Should You Roll 401(k) Over After Leaving a Job?

Leaving a job comes with plenty of questions and decisions to make. One of the most important is what to do with your 401(k). Rolling it over into an IRA or a new employer’s plan may seem like the obvious choice, but it’s not always the best move. The right decision for you depends on your current plan’s features, your investment goals, and your current financial situation.

This article will outline your options for managing a 401(k) after leaving a job, whether you keep it as is or roll it over. We’ll also highlight common rollover mistakes to avoid and explain how a financial advisor can help you make the best long-term choice.

What Are Your Options for a 401(k) After Leaving a Job?

When you leave a job, you must decide what to do with your 401(k) and the funds you’ve built up within it. Typically, you have four options: leave it with your former employer, roll it over to your new one, move it to an IRA, or cash it out. Depending on your current financial situation and goals, each choice will have advantages and drawbacks to consider carefully.

Below is a breakdown of each option:

1. Keep Current 401(k) Plan

Even after leaving a job, your 401(k) remains intact with your previous employer’s plan. If the plan offers low fees, strong investment options, or unique benefits, keeping it as is might be a smart move. Additionally, Michael Santiago, CRPC^™, Senior Financial Editor at RetireGuide.com, notes that staying with your employer’s plan “allows for penalty-free withdrawals at age 55, while an IRA does not.”

However, the tradeoff is that you won’t be able to make additional contributions. Your funds will remain invested until you decide to take withdrawals or roll them over. Exploring other options may be more beneficial if your former employer has high fees or limited investment choices.

2. Rollover to New Employer Plan

If your new job offers a 401(k) plan, rolling your old account into the new one can simplify retirement savings by consolidating everything in one place. This option allows you to continue contributing and maintaining tax-deferred growth without managing multiple accounts.

Not all employer plans are equal, however. If your new plan has high fees or limited investment options, keeping your old 401(k) or rolling it into an IRA might be the better choice. Additionally, the rollover process can be complex, requiring coordination with your former and current plan administrators.

3. Rollover to Traditional or Roth IRA

Rolling your 401(k) into an IRA can provide greater flexibility and access to a wider range of investments than most employer-sponsored plans. A traditional IRA maintains the same tax-deferred structure as a 401(k), meaning you’ll pay taxes on withdrawals in retirement. A Roth IRA, on the other hand, requires you to pay taxes on the rollover now but allows tax-free withdrawals in retirement.

This option gives you more control over your investments but also means you’ll be responsible for managing the account yourself. Additionally, if you roll over into a traditional IRA, you may lose the ability to move the funds back into a 401(k) later.

4. Cash It Out

Cashing out your 401(k) may seem tempting, especially if you need the funds immediately. However, this option comes with significant consequences. If you withdraw before age 55, you’ll owe a 10% early withdrawal penalty, plus ordinary income taxes on the entire amount. Additionally, you’ll face the opportunity cost of compound interest and long-term growth if you take cash out too soon.

Because of these penalties, cashing out is usually only advisable if you’re at least 55 years old or facing a financial emergency with no other options. Otherwise, keeping your savings in a tax-advantaged retirement account is the better long-term strategy.

How to Decide Which Option Is Best

With multiple options for your 401(k), choosing the right path isn’t always easy. The best decision depends on your financial goals, current situation, tax implications, and the details of your old and new employer’s plans. Because 401(k) plans often vary in fees, investment choices, and unique benefits, it’s essential to weigh your options carefully before making a move.

The following is an overview of each factor to consider as you decide which option suits your needs:

1. Fees

According to Brian Saranovitz, founder and CEO of Your Retirement Advisor, it’s important to “look at the fees” first when considering the best option. “Some 401(k)s have great low-cost options, while others are loaded with unnecessary expenses,” he adds. For example, if your previous 401(k) has a more optimal fee situation, it may be worth keeping it in place or considering another option, such as rolling it into an IRA.

2. Investment Options

“Next, check the investment options,” notes Saranovitz. When weighing between your current or former employers’ 401(k) plans, it’s key to consider the asset allocation you have access to. If your former employer’s plan is invested in exclusive or optimal funds, for instance, you might want to preserve that.

Additionally, consider that a traditional or Roth IRA tends to have more flexible investment options than a 401(k), including mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), and individual stocks. While this may not be the deciding factor (others apply, such as tax implications and employer matching), it can help you choose.

3. Tax and Withdrawal Implications

It’s also important to think carefully about the tax implications if you decide to roll your 401(k) over to an IRA. Moving cash to a traditional IRA won’t require you to pay taxes in the short term, but it will follow the same tax-deferred structure you’ve had. Meanwhile, a Roth IRA requires you to pay taxes first and then contribute funds.

Also, keep in mind that both 401(k) plans and traditional IRAs have required minimum distribution (RMD) rules, which require you to begin withdrawing funds at age 73. However, if you roll over to a Roth IRA, you won’t need to worry about this policy.

4. Convenience

Convenience is another key factor. Managing multiple 401(k) plans from your past jobs can be complicated, so consolidating funds into a single account may simplify your finances.

Likewise, if you value flexibility with your investment options, an IRA rollover may be worth considering. As noted above, these tend to offer much more asset choices. However, they also require you to assume control of your portfolio rather than have a plan administrator manage asset allocations as 401(k)s typically do.

Common Rollover Mistakes to Avoid

Deciding what to do with your 401(k) isn’t always easy and, unfortunately, mistakes are possible. Depending on the severity of the missteps, these can subsequently cause harm to your retirement plan and immediate financial situation.

Investing and retirement vehicles can be very complex and, as a result, it may not even occur to some people that a rollover is an option without outside advice. For most people, cashing out a 401(k) completely is a mistake, per Saranovitz. “If you take the money instead of moving it to another retirement account, you’ll owe taxes and possibly a 10% penalty if you’re under 59½,” he explains.

Another potential mistake is ignoring the impact of taxes as you roll funds over to a Roth IRA. 401(k) plans are funded with pre-tax dollars, whereas Roth IRAs use after-tax contributions. When you roll cash from a 401(k) to a Roth IRA, you must pay taxes before contributing.

Finally, even if an advisor says to roll over your 401(k), be sure to ask questions and only do so if you feel confident that it’s in your best interest. Matt Hylland, financial planner at Arnold and Mote Wealth Management, cautions that you should ensure that a rollover is in your best interest when a person who’ll “receive compensation after you do so” suggests it.

Hylland explains that common examples include “rolling 401(k)s into qualified annuities, or to advisors that charge a fee based on the assets they manage.” He adds that it’s important to “at least be aware that there may be conflicts of interest from those who recommend you roll over a 401(k) to an IRA.”

How a Financial Advisor Can Help

By no means is rolling your 401(k) over an easy or simple process. For most people, having the expertise of a financial advisor can be invaluable. A professional can help you decide whether to roll your 401(k) over and, if necessary, work with you to smoothly complete the process.

For help with retirement planning, we recommend looking for professionals such as certified financial planners (CFPs) or chartered financial consultants (ChFCs). Not only do they have extensive financial planning experience and expertise, but their titles require them to act in your best interest at all times.

If you need help finding a financial advisor, consider this free matching tool. After filling out a short quiz that asks you about your current situation, retirement goals, and risk tolerance, it’ll connect you with a professional who aligns with your needs.