What to Do With a 401k When You Leave Your Job

A 401k is a great benefit, especially if your company matches a portion of it. Saving for retirement is extremely important, and a 401k allows you to do that pretty painlessly. But what happens to the money in it when you leave your job before retirement age, either voluntarily or due to a layoff?

Your options

Depending on your company’s policy and the amount in your account, you may be allowed to leave the money where it is. If you’re happy with your investment options and you won’t forget about the account, that can be something to consider.

But if you’re not, the other options are to cash it out or to roll it over to a different account somewhere else. This Rollover Chart from the IRS tells you what types of accounts the contents of a 401(k) (which is a qualified plan) can be rolled over into.

Two types of rollovers

There are two types of rollovers: direct and indirect. In a direct rollover, the company you used to work for sends a check made out directly to the custodian of your rollover account. Note that they may still send that check to you, but it won’t be made out to you. If that happens, it’ll be up to you to pass the check on in a timely manner to the company handling your investment. You have 60 days from the date you receive your distribution to roll it over.

In an indirect rollover, the check will be made out to you. This is not so good, for a couple of reasons. First, you’ll be tempted to spend it. (But don’t!) It’ll also have a mandatory 20% withholding for taxes taken out of it, which is bad because you’ll need replace that 20% yourself to make up the difference when you send the money on to its new home.

Otherwise the amount that was withheld for taxes will be counted as a withdrawal — which is taxed at your actual tax rate (which may then be higher than normal, because you’ll now have some extra income to be counted — that 20% that was withheld.). You’ll also be penalized on that amount. See this IRS tax topic for more information.

Which brings me to…

What not to do

Cashing your account out can be tempting — especially if you’re thinking of using your 401(k) for credit card debt, but it’s rarely a good choice. Remember, it may feel like “free” or “extra” money, but it’s definitely NOT. It’s money you spent a lot of time and effort earning. There’ll be taxes and penalties to pay as well if you cash it out. Who wants to pay a penalty?

As someone who went this route once, let me tell you it wasn’t worth it. I wish I had known better then, because I’d have been much, much better off letting it grow for retirement instead.

The next time I left a company, I went the rollover route instead. I did a direct rollover to an IRA. Much better to hang on to that money for when I’ll really need it. You know, when I retire either by choice or by circumstance.


  • When I left my ‘cube’ job I rolled my 401(k) into a traditional or rollover IRA. It was pretty easy since both were with Fidelity and I was able to closely match my funds. Now it’s under my control as far as what funds I want to invest in.

  • It’s nice to have those funds under your control, isn’t it?

  • When I left my last job, I moved everything into a rollover IRA at Charles Schwab and re-invested in diverse funds. Schwab took care of almost everything for me. All I had to do was a few phone calls and drop off the check at a local office.

    • Sounds like it was a nice experience for you :)

      I rolled over an IRA (that originally came from a 401k) to Zecco and had a similar experience. The only difference was I mailed in the check :)

  • Great advice! I’m a big proponent for rollovers even if the old 401k is “better”. Taking it with you makes it easier to track, might even lower the costs, and any good broker will offer similar or better investment options.

    • I think it’s a rare company that offers a 401k that’s really excellent in terms of choices; there’s just no way to compare with having everything available if you switch to something self-managed.

  • I also had an easy roll over to an IRA w/ Fidelity. I am glad that money is there for the future – to me it’s one less thing for me to worry about.

  • Don

    I”m still trapped in my cube priso… erh job, so I don’t have the opportunity to roll it into a traditional ira, but given that opportunity, that’s where it would land :)

  • Been there, done that! I did a direct rollover, but I have a friend who went the indirect route – and forgot to get that all-important check to her new brokerage in the 60 day period! She was none too pleased when she learned how much her mistake would cost her….

  • I’ve had more than one co-worker leave the company and instead of doing a rollover, they just used the “clean break” as an opportunity to pull the money (yes, with tax/penalty). WTH? Total waste, no logic, complete lack of discipline and no “plan”.