I quit my job — What should I do with my 401k?

Man using computer at home

When you leave your job, you have several choices regarding your 401(k). These options for a 401(k) rollover are pretty much universal, meaning they apply to every 401(k) and to every job change situation. Your options are:

Cash the 401(k) Plan and Receive a Full Pay-Out

I've listed this option first because it has the most serious ramifications.

First, if you take a full payout, you will have to pay taxes on the plan — usually 20% off the top when you take the money out, and a 10% penalty when you file your taxes if you are below the age of 59-1/2.

Second, if you have no other retirement plan and you take a pay-out on your 401(k), then you now have no more retirement money. You must start again from the beginning, and this puts you behind.

If you take a full payout but then decide you shouldn't have done so, there's still hope. The IRS has provided the 60-day rollover rule, which allows you take the money you withdrew from your 401(k) and roll it into an IRA within 60 days. You still pay taxes at the time you take the money out of the 401(k), so it's your responsibility to find the cash to bring the IRA contribution to the level of your 401(k) withdrawal. However, when you file your tax return, you get a credit for the taxes on the 401(k) and for the 10% penalty. (Documentation is required.)

Related >> Frequently Asked Tax Questions

Roll the Money to a New 401(k) Plan

This option generally has no negative ramifications. Simply take the money from your old 401(k) plan and move it to the 401(k) plan at your new job. The money moves from one account to the other. There are no taxes or penalties involved. Best of all, you keep all your retirement money and can now add to it in the new 401(k) plan.

However, if there is a waiting period until you can participate in your new employer's 401(k) plan, be sure you can let your money sit in the old 401(k) for the required time frame. If you're not allowed to do this, all is not lost. You have another option.

Roll the Money to an IRA

This option also usually has no negative ramifications. You can always take the money from your old 401(k) and roll it into an IRA. The transfer will occur without incurring taxes or penalties. Moreover, once the money moves into the IRA, you can continue to contribute to the IRA at your discretion. You'll have more investment choices available, and the IRA will have fewer restrictions than your 401(k) plan.

You can also roll your 401(k) money into a Roth IRA, but you need to remember that a 401(k) plan is a pre-tax plan, and a Roth IRA is an after-tax plan. You will need to pay taxes if you move from a 401(k) to a Roth IRA, unless you are rolling after-tax money. Be sure to ask your 401(k) representative about this option for further details.

Related >> How to Start a Roth IRA

Leave the Money in the 401(k) Plan

This option has a few ramifications, but they aren't serious. If you meet the minimum amount required to keep the money in your existing 401(k), then you can leave the money alone, perhaps giving you time to decide you decide what to do with it. Be sure you to find out what the minimum required amount is for your particular 401(k) plan. These minimums can range from $1000 to $5000. (Each plan is different.)

If you decide to leave the money in your existing 401(k), there are several things to consider. First, you will not be able to make additional contributions to the plan. Remember, a 401(k) is a payroll deducted plan; if you leave your job, there is no payroll from which to contribute. Second, you must keep tabs on the 401(k). The plan can change hands from one record keeper to another, and the onus is on you to track where the plan moves if this happens. Third, you typically cannot roll into a 401(k) plan if you are no longer working for the company. However, you will want to check the rules to see if this rule applies to your plan.

Conclusion

These are the choices for your 401(k) plan once you leave your current job. Be sure to research the options that apply to your situation. Remember that you are making a decision that will affect your retirement savings, affecting how much money you may have when you retire. Getting the facts will make this transition easier for you.

Note: If you're faced with this situation, be sure to read the comments on this entry for additional discussion on the nuances involved.

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Mrs.ThePoint
Mrs.ThePoint
12 years ago

I am wondering, if I already have a Roth IRA, can I rollover my 401K into my existing Roth IRA? Or I have to open a new Roth IRA for this? are we allowed to have multiple Roth IRA?

Also, if my new job also offers 401K with the same investment company(Fidelity), do I still need to worry about rollover,cash out or any of these? Can I just leave it as it is?

Paul
Paul
6 years ago
Reply to  Mrs.ThePoint

Yes you can, but, probably shouldn’t. Since your 401k is a pre-tax account & the Roth IRA is an after tax account, if you rollover your 401k into a Roth IRA, you will have to pay taxes on the entire rollover amt.

