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How to Roll Over a 401(k) When You Switch Jobs
Change jobs and your 401(k) follows you — but the default choice at many custodians is the worst one. Cash it out at 35 with a $60,000 balance and, between the 20% withholding, the 10% penalty, and lost compounding, the real cost approaches $440,000 by age 65. Rolling over instead takes one form.
The Four Options, Ranked
- Roll to the new employer's plan if its fees and fund menu are decent. Keeps everything in one place, preserves backdoor Roth pro-rata cleanliness, and shields pre-tax money from conversion calculations.
- Roll to an IRA for the widest investment choice and lowest fees. Watch the creditor-protection difference: federal law protects 401(k)s fully, while IRA protection varies by state.
- Leave it behind if the balance is above roughly $7,000 and the plan is cheap. Accounts below that threshold can be forced out by the employer under 2024 rules.
- Cash out — almost always the wrong move except in true emergencies.
Do a Direct Rollover, Not a 60-Day Check
Ask for a direct (trustee-to-trustee) rollover: the money moves institution to institution and never touches your hands. Requesting a check to yourself instead triggers 60-day rollover rules — deposit it one day late and the distribution becomes taxable, plus penalty if under 59½. The old plan also withholds 20% for taxes on any indirect rollover, money you must replace from your own pocket to complete the transfer and claim back at filing.
The Pre-Tax and Roth Split
Balances with both pre-tax and Roth 401(k) money can be split — rollovers may go to different destinations, and pre-tax and Roth dollars must stay in their own lanes to remain untaxed. Confirm whether your old plan holds any after-tax (non-Roth) contributions, which roll best into a plan allowing mega backdoor conversions rather than a plain IRA.
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