What to Do With an Old 401(k): Your Four Choices

Leaving a job doesn't mean your 401(k) has to leave too. You've got four real choices, and each one trades something away. Here they are, side by side, with the catches spelled out.

Why bother thinking this through?

An old 401(k) is often the biggest pile of money a person has. Where it lives decides what you pay in fees, what you're allowed to buy, and how easy it is to get cash out later on.

No rush. There's rarely a clock running on this, so you can take a few weeks, pull the statements out of the drawer, call the plan, and compare the numbers side by side before anything moves.

Choice 1: Leave it where it is

Lots of plans let former employees stay put. Some will push small balances out on their own, though, and the cutoff is set plan by plan, so call the administrator if yours is on the modest side.

Why staying can be smart

• Low costs. Big employer plans can offer institutional share classes, and those fees can be tiny.
• The rule of 55. Leave that employer in or after the year you turn 55 and, if your plan allows it, you can take withdrawals from that plan without the 10% early withdrawal penalty. There's more on this below.
• Strong creditor protection. Most 401(k) plans fall under a federal law called ERISA, which shields the money from most creditors.
• Simplicity. If you like the plan, doing nothing is a perfectly good decision.

Why people leave anyway

• You're stuck with whatever funds your old employer picked.
• Some plans charge more than you'd pay on your own.
• After three or four job changes, it's easy to lose track of an account entirely.

Choice 2: Roll it to an IRA

This is the move most people make. You open an IRA at a brokerage, bank, or other custodian, fill out the plan's distribution form, and the 401(k) sends the money over. How long that takes depends on the old plan. Traditional 401(k) money lands in a traditional IRA; Roth 401(k) money lands in a Roth IRA.

Ask for a direct rollover. The money goes plan-to-IRA, you never touch it, and nothing gets withheld for taxes. It's the cleanest way to do this, and our guide to rollovers vs. transfers explains why the method matters so much.

What you gain

• Choice. An IRA can hold nearly any stock, bond, fund, or ETF your custodian offers. A self-directed IRA can even hold physical precious metals.
• One account instead of several. Fold every old 401(k) into a single IRA and tracking, and later withdrawals, get a lot easier.
• Flexible withdrawals. You pick the amount and the timing.

What you give up

• Costs swing hard depending on what you buy. Some IRAs are dirt cheap. Others come wrapped in advisory fees or pricey products.
• The rule of 55 no longer applies to that money.
• Creditor protection works differently (see below).

Choice 3: Move it into your new employer's plan

Starting a new job? Its plan might take your old 401(k) money. Might. Not all of them do, so ask the new plan administrator before you start paperwork.

You'd keep everything in one employer plan with the same ERISA protection. There's a quieter perk, too, if you plan to keep working past your required minimum distribution age: many plans let current employees who aren't 5% owners put off RMDs from that plan until they actually retire. Our RMD guide covers how that works.

The drawbacks look a lot like staying put. Limited menu. Fees that could be better or worse. And you're trusting that the new employer's plan is a good one, which you won't really know until you've read its fee disclosure and looked hard at the funds on offer.

Choice 4: Cash it out

You can ask for a check for the whole balance. It's the simplest option and almost always the priciest.

• The plan has to withhold 20% for federal income tax.
• The entire amount counts as ordinary income for the year, which can shove you into a higher bracket.
• Under 59½ with no exception? Add a 10% early withdrawal penalty.
• Your state might want its share, too.

Once the money's out of the tax-advantaged account, it stops growing tax-deferred. Cashing out a large balance trades a lot of future money for a little convenience, and we'd steer almost anyone away from it.

The four choices at a glance

What's the rule of 55, exactly?

Take money out of a 401(k) before 59½ and you'd normally owe a 10% penalty on top of income tax. The rule of 55 carves out an exception. If you leave your job in or after the calendar year you turn 55, withdrawals from that employer's plan skip the 10% penalty. Income tax still applies.

