Blog / Money basics
The money does not move by itself. That is the first thing to understand, because the fantasy is that HR handles it and the reality is a letter you never open. When you leave an employer, your 401(k) just sits there, in the old plan, invested in whatever it was invested in, slowly becoming one of those accounts you forget about until a former coworker mentions theirs at a wedding. I know how that sounds. Everyone has at least one friend with three stranded 401(k)s from jobs they barely remember.
You have four options. Leave it where it is. Roll it into your new employer's plan. Roll it into an IRA. Cash it out. The fourth one is almost always a mistake, and the first three are where the real decision lives.
Doing nothing is a legal option with one condition: your balance. Above $7,000, your former employer generally cannot force you out, and the money can stay in the old plan indefinitely. Between $1,000 and $7,000, the plan can roll your balance into an IRA in your name without asking you, and it often lands in a low-return money market fund where it sits earning almost nothing. Below $1,000, they can cash you out and mail a check.
Leaving it works best when the old plan has good investments and low fees, which is common at large companies. The risk is drift: you stop reading the plan notices, the fund lineup changes, and five years later you are paying fees you would never choose today. If you are the kind of person who already has one forgotten account, do not create a second one. That is not financial advice, it is a personality assessment.
Rolling into an IRA is the choice most people should make, and it is the one I would pick. A direct rollover moves the money provider to provider, no taxes, no penalties, and suddenly you have the entire investment universe instead of the 15 funds your old employer picked. The new employer's plan is the tidier choice: one account, continued tax-deferred growth, and sometimes access to plan loans. But check that the new plan accepts incoming rollovers first, most do, some do not, and compare its fees to what an IRA would cost you.
The mechanic that costs people real money is the indirect rollover. The check comes to you instead of going provider to provider. The plan withholds a chunk for taxes, commonly 20 percent, and you get 60 days to deposit the full original amount, including the withheld part, into the new account. Miss the window, or fail to cover the withheld piece out of pocket, and the shortfall becomes a taxable distribution. Under 59 and a half, add a 10 percent early withdrawal penalty on top. People discover this the week after it happens, which is the worst possible time to learn it. Ask for a direct rollover. Every time.
Your contributions are always yours. The employer match is not always yours. Most plans vest the match on a schedule, a common one is full vesting after 3 years, and if you leave before you vest, the unvested match goes back to the plan. If you are two years and ten months into a three-year vesting schedule, the timing of your resignation is worth real money. Check the schedule before you accept the new offer, not after. This is the detail in the whole 401(k)-job-change process that actually feels unfair, because the match was printed on your pay stub as if it were yours, and it was not, quite yet.
For most people, most of the time: direct rollover into an IRA, done in the first month after you leave, before the old account has time to become archaeology. It takes one phone call to the brokerage and one form from the old plan. The exception is if your new employer's plan is genuinely excellent, or if you change jobs often enough that consolidating into the current employer's plan keeps your life simple. And if your balance is under $7,000, move faster, not slower, because that is the range where the old plan starts making decisions for you.
Cashing out is the one I will not soften. A $20,000 balance at 30, taxed plus penalized, costs you something like $6,000 immediately and a six-figure sum in lost compounding by retirement. The check feels like found money. It is your own money, from your older self, who will notice it is gone.
Nothing automatic. You choose: leave it, roll it to the new plan, roll it to an IRA, or cash it out. A direct rollover into an IRA is the best default for most people.
Under $1,000, yes. Between $1,000 and $7,000, they can roll it into an IRA for you. Above $7,000, they generally cannot force you out.
With an indirect rollover, you have 60 days to redeposit the full amount. Miss it and it becomes a taxable distribution, plus a 10 percent penalty under 59 and a half. Use a direct rollover instead.
Your own contributions are always yours. Unvested employer matching can be forfeited. Check the vesting schedule before you time your exit.
IRAs usually win on choice and fees. The new employer's plan wins on simplicity and creditor protections. Do not let old accounts accumulate.
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