Frugal Dad
Frugal Dad
12 years ago

I elected to cash out my 401(k) after leaving my last job to pay for the costs of relocating, buying a new house, etc. Looking back, it was a terrible move because of the “stupid tax” I had to pay! If I had it to do over again I would have rolled it to an IRA, and eventually converted to a Roth when I had to money saved to cover the taxes on a conversion.

Felicia Johnson
Felicia Johnson
5 years ago
Reply to  Frugal Dad

I just actually did the same thing. I cashed out and of course spent the funds. It was about 12,000. How much tax do you think I am going to pay on this?

Daniel
Daniel
12 years ago

The only option I would ever consider, which is what I did after recently leaving an employer, is to move the 401k money to a traditional IRA account. I would NEVER consider cashing out a 401k plan – as Todd states, the penalties are just too high to make it worthwhile. I would not move it to a Roth IRA, because I don’t want to pay the taxes today. I would not move it to a new 401k because an IRA account gives me more control over the money. Similarly I would not leave the money in the 401k because… Read more »

Kirk
Kirk
12 years ago

For Mrs.ThePoint, You can’t roll from a 401K into a Roth IRA directly unless your 401K is a Roth 401K. You need to set up a traditional rollover IRA and then convert to the Roth. Remember, you will face tax consequences for moving assets from a 401K or traditional IRA to a Roth. And, there are income restrictions on doing this so make sure you meet them. As far as Fidelity, you will still have to roll over. The retirement plan is dictated by the plan documents, not the custodian. So just because Fidelity does both plans doesn’t mean you… Read more »

K Bennett
K Bennett
12 years ago

One BIG caution on the 401k rollover for people who retire after they’re 55: There’s a federal rule that says you can take penalty-free distributions from your 401K. The distributions are, of course, subject to income tax, but NOT the early distribution penalty. If, however you roll it over into an IRA first you are stuck and must wait til you’re 59 1/2 to take penalty-free withdrawals, unless there are specific exceptions that apply in your plan. I retired at 55 and am now 58. Nearly every time I call Vanguard (where my 401K and IRAs are held) I get… Read more »

Mrs.ThePoint
Mrs.ThePoint
12 years ago

I am also wondering, if it is worthy for me to set up my 401K right now, because I change job very often. (almost once a year) My current job is offering no match for my 401K and the new job is not going to offer match until I work there for full 2 years, by than, I might be gone again. I know if the company offers match I should definitely take it, but how about with no match? I don’t understand 401K very much. Would often transfer funds to new company’s 401K hurts my investment? (I am a… Read more »

Dr T
Dr T
12 years ago

I have to agree with Daniel above.

As someone with a high likelihood of being in a much high tax bracket in the future I am often torn. Do I pay taxes now by contributing to a Roth IRA with its greater potential reward or do I take my tax break now by contributing to an IRA/401k.

I have decided to take my smaller tax break now rather than have the potiental of paying taxes twice. I just don’t see how we can fund our federal programs in the future.

Schizohedron
Schizohedron
12 years ago

Confusion about 401(k)s in general is widespread. Proper handling of rollovers for a workforce that will change jobs many times before retirement is always vital. For both reasons, thanks for an article on this ever-timely subject.

Daniel
Daniel
12 years ago

@Mrs.ThePoint (5) – the main benefit for you of a 401k over an IRA account would be that the income limits might be higher. If memory serves, I believe the 401k contribution limit is 15% of your annual salary. If that is higher than the IRA limit, and you can save that much, it’s probably worth creating a 401k at each job and rolling those into an IRA account as you leave each job.

KC
KC
12 years ago

Roll it into an IRA so you can invest it in index funds or investments of your choosing. The mutual funds in your 401k plan will offer higher fees and lower returns than what you can do with index funds. Now I need to follow my own advice and roll over my 457b. Good luck.

Read Jim Cramer’s new book (Stay mad, I think is the title). He agrees on this. Your investment choices in an IRA are much better than the limited ones of your 401k plan.

Jeff
Jeff
12 years ago

To expand on Daniel’s point, the negative ramification of rolling into your new 401k or keeping it in the existing plan is investment choices. Most 401ks have a limited number of funds in which the money can be invested. In some 401ks it is extremely limited. A rollover IRA gives the investor many more investment choices.

