What happens to your 401(k) when you leave a job?
When you leave a job, you usually have four options for your 401(k): leave it where it is, move it to your new employer's plan, roll it into an Individual Retirement Account (IRA), or cash it out. Here's how each option works, and how to decide what makes sense for you.
Your 401(k) doesn't move automatically when you change jobs. In most cases, the money stays in your former employer's plan until you tell it where to go. Taking time to compare your options now can make a real difference for your retirement later.
Four options at a glance
Leave it with your old employer
You need more time to decide or like the plan's investment options
You can't add contributions; small balances may be moved out automatically
Move it to your new employer's plan
You want everything in one place and your new plan is solid
Not every plan accepts rollovers; compare fees first
Roll it into an IRA
You want more investment choices and flexibility
Tax rules vary; Roth conversions may trigger a tax bill
Cash it out
You need immediate funds and have no other financial options available
Taxes and possible penalties may significantly reduce your balance
Option 1: Leave your 401(k) with your old employer
This is often the easiest short-term path. Your money stays invested and keeps growing tax-deferred while you get settled in your new role.
A few things to consider before you decide:
- Your balance determines your options: if your balance is small, your former employer may have the right to move it without your input, either by rolling it into an IRA or, for very small amounts, sending you a check directly. Check with your HR department or plan administrator to understand what threshold applies to your account.
- You can't keep contributing: once you leave, you can no longer add money to this account or receive employer matching contributions, and additional administrative fees may apply.
- Your investment options are limited: you're restricted to whatever the old plan offers with no ability to expand your choices. It's worth comparing against an IRA or new employer plan before you decide.
- Keep your contact information current: accounts you're not actively managing are easy to lose track of. Make sure the plan administrator can still reach you.
Option 2: Move your 401(k) to your new employer's plan
If your new employer's plan accepts rollovers, you can move your old 401(k) directly into the new plan. One account, one login, one place to track your retirement savings.
Before you decide, compare:
- Fees in the new plan versus your old one
- Investment choices available to you
- Waiting periods before you're eligible to join or roll money in
If you move the money, consider asking for a direct rollover. That means the funds go straight from one plan to the other. If the check is made out to you instead, your old plan is required to withhold 20% for federal taxes, and you'd need to make up that amount out of pocket to complete the rollover within 60 days.
Option 3: Roll your 401(k) into an IRA
Rolling your 401(k) into an IRA can give you more control over where your money lives and a broader range of investment choices than most employer plans offer. You have two options for where to roll over your money: a traditional IRA or a Roth IRA.
Tax when rolling over
No immediate tax — money stays tax-deferred
Taxed on the amount rolled in; tax-free if rolling from a Roth 401(k)
Tax on withdrawals
Ordinary income tax applies. Withdrawals before age 59½ are also subject to a 10% early withdrawal tax penalty.
Typically tax-free after age 59½ if the account has been open at least five years. Earnings on non-qualified withdrawals may be taxed.
Required minimum distributions (RMD)
Begin by April 1 of the year after you turn 73
None required during your lifetime
Option 4: Cash out your 401(k)
Cashing out is an option, but it's usually the most expensive one.
When you take a cash distribution, your former employer is required to withhold 20% for federal income taxes. If you're under age 59½, an additional 10% early withdrawal penalty typically applies. Depending on your tax bracket, taxes and penalties could reduce your balance by a third or more before you see what's left.
Beyond the immediate hit, the money stops growing for retirement. For most people, keeping those savings invested is likely to produce a better long-term outcome.
One important exception: If you leave your job in or after the year you turn 55, you may be able to take withdrawals from that employer's plan without the 10% early withdrawal penalty. This is sometimes called the Rule of 55. It applies to the plan tied to the job you're leaving — not to older 401(k)s or IRAs.
Choosing between an IRA and a new 401(k)
For most people, the real decision comes down to two options: roll into an IRA or move to a new employer's plan. Here's a quick comparison:
Investment choices
Typically broader
Limited to what the plan offers
Loan access
Not available
Available in many plans
Early access (Rule of 55)
Not available
May apply if you leave at age 55 or older
Required minimum distributions
Must begin at age 73 (not applicable to Roth IRAs)
May be delayed if you're still working
If you change jobs frequently or want more control over your investments, an IRA may be a better long-term fit. If you prefer simplicity and your new plan has solid options and low fees, rolling into the new 401(k) can work just as well.
What to check before you make a move
Beyond reviewing your account balance and deciding how you want to move the money, these two factors are easy to overlook, and both can affect your outcome if you don't catch them before your last day:
- Your vesting status: your own contributions are always yours. Employer matching contributions may vest over time, meaning you only keep what's already vested when you leave. Check your vesting schedule before your last day, especially if you're approaching a milestone.
- Any outstanding 401(k) loans: if you borrowed from your 401(k), the balance typically becomes due when you leave. If you can't repay it, the unpaid amount may be treated as a taxable distribution, which means income taxes and possibly the 10% penalty.
Ready to talk through your options?
Changing jobs is a good time to take a closer look at where your retirement savings stand. The right move depends on your goals, your timeline and what your new employer's plan offers. A State Farm agent may be able to help you explore your retirement options and find what could work for your situation.
This article was drafted with the help of AI and reviewed by State Farm editors.
The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
Neither State Farm nor its agents provide tax or legal advice.
Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it's important that customers understand their options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.
