funds directly to your IRA administrator.

There are important and somewhat complex rules to navigate when rolling the money into an IRA in order to avoid tax consequences. For instance, money from a Roth 401(k) or Roth IRA (both of which are funded with after-tax dollars) cannot be rolled into a Traditional IRA, which is an account funded by pre-tax contributions, explains Tierney. The money must be rolled into an account with the same type of tax status.

However, traditional 401(k) funds can be rolled into either a Roth IRA or a Traditional IRA. But here too, there are tax ramifications to be aware of.

“If you roll money from a pre-tax 401(k) into a Roth IRA it would be a taxable event because you’re converting those funds from pre-tax funds to a Roth,” says Tierney. “But there may be reasons that you want to do that. You may want the features of a Roth account. Or you may expect your taxes to be higher in retirement, so you want the money to be taxed at your current lower tax rate now.”

You may also want to convert the money to a Roth so that you can leave the money to your heirs tax-free.

Begin taking distributions

If you’re retiring, and are 59 ½, you may be able to simply begin taking qualified distributions from your 401(k) plan. When doing so, you will pay income tax at your ordinary rate on any distributions you receive.

For those retiring before age 55, there will be a 10% penalty for distributions. But here too, there are exceptions. “There’s a penalty exception for those who leave an employer plan in the calendar year that they turn 55. It allows you to take distributions penalty free,” explains Tierney.

As you consider taking distributions, it’s important to also find out what the plans rules are, adds Tierney. Some plans charge $25 per distribution, or limit the number of distributions you can take per month, for instance.

Cash out 

Because of the steep penalties and tax consequences, cashing out a 401(k) fund should generally be a last choice— unless you have an immediate, critical need for the cash and no other options. Those who cash out prior to age 59½, may be required to pay both ordinary income taxes and a potential 10% early withdrawal penalty.

In addition, the plan administrator will withhold 20% of the money and send it to the IRS, says Tierney.

“The plan administrator is required to withhold that 20% for taxes,” Tierney explains. “And when you file your annual tax return, your actual tax obligation for cashing out will be calculated. If it turns out you owed less than 20% that will be factored into your tax return.”

While withdrawing money from your 401(k) may seem like a beneficial move if you’re facing financial challenges, early withdrawals can have serious financial consequences beyond the immediate penalties and tax bills. 

“Making up for those lost savings and any investment gains can also be difficult,” says Voris. We encourage workers in need to seek advice and carefully weigh the implications before making a premature withdrawal. Your 401(k) provider likely can offer you free guidance to help you make the best choice.”

The takeaway 

There are many options for your 401(k) funds when you leave an employer or stop working  altogether. Before making any decisions, weigh your choices carefully. Some options trigger tax consequences or early withdrawal penalties,while others may include limitations on plan withdrawals or conversely forced minimum distributions before you retire. Talking with a financial advisor may be a good step to help identify the best rollover option for your financial goals.

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