Heidi
Heidi
12 years ago

It doesn’t have to be all of one and none of the other. You can split it and roll a portion into a Roth IRA and the balance into a traditional IRA. No matter what you do, don’t take the cash out. Pesonally, if you can afford to take a bit of a tax hit now, I highly advocate the Roth (but naturally I am operating under the assumption that congress will keep it’s promise to let these dollars flow out of the plan tax-free). As far as what to invest in once you have chosen a plan type –… Read more »

Anne
Anne
12 years ago

Sometimes it makes sense to leave your money in a 401(k). You may have access to funds that you wouldn’t have access to elsewhere, such as DFA funds, or you may have access to funds that are closed to new investors.

William Tanksley
William Tanksley
12 years ago

Warning: the devil’s in the details for a lot of these things. For example, if you’re moving money between before-tax plans, the law allows you to accept a payout and send the money to the new plan — but the law places hard limits on how many days you have to get the money into that new plan. If at all possible, have the plan administrator handle the money; the law says that they can transfer the money without risking making it look like a cashout.

-Wm

WorkingDollar
WorkingDollar
12 years ago

Mrs. ThePoint, You can actually roll over a regular pre-tax 401(k) to a Roth IRA – however your pre-tax 401k will be taxed and incur a penalty for early withdrawal since it is moving from a pre-tax account to an after tax account. If you do not want to incur penalty or tax, then it is best to roll from a pre-tax plan into another pre-tax plan. Keep in mind Roth is after tax. Also, you can have multple plans, but there is a 402g limit that the IRS will place on you for contributions into 401k plans, as well… Read more »

jtimberman
jtimberman
12 years ago

FWIW, Daniel’s advice is similar to Dave Ramsey’s. When you leave a company, *ALWAYS* get a direct transfer rollover into a traditional IRA. The reason is simple: the 401K may have a few mutual funds and other investments to choose from, and an IRA opens up to thousands of mutual funds alone. And staying with Dave Ramsey’s advice, never invest long term in anything other than mutual funds [with at least a 10 year track record of 12% returns]. Also, if your 401K is in a lot of your company’s stock, roll it out so fast that your head spins.… Read more »

JackFoley
JackFoley
12 years ago

Rolling your 401(k) into an IRA gives you total control over _your_ money. You don’t have to worry about the plan sponsor changing the investment choices; you don’t have to worry about the plan sponsor at all because they are out of the picture. To roll funds out of a 401(k) the trustee of the plan typically has to sign off on the transfer. I have seen situations where a small company goes bankrupt, changes ownership or moves and getting that trustee’s signature becomes _very_ difficult. Rolling the funds out eliminates that issue all together. I’ve seen it take as… Read more »

SavingDiva
SavingDiva
12 years ago

What are your options with a 403(b)?

jtimberman
jtimberman
12 years ago

SavingDiva – 403(b) should be similar to 401(k), since they are both retirement savings, except the 403(b) is for health professionals, nonprofits and schools instead of corporations.

Remember folks, 401(k) refers to the tax code, section 401, subsection “k” and 403(b) is section 403, subsection “b”.

Anne
Anne
12 years ago

@jtimberman – as I mentioned above, it’s not always the case that the 401(k) has worse options than an IRA. Some 401(k) plans offer funds that wouldn’t be available to you elsewhere. If they’re good funds, it makes sense to stay in.

jtimberman
jtimberman
12 years ago

Anne,

Are you a millionaire? Have you helped thousands of people with this process?

Dave Ramsey is, and has, so I’ll listen to him instead. Thank you though.

Diana Grogan
Diana Grogan
5 years ago
Reply to  jtimberman

LOL… no need to get snappy. He was just politely giving advice as requested.

Why the chip on your shoulder. All just trying to learn from each other!

Anne
Anne
12 years ago

@jtimberman – I really don’t care what you do with your money; I’m just offering a counterpoint to Dave Ramsey’s blanket advice. Incidentally, Dave Ramsey himself says that you shouldn’t make investment decisions just because he says to; you should be sure you understand them yourself. If the reason for rolling over a 401(k) is to get access to better funds–well, this rationale doesn’t always apply.

CollegeSavings.About.com - Ken Clark, CFP
CollegeSavings.About.com - Ken Clark, CFP
12 years ago

Actually, starting in 2008, you can make a direct conversion from an employer sponsored plan to a Roth. You’ll have to pay the taxes (no penalty)…

If you are thinking about doing it, you may want to get it done before the tax rates potentially pop upwards in 2010.

