What to do with your 401(k) when you leave a job
Ask for a direct rollover to an IRA or your new plan. Cashing out early usually costs income tax plus 10%.
New to this?
A rollover is moving money from one retirement account to another without paying tax on it. It usually happens when you leave a job and want to take your 401(k) with you. Done right, the money stays invested and keeps its tax break. Done wrong, part of it gets taxed as if you spent it.
Myth
When I quit, I have to take my 401(k) money out.
Truth
You don't. You can leave it, move it to your new job's plan, or roll it into an IRA. Cashing out $18,000 at 31 could leave you about $12,240 after federal taxes.
Worth memorizing
- 1
You have four choices for an old 401(k).
Leave it in the old plan, move it to your new plan, roll it into an IRA, or cash it out.
- 2
A direct rollover has no tax withheld.
The old plan sends the money straight to the new account. A check made out to you has 20% withheld.
- 3
Cashing out early costs tax plus 10%.
Before age 55 in the year you leave, a cash-out is usually taxed as income with a 10% additional tax on top.
I'd move an old 401(k) by direct rollover within a few weeks of leaving, so it doesn't get forgotten. An IRA usually has more fund choices. If your new plan has low-cost index funds, rolling into it keeps things simple too. I would almost never cash out.
Do this today
Log in to any old 401(k) you have, or find your last statement. Write down the balance and the plan's phone number. If you have more than one old account, pick where they will all go and open that account.
Practice
1 of 3
Your old plan mails you a check for a $10,000 rollover. How much will the check be for?
A plan must withhold 20% when it pays you directly. $10,000 × 20% = $2,000 withheld, so the check is $8,000.
2 of 3
Which move keeps your old 401(k) untaxed with nothing withheld?
In a direct rollover the old plan pays the new account directly, so no tax is withheld and the move is not taxed.
3 of 3
You have Roth 401(k) money. Where should it go to stay tax-free?
Roth money belongs in a Roth IRA or another Roth account, so it keeps its tax-free treatment.
Tips
Open the new account first
Open the IRA or confirm your new plan accepts rollovers before you call the old plan. You need the new account number and the exact name the check should be made out to.
Ask for a direct rollover
Use those words with the old plan. The money goes to the new account, or a check comes made out to it, with no tax withheld and no 60-day clock.
Match Roth to Roth
Roth 401(k) money goes into a Roth IRA, and traditional money into a traditional IRA. Rolling traditional money into a Roth IRA means you pay income tax on it that year.
Invest it after it lands
Rolled money often arrives as cash. Log in a week later and choose your funds, such as a broad index fund or a target-date fund, or it may just sit there.
A worked example: what cashing out would cost Priya
Priya is 31 and leaving her job with $18,000 in a traditional 401(k). She is in the 22% federal tax bracket and is tempted to cash out.
- Cashing out adds $18,000 to her income. Tax at 22% is $18,000 × 22% = $3,960, and the 10% additional tax is $18,000 × 10% = $1,800.
- She keeps $18,000 − $3,960 − $1,800 = $12,240, before any state income tax. That is about 68% of the balance.
- With a direct rollover she keeps all $18,000 invested. At an assumed 7% a year, which is not promised, it could grow to about $146,097 by age 61.
- 401(k) balance$18,000
- Income tax at 22%−$3,960
- 10% additional tax−$1,800
- Left after cashing out=$12,240
- Rolled over at 7% for 30 years$146,097
Try your numbers
Reference
What $18,000 rolled over could grow to with no new deposits, at an assumed 7% a year
| Year | You put in | Growth | Balance |
|---|---|---|---|
| 1 | $18,000 | $1,301 | $19,301 |
| 10 | $18,000 | $18,174 | $36,174 |
| 20 | $18,000 | $54,697 | $72,697 |
| 30 | $18,000 | $128,097 | $146,097 |
Common mistakes
Taking the check made out to you
The plan withholds 20%, and you have to replace it from savings within 60 days or that part gets taxed. Ask for a direct rollover so nothing is withheld.
Forgetting the old account
Old 401(k)s get lost when you move and your address changes. Roll it over soon after you leave, or at least update your contact details and beneficiaries with the old plan.
Leaving rolled money in cash
An IRA can hold the rollover as cash until you pick investments. Check the account after the money arrives and choose your funds so it keeps growing.
Going deeper
When you leave a job, you can leave your 401(k) where it is, move it to your new employer's plan, roll it into an IRA, or cash it out. Moving it by direct rollover keeps every dollar invested and untaxed, while cashing out early can cost a third of the balance.