Say you're 55, you've just left a job you held for years, and you need to cover a few lean years before Social Security. Roll the whole 401(k) into an IRA and every withdrawal until 59½ carries the penalty. Leave it in the plan and it doesn't.

The fine print:

• It covers only the plan of the employer you just left. Older 401(k)s from previous jobs don't count.
• IRAs are out. Roll the money to an IRA and you give up this exception for that money.
• Certain public safety workers can qualify starting at age 50.
• Your plan has to allow the kind of withdrawals you want.

So if there's any chance you'll need money between 55 and 59½, we'd leave at least part of the balance in the plan for now. The IRS lists every exception on its page about exceptions to tax on early distributions.

How does creditor protection compare?

What follows is an overview. Your own protection depends on your state and your circumstances.

ERISA covers most 401(k) plans, and that federal law shields plan money from most creditors, in bankruptcy and out of it. There are exceptions, like IRS tax debts and certain divorce-related court orders.

IRAs get different treatment. In federal bankruptcy, IRA money is protected up to a dollar cap that's adjusted for inflation, and money rolled over from an employer plan doesn't count toward that cap. Outside bankruptcy, it's up to state law, and states are all over the map.

Worried about lawsuits or debts? Then talk to an attorney in your state before you move a large balance.

Holding company stock? Stop here first

If your plan holds your employer's shares and they've grown a lot, don't roll everything over on autopilot. A tax rule called net unrealized appreciation (NUA) can let you move those shares into a regular brokerage account and pay income tax only on what the plan originally paid for them. The growth gets taxed later, at long-term capital gains rates, when you sell.

Roll the stock into an IRA first and that door closes for good. NUA's requirements are strict. Get a tax pro involved.

Do fees really matter that much?

Over a long retirement, yes. Very much. Half a percent a year sounds like nothing, but on a large balance over 20 or 30 years it adds up to real money.

Before deciding, pull these numbers together:

• Fund expense ratios in your old plan, which you'll find in the plan's annual fee disclosure.
• Plan administrative fees that might be charged to your account.
• IRA costs: account fees, trading costs, and any advisory fees.
• Product costs for whatever you'd buy inside the IRA, such as annuities or a gold IRA's storage and custodian fees.

So which one fits you?

Run through these:

1. Do I like my old plan's funds and fees? Then staying is fine.
2. Could I need money before 59½? The rule of 55 argues for keeping some of it in the plan.
3. Do I want more investment choice, or one simpler account? That points to an IRA.
4. Am I at a new job with a good plan? Moving the money there keeps life simple.
5. Do I own company stock in the plan? Look at NUA before you do anything else.

Want to look at every account you own at once? Our retiring-in-5-years checklist takes you through it.

Common questions

Is there a deadline to decide what to do with my old 401(k)?

Rarely. Many plans let you leave the money in place indefinitely. Plans can push small balances out on their own, though, and required minimum distributions kick in eventually, so check with your plan administrator.

Will I pay taxes if I roll my 401(k) into an IRA?

Not if it's traditional 401(k) money going to a traditional IRA, or Roth 401(k) money going to a Roth IRA, through a direct rollover. Moving traditional money into a Roth IRA is a conversion, and the converted amount is taxable.

Can I roll my 401(k) into a gold IRA?

Yes. A gold IRA is a self-directed IRA, so it takes a rollover like any other IRA. Before you do, read up on the costs and rules in how a gold IRA works, and on when it isn't a fit.

Does the rule of 55 apply to my IRA?

No. It applies only to the employer plan from the job you left in or after the year you turned 55. Once the money's in an IRA, the usual age 59½ rules take over.

Can I split my 401(k) between choices?

Often, yes. Many plans allow a partial rollover, so you can move some money to an IRA and leave the rest behind. Check what your plan permits.

We base our guides on primary sources such as the IRS, the Department of Labor, and federal regulators. Read our editorial policy. Spot an error? Tell us.