-Ken

jtimberman
jtimberman
12 years ago

Yep, he says that too. And I understand mutual funds, so I follow his advice on investments.

James Crocker
James Crocker
12 years ago

Well in my scenario, it makes much more sense to follow Anne’s advice. I work for IBM, and my 401k plan has great investment options, I have access to low low low low fee mutual funds (1 cent per $100) for passively managed index funds. I will be going to grad school full time in the fall, and it makes more sense to leave my current funds in my existing 401k. Since I won’t have any money to contribute to retirement while I’m in school, it’s ok to leave it invested where it is. It is more cost effective than… Read more »

Michael
Michael
12 years ago

Anne is right that some 401(k)s offer better investments than those available to individuals. For example, the Vanguard 500 charges institutional clients (401k) half of what it charges individual investors (Rollover IRA). 401(k) custodians can also use their size to negotiate lower fees with investment managers.

But yes, many 401(k)s are expensive and don’t offer good investments.

P.S. James Crocker, exactly. The biggest companies are best at this. IBM probably employs a whole department to deal with the 401(k) custodians and advisors.

Pam
Pam
12 years ago

I would recommend anyone who is in a rollover situation check out the concept of a “Stretch” IRA. Because of how distribution rules vary for 401(k)s and IRAs, it can be very beneficial for your heirs if you roll over the old 401(k) to an IRA as opposed to a new 401(k). Should you pass away before all the money in the IRA has been disbursed, and if you leave the money to your children, they are allowed to take distributions calculated over THEIR lifespan.

Ed Slott has written a number of books on this topic.

No Debt Plan
No Debt Plan
12 years ago

Never, ever cash out.

Rollover into an IRA, gives you more flexibility than a new 401k would.

Money Tips
Money Tips
12 years ago

Everyone’s situation is different and I think the article sumarizes the options well.

Other Daniel
Other Daniel
12 years ago

I agree with Daniel and the others who are saying to roll to an IRA. That’s really the only decent option, although some company’s 401K may be so brilliant that Fidelity and Vanguard can’t compete. Doubt it, but possible. If you switch jobs often, you can roll each 401K over into the same (Rollover) IRA, to manage it in one place. If you’re in a pension program that requires vesting over 5 years of so, DON’T pull it out unless there’s no chance you’ll ever work under that pension plan again. I’ve met people who pulled out of gov’t pension… Read more »

John
John
12 years ago

Is this the same for a 403(b)? I’m in this exact situation where I am thinking about rolling my old 403(b) into my new 401(k), but am not exactly sure how to go about it.

A great, timely article as always.

Sam
Sam
12 years ago

This is good general advice but, I agree with others that the devil is in the details. A company sponsored 401(k) may give you access to institutional class funds (lower cost) compared to the retail class funds (for the same mutual fund). I also have access to a 401(k) Roth via work and I can not invest in a Roth IRA. You need to have a good understanding of the options of your current plan and the options of a new plan at a new job and private options (i.e. IRA). But don’t cash it out just because you might… Read more »

John Reade
John Reade
12 years ago

Does anyone know if is possible to roll some of the money from a 401k to an IRA even if you do not leave your current job? I’d like to do this because an IRA offers more investment choices as many have noted.

CollegeSavings.About.com - Ken Clark, CFP
CollegeSavings.About.com - Ken Clark, CFP
12 years ago

As far as I know, you cannot roll over your qualified plan balance while still currently employed… Unless has discovered a loop-hole.

Other Daniel
Other Daniel
12 years ago

John — I believe 403B plans are a little bit different, in that there isn’t a penalty for taking the money after leaving employment. 403B and 457 plans are both deferred compensation. If you roll them over to IRAs, they are “recharacterized” and you lose access to the money without penalty.

If you have a good emergency fund and don’t need cash to start a business, then a rollover is a good idea. But if you might need that chunk of cash, it’s one place you can get it without penalty, and without high interest rates.

Nate
Nate
12 years ago

I’ve transfered jobs last year and now my 2007 taxes are a little crazy due to the rollover. I remember doing it, but I didn’t document it sufficiently

James
James
12 years ago

Thanks for the article! I’ve had some money in my previous employer’s 401K since April 2005.

I still don’t know what to do with it. I’m buying a house soon and was considering taking the cash out until I read this. I’d heard there was a penalty but wasn’t sure how much it was.