Four options when you leave
The IRS lists four choices for a 401(k) when you leave a job: leave the money in the old plan, roll it into your new employer's plan, roll it into an IRA, or withdraw it as cash.
Direct rollovers skip withholding
In a direct rollover, the old plan pays the new plan or IRA directly, or sends a check made out to the new account. No tax is withheld and the move is not taxed.
A check to you has 20% withheld
If the plan pays you instead, it must withhold 20% for federal tax. To roll over the full amount within 60 days, you have to replace that 20% from your own savings.
Small balances can be moved for you
Plans may cash out or move balances up to $7,000 without your consent. Balances over $1,000 that are cashed out this way must go to an IRA unless you choose otherwise.
Your four options, side by side
Leaving the money in your old plan is fine if the plan has low fees and good funds, and if your balance is large enough that the plan lets you stay. The downside is clutter. People who change jobs every few years can end up with four or five old accounts and lose track of them.
Rolling into your new employer's plan keeps everything in one account. Check that the new plan accepts rollovers and compare its fees and fund list with an IRA. Money in a 401(k) can also qualify for the rule of 55, described below, while money in an IRA can't.
Rolling into an IRA gives you the widest choice of investments and puts you in charge of the account. You open the IRA yourself at a bank or brokerage, and the old plan sends the money there.
Cashing out gives you money now, but you lose the tax break and the future growth. It is the only option that costs money on the day you choose it.
How a direct rollover works, step by step
First, decide where the money is going and open that account. Second, contact your old plan by phone or on its website and ask for a direct rollover, giving the new account details. Third, if the plan mails a check, it will be made out to the new account, so you just forward it. Fourth, once the money arrives, pick your investments.
The whole process usually takes one to three weeks. Keep the paperwork. Next year you will get a Form 1099-R from the old plan that shows the rollover, and your tax return reports it as a rollover so it is not taxed.
The 60-day rollover and the 20% trap
If the old plan pays the money to you instead, you have 60 days to deposit it into an IRA or plan. The catch is that the plan must withhold 20% for federal tax first. On $18,000, you would get a check for $14,400.
To avoid tax, you must deposit the full $18,000 within 60 days, which means finding $3,600 from your own pocket. You get the withheld $3,600 back as a refund when you file. If you only deposit the $14,400, the missing $3,600 counts as a withdrawal and is taxed, often with the 10% additional tax too.
Roth money and company stock
If your 401(k) has both traditional and Roth money, the plan should split it. Send the Roth part to a Roth IRA and the traditional part to a traditional IRA. Rolling traditional money into a Roth IRA is allowed, but the whole amount is added to your taxable income for that year.
If you hold your employer's own stock in the plan, ask about it before you roll over. Special tax rules can apply to company stock, and a tax professional can tell you whether they help in your case.
The rule of 55
If you leave your job in or after the year you turn 55, you can usually withdraw from that employer's 401(k) without the 10% additional tax. Income tax still applies. This exception covers the plan of the job you left, not an IRA.
That is one reason someone in their mid-50s might leave money in the old plan for now. If you are 30, it doesn't apply to you yet, and a rollover is usually the cleaner choice.
Questions people ask
How long do I have to roll over my 401(k) after leaving a job?
There is no deadline to start a direct rollover. You can leave the money in the plan while you decide, unless your balance is small enough for the plan to move it. The 60-day limit only applies once a distribution is paid to you.
Is it better to roll over to an IRA or my new 401(k)?
Compare fees and fund choices. An IRA usually has more options. A new 401(k) keeps everything in one place and may allow the rule of 55 later. Either works if the funds are low cost.
Do I pay taxes on a 401(k) rollover?
Not on a direct rollover from a traditional 401(k) to a traditional IRA or plan. You will get a Form 1099-R and report it as a rollover. Moving traditional money into a Roth IRA is taxed as income that year.
What happens if I miss the 60-day rollover window?
The money is treated as a withdrawal, taxed as income, and may get the 10% additional tax. The IRS can waive the 60-day deadline in some situations where you missed it because of circumstances beyond your control.
Printable worksheet with answer key, free for classrooms. Lesson plan for this unit.
Sources
- IRS: Retirement topics, termination of employment
- IRS: Rollovers of retirement plan and IRA distributions
- IRS: Topic 558, additional tax on early distributions
- IRS: Publication 560, involuntary cash-out limit
Updated October 4, 2026. General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act.
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