What to Do With Your 401(k) After Leaving a Job: A Clear Guide to Making the Right Move

A Personal Experience: Transferring My TSP to an IRA

When I left government service, I faced a decision that many people encounter when changing jobs or retiring: what to do with my retirement account. In my case, it was my Thrift Savings Plan (TSP), the federal government’s version of a 401(k). I knew I had a few options, but the process of actually rolling it over into an IRA was anything but straightforward.

I spent hours researching online, sifting through outdated information, calling customer service reps who gave me conflicting advice, and trying to decipher IRS guidelines. The sheer confusion and lack of clear instructions frustrated me. Even though I knew what I wanted to do, I wasn’t sure how to execute it without triggering unexpected taxes or penalties.

That experience inspired me to write this article—to help others navigate this process smoothly. If you’re wondering what to do with your 401(k) after leaving a job, this guide will break down your options, pros and cons, and the steps to make the best decision for your financial future.

What Happens to Your 401(k) When You Leave a Job?

Your 401(k) doesn’t just vanish when you leave a job. The money remains invested, but what happens next depends on several factors. Generally, here’s what could happen:

• If your balance is under $1,000, your former employer may automatically cash it out and send you a check (which could trigger taxes and penalties if not rolled over).
• If your balance is above $5,000, you typically have the option to leave it in the plan indefinitely.

But just because you can leave your money in your old 401(k) doesn’t always mean you should. Let’s explore your four main options.

Your Four Options for Your Old 401(k)

Option 1: Leave It in Your Former Employer’s 401(k) Plan

Pros:

• No immediate action needed—your money stays invested and tax-deferred.
• 401(k) plans often have strong creditor protections in case of lawsuits or bankruptcy.
• If you retire between ages 55 and 59.5, you may be able to withdraw funds without the usual 10% penalty (this does not apply to IRAs).

Cons:

• You can’t contribute any more money to the account.
• Limited investment options compared to an IRA.
• Some employers charge higher fees to former employees.
• If you switch jobs multiple times, you could end up with multiple old 401(k)s to keep track of.

Best for: Those who want a hands-off approach and are happy with their existing investment options.

Option 2: Roll It Over to Your New Employer’s 401(k) (If Allowed)

Pros:

• Consolidates your retirement savings into one account, making it easier to manage.
• You can continue making tax-advantaged contributions.
• If your new employer offers a matching contribution, future contributions could grow even faster.

Cons:

• Your new plan may have higher fees or limited investment options.
• Not all employers allow rollovers—check with HR first.

Best for: Those who want to keep all retirement funds in one place and their new employer offers a better or comparable plan.

Steps to Roll Over to a New 401(k):

1. Confirm your new plan accepts rollovers.
2. Compare investment options and fees.
3. Request a direct rollover from your old provider.
4. Complete any required paperwork from your new employer.
5. Verify the funds were transferred correctly.

Option 3: Roll It Over to an IRA

Pros:

• More investment choices (ETFs, index funds, individual stocks, bonds, etc.).
• Generally lower fees than 401(k) plans.
• More control over your investments.
• Can be managed passively using target-date funds or robo-advisors.

Cons:

• Requires opening an IRA if you don’t already have one.
• No employer match.

Best for: Those who want lower fees and better investment options.

Steps to Roll Over to an IRA:

1. Choose an IRA provider (Vanguard, Fidelity, Schwab, Betterment, etc.).
2. Open a Traditional or ROTH IRA.
3. Request a direct rollover from your old 401(k) provider.
4. Deposit the funds within 60 days if you receive a check.
5. Select your investments based on your risk tolerance.

Option 4: Cash It Out (Last Resort!)

Pros:

• You get access to your money immediately.

Cons:

• Income taxes and a 10% early withdrawal penalty if under 59.5.
• Reduces your retirement savings significantly.

Best for: Only those in an emergency situation with no other financial options.

Key Considerations Before Making a Decision

1. Fees & Investment Options

401(k) fees can eat away at your returns over time. If your old plan has high fees or poor investment choices, an IRA might be a better option.

2. Required Minimum Distributions (RMDs)

• Traditional 401(k)s and IRAs require RMDs at age 73.
• Roth IRAs do not require RMDs, so rolling into a Roth IRA gives you more flexibility.

3. The Rule of 55

If you leave your job at 55 or later, you can withdraw from a 401(k) without the 10% penalty. This does not apply to IRAs, so keep this in mind before rolling over.

4. Employer Stock & NUA Strategy

If you have company stock in your 401(k), rolling it into an IRA may increase your tax burden. A Net Unrealized Appreciation (NUA) strategy could reduce taxes.

5. Legal Protection from Creditors

401(k)s generally have stronger protections than IRAs in the case of lawsuits.

How to Keep Track of an Old 401(k) If You Leave It

• Set calendar reminders to check your account every 6–12 months.
• Update your contact information with the plan provider.
• Consider rolling it over if your employer raises fees or changes plan terms.
• Use the National Registry of Unclaimed Retirement Benefits if you lose track.

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Final Thoughts

There’s no one-size-fits-all answer when deciding what to do with an old 401(k). Your best option depends on fees, investment choices, legal protections, and personal financial goals. If you want the easiest path, leaving it in your old plan might work. But if you want better returns and more control, an IRA is often the best choice.

Making an informed decision now can significantly impact your future retirement savings. If you’re uncertain, consulting a financial advisor can provide clarity.

What will you do with your old 401(k)? The decision is yours, and now you have the knowledge to make the right one.