My current employer has a 401k but they don’t match. Would an IRA be better for me?

Jess
Jess
5 years ago
Reply to  James

If it is your first house and the loan is under your name, there may be an exception to the tax penalty for taking the money out of a 401k.

Patrick
Patrick
12 years ago

Must one sell their 401(k) positions in order to roll the funds over to a Roth IRA? In other words, do I have to convert everything to cash and then re-buy the stocks/bonds/mutual funds when the money’s in the new account?

joe
joe
12 years ago

I’m confused about one thing:

Let’s say I have $50,000 in my 401(k) and I quit my employer. How can I move that all into an IRA when the contribution limits of an IRA are $5,000?

Thanks!

Daniel
Daniel
12 years ago

@joe (39) – Contribution limits are $5k. If you do a rollover, you are not making a contribution; you are rolling it over. The $5k limit does not come into play when you do a rollover.

I rolled over about $55k when I left my employer in January.

CollegeSavings.About.com - Ken Clark, CFP
CollegeSavings.About.com - Ken Clark, CFP
12 years ago

Hey Joe-

There is no dollar limit to “rollover” amounts from a qualified employer plan to an IRA.

The limit is on contribution of new funds.

By the way… make sure your rollover is a “trustee-to-trustee” transfer… if the check comes to you and then you try and roll it back into an IRA, you’re going to get the mandatory withholding.

fontraid
fontraid
12 years ago

@James (#37)
Not necessarily. A 401(k) is a better choice than an IRA if you wish to contribute more than the IRA limit (for 2008, the limit is $5000/yr if under age 50, $6000/yr if 50 or older).

Daria
Daria
12 years ago

There is another issue which has to do with people who are putting money into non-deductible IRAs, planning to convert them to Roth IRAs in 2010. If you are in that category, you need to be careful before doing a 401k to IRA conversion. But I don’t know enough to offer an explanation, just thought it should be noted. Nickel has an article on the topic: http://www.fivecentnickel.com/2007/10/18/look-before-you-leap-roth-ira-conversions-in-2010/

ageekymom
ageekymom
12 years ago

What would you recommend for a person who has 401ks from previous jobs and wants to combine them (rollover?), but now has a job with an employer that doesn’t offer a 401k?

nikki
nikki
12 years ago

I’m in somewhat of a similar situation as ageekymom – I have several IRAs in different places, and a couple of retirement accounts (401 K plans) to roll over. Is now a good time to consolidate IRAs and retirement accounts to one company (I’m thinking of Vanguard) or should one wait for less volatile times or take a gradual approach and do this over several months? I look forward to hearing your perspectives. thanks!

Meles
Meles
12 years ago

nikki, Volatile times is relevant. I recently moved money from Vanguard to Fidelity and it took almost a month. If the market makes one of its big two week moves upward during this period with your money in cash you could miss out on a 10% return (that’s right, historically all the big permanent moves upward have occurred over a two week period.) I’d do one at a time to spread your risk. I wouldn’t wait. I’d make very sure you know how long the transfer will take and that you are doing it in the best way. I believe… Read more »

nikki
nikki
12 years ago

Meles,
Thanks for the advice on moving the accounts over soon, but gradually. I was able to speak to my tax advisor who said the same about spreading the risk out over time since one can’t predict the market on any given day.

Was there anything @ Vanguard that you didn’t like that made you want to switch to Fidelity?

mjhvball
mjhvball
12 years ago

Is there any way to transfer my money from my current 401k to an IRA? My company was just bought out. The new company did away with the 401k match, moved the 401k from T.Rowe Price (20-30 investment options) to Mercer (6 options that perform poorly). Now we are being told that starting in 2009 we will have to start paying a management fee to participate in the 401k plan, not being told what the fee will actually be. Any ideas? Thanks.

joe
joe
12 years ago

I bet most regular GRS readers already saw this, but JD made a follow-up post with a chart:

https://www.getrichslowly.org/retirement-plan-rollover-chart/

Lonnie
Lonnie
12 years ago

My wife just left her job to raise our daughter and had been participating in her company 401k for just about a year, contributing 3% a week. We are not sure what to do with the little amount of money in her 401k.

If we roll it over to an IRA, is there a minimum deposit necessary and are there minimum contributions that need to made each year (without her income, not sure if we can swing this).

Would it be a possible to roll over her 401k into my 401k?

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