What to do with your 401(k) when you change jobs
You have four choices. Three keep your savings growing. One can cost you a third of it. Here’s how to pick, and how to avoid the 20% withholding trap.
The short answer
Move it with a direct rollover, straight from your old plan to an IRA or your new plan. No taxes, no withholding, no deadline to worry about.
Your four options
1. Leave it
Allowed if your balance is above the plan’s minimum. Easy, but you’re limited to the old plan’s funds and it’s easy to lose track of.
2. New employer’s plan
Keeps everything in one place, if the new plan accepts rollovers. Keeps the Rule of 55 option open.
3. Roll to an IRA
The widest choice of investments and annuities. Our most common recommendation, done as a direct rollover.
4. Cash it out
20% withheld up front, income tax on all of it, and often a 10% penalty before 59½. Usually the costliest choice.
Worked example
What cashing out $50,000 at age 40 really costs
Hypothetical: a $50,000 401(k), a 22% federal tax bracket, no penalty exception.
California income tax comes on top. Ask your tax preparer for your own numbers.
- 401(k) balance
- $50,000
- Federal income tax (22%)
- −$11,000
- 10% early distribution tax
- −$5,000
- California income tax
- −[varies]
- You keep, at most
- $34,000
68% kept before state tax. At check time, 20% ($10,000) is withheld toward these taxes.
Direct vs indirect rollover
Do this
Direct rollover
The old plan sends the money straight to your IRA or new plan. Nothing is withheld, nothing is taxed, and there’s no deadline for you to meet.
Be careful
Indirect rollover
The plan pays you, minus 20% withholding. You have 60 days to deposit the full amount. On $50,000 you’d get $40,000, and you’d need to add $10,000 of your own money, or that $10,000 is taxed as a distribution.
IRS rules worth knowing
Five rules that change the decision
60
days to finish an indirect rollover
20%
mandatory withholding when the plan pays you
10%
extra tax on most withdrawals before 59½
55
Rule of 55
Leave your job in or after the year you turn 55 and you can withdraw from that employer’s plan without the 10% tax (50 for some public safety workers). It doesn’t apply to IRAs, so rolling over first can lose it.
1
IRA-to-IRA rollover per 12 months
Across all your IRAs. Direct trustee-to-trustee transfers don’t count.
Source: irs.gov, rollovers of retirement plan and IRA distributions; exceptions to tax on early distributions.
Before you leave your job: checklist
- ☐Check how much of your employer match is vested
- ☐Find out if an outstanding plan loan becomes due when you leave
- ☐Ask whether you hold company stock (special tax rules may apply)
- ☐Note your age: 55 or older? Think about the Rule of 55 first
- ☐Get the plan’s rollover form and ask for a direct rollover
- ☐Update your beneficiaries on the new account
Should the rollover go into an annuity?
Sometimes. If you’re within about 10 years of retiring and want part of that money to become guaranteed income, an IRA annuity can do it. If you’re younger, or might need the money soon, surrender charges make it a poor fit.
How annuities work401(k) rollover FAQ
How long do I have to roll over my 401(k)?+
If the plan pays you directly, you have 60 days to deposit it into an IRA or another plan. With a direct rollover there’s no deadline for you, because the money never passes through your hands.
Is a 401(k) rollover taxable?+
Not if it’s done correctly, from a traditional 401(k) to a traditional IRA or plan. Rolling pre-tax money into a Roth IRA is a conversion, and that amount is taxable.
What is the Rule of 55?+
If you leave your job in or after the year you turn 55, you can take money from that employer’s plan without the 10% early distribution tax. It applies to workplace plans, not IRAs.
Do you charge to help with a rollover?+
[Compensation disclosure: to be confirmed with the client at review]
Changing jobs? Let’s move it the right way
We’ll review your old plan and walk you through a direct rollover.
[Licensing and disclosure wording: to be added at client review]