Most people have no idea what to do with their 401(k) when they change jobs. Here's the full breakdown of your options - and which one is almost always right.
When you leave a job, the account balance you've built in your 401(k) doesn't disappear - but you do need to decide what to do with it. The decision matters, because the wrong choice can cost you significantly.
You generally have four options: leave it where it is, roll it to your new employer's plan, roll it to an IRA, or cash it out. Here's what each actually involves.
If you have at least $5,000 in the account, most plans will let you leave it where it is after you leave. This is the easiest choice in the short term, but it has downsides: you'll end up with accounts scattered across former employers, you may lose access to convenient account management, and you may have limited investment options compared to an IRA.
This is fine as a temporary solution while you figure out the right move. It's not ideal as a long-term strategy.
Rolling over to your new employer's 401(k) keeps things simple and consolidates your accounts. You'll need to compare the investment options and fees at both plans - if your new plan has better options or lower fees, the rollover makes sense. Some plans also allow in-service loans, which can be useful in emergencies.
Rolling to an IRA (individual retirement account) usually gives you the widest investment options and most flexibility. IRAs at brokerages like Fidelity, Vanguard, or Schwab offer low-cost index funds and broad access to the markets. For most people, rolling a 401(k) to an IRA with a reputable brokerage is the right long-term move.
Cashing out your 401(k) when you leave a job is almost always a bad decision. You'll owe income taxes on the full amount, plus a 10% early withdrawal penalty if you're under 59.5. Depending on your tax bracket, you could lose 30-40% of the balance immediately. The compounding you would have earned on that money over decades is gone.
Even if you're in financial difficulty, there are almost always better options than cashing out retirement savings: a hardship withdrawal (which still triggers taxes but waives the penalty in some circumstances), a 401(k) loan (which you repay to yourself), or other borrowing. Treat your retirement account as untouchable except in genuine emergencies.
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