401(k) Rollover Options: What To Do If You Lose Or Change Your Job

Many Americans will, at some point, face the decision of what to do with an old 401(k) account as they switch jobs or find themselves out of work. If you lose or change your job, it’s important to consider your options for your 401(k), the advantages of each account type, the drawbacks, your own financial situation and the tax implications.

Depending on how much you have invested in your plan, you may have limited time to make this decision. In some cases, your former company can make the decision for you.

• If you have less than $1,000, your ex-employer can just cash you out or roll the money into an IRA. If you’re cashed out, you can still roll over the money into another account, but you typically must do so within 60 days.
• If you have between $1,000 and $7,000, your ex-employer can move the money into an IRA of its choice. If you don’t like that IRA, you can always move it. In some cases, your company may also be able to do a rollover into your new employer’s 401(k).
• If you have more than $7,000 in your 401(k), your company must await your instructions on how to proceed. You could leave your money in your old 401(k), have it moved to an IRA, have it rolled into a new 401(k) or cash it out.

The specific rules vary from employer to employer, and the rules that apply to your old 401(k) can be found in the plan’s documents. So check there first if you’re unsure how to proceed. A financial advisor can help you navigate this process and make smart moves.

Here are four options for a 401(k) rollover and when each might be right for your situation.

1. Transfer to a new company’s 401(k) plan

A transfer to your new company’s 401(k) plan may be the easiest option. You’ll keep all the money in one place, and you may be able to access some professional advice as part of your new plan, too. A transfer to a new 401(k) also wins from a tax perspective, because you won’t incur taxes as long as you transfer to the same type of 401(k) at your new employer.

In addition, having all your money in a 401(k) protects you from the pro-rata rule. This rule could really trip you up and limit the effectiveness of a backdoor Roth IRA, which is a useful strategy if you earn too much to contribute directly to a Roth IRA.

One downside, however, is that your new plan may have unattractive investment choices, like expensive funds. So you’ll want to consider your investment options, too.

2. Rollover into a traditional IRA

A rollover into a traditional IRA is another good choice because you’ll still enjoy substantial tax benefits in that account. You’ll be able to defer taxes on any gains, and you can continue to add to your IRA, up to $7,000 or $8,000 annually in 2025, depending on your age and enjoy the tax breaks on any income you stash there.

Another advantage is that you’ll generally get more investment choices than with a 401(k), so you can pick a top-performing low-cost index fund or individual stocks. Some might see the flexibility of a traditional IRA as a disadvantage, because it requires them to make investment decisions, and so many people will need the advice of a financial professional. Another option is opening an IRA with one of the best robo-advisors and automating your investing decisions.

If you opt to roll over your money into an IRA, here are the best brokers for a 401(k) rollover.

3. Rollover and convert to a Roth IRA

Another option is to roll over your 401(k) into a Roth IRA. The Roth IRA provides enviable tax advantages, such as never paying taxes on gains or withdrawals. It also offers attractive estate planning advantages and no RMDs.

That said, you should know that rolling a traditional 401(k) into a Roth IRA will create a tax liability. But if you have a Roth 401(k), you can roll your money into a Roth IRA without creating extra taxes.

This Roth IRA calculator can help you tally up how much tax-free money you can amass.

4. Rollover into an annuity

Another option is to roll your 401(k) into an annuity, which helps you avoid taxes on your rollover.

An annuity can provide stable income with a guaranteed return. When participants tap the annuity, they can receive a regular pension-like income. Many savers like this security, as well as the fact that they don’t have to be active investors.

That said, annuities are notorious for high sales commissions that can sometimes be hidden in contracts. Annuity contracts can also be incredibly complex, with all types of restrictions and caveats.

Another downside is that once you buy the annuity, the money is typically locked in for some period, so it may not be readily accessible if you have an emergency and need cash. If you’re still within the lock-up period, you’ll usually have to pay a hefty surrender fee to access your money.

Annuities divide many financial experts because of their pros and cons — in particular their costliness and complexity. If an annuity appeals to you, speak with a fee-only financial advisor who is a fiduciary for guidance.

Avoid taking the cash

If you’re leaving or losing a job and need money, it can be tempting to cash out your 401(k). But more than half of Americans have said they already feel behind on retirement savings, according to one Bankrate survey. If you take a withdrawal now, that’s less money you’ll have in the future.

Also, if you take money out of a 401(k) before retirement age (59½), the IRS will hit you with a 10 percent penalty on top of the taxes that you’ll already owe. In addition, you may have to sell investments at a bad time, thereby locking in loss, and you’ll lose any potential appreciation over your working years, hitting your nest egg even more.

What to consider when rolling over a 401(k)

If you’re not required to move your money from your old 401(k), you could consider leaving the account open. Your investments will remain active, but you can’t make additional contributions. Ask yourself a few questions to see if you really do need to do a 401(k) rollover.

• Does a new rollover account offer valuable features such as greater investment options or cheaper funds? If so, it could make sense to roll over your account.
• Do you value the convenience of having your money consolidated in one place? If so, it could make sense to roll over your 401(k).
• If you roll over your 401(k) to an IRA, do you have the ability or resources to manage it yourself? If you’re not up to that job, it may make sense to stick with your current plan or open an IRA with a robo-advisor.

Remember, while you may have the option to leave your 401(k) alone when switching jobs, it’s generally not advisable unless your former employer’s plan offers terrific features other plans don’t. Not only might you struggle to manage multiple retirement accounts, but you also risk forgetting about that money if it’s not a particularly large sum.

Bottom line

Workers have a few 401(k) rollover options, but the right rollover will differ from person to person. You may want to consult a financial advisor to help you navigate the process.

It’s also important to avoid tapping your retirement funds early if possible. Leaving your money earmarked for retirement could help you avoid a financial shortfall later in life.

— Maurie Backman contributed to an update of this story.