Changing Jobs: Should You Roll Over Your 401(k)?

July 13, 2023
Consider these five strategies for handling an old 401(k).

Changing jobs? Here are five ways to handle the money in your employer-sponsored 401(k) plan, including some pros and cons of each. 

1. Leave it in your current 401(k) plan

The pros: If your former employer allows it, you can leave your money where it is. Your savings have the potential for growth that is tax-deferred, you'll pay no taxes until you start making withdrawals, and you'll retain the right to roll over or withdraw the funds at any point in the future.

The cons: You'll no longer be able to contribute to the plan, and the plan provider may charge additional fees because you're no longer an employee. Managing multiple tax-deferred accounts can also prove complicated. The IRS mandates required minimum distributions (RMDs) annually from all such accounts beginning at age 73 (assuming you're no longer working for the employer sponsoring the account).1 RMDs are calculated based on all of your tax-deferred retirement accounts. If you fail to correctly calculate your RMD or don't take it on time, you may owe a 25% penalty on the shortfall.2

2. Roll it into a new 401(k) plan

The pros: Assuming you like your new plan's costs, features, and investment choices, this can be a good option. Your savings have the potential for growth that is tax-deferred, and RMDs may be delayed beyond age 73 if you continue to work at the company sponsoring the plan.

The cons: You'll need to liquidate your current 401(k) investments and reinvest them in your new 401(k) plan's investment offerings, which will take time and some research. The money will be subject to your new plan's withdrawal rules, so you may not be able to withdraw it until you leave your new employer.

3. Roll it into a traditional individual retirement account (IRA)

The pros: Because IRAs aren't sponsored by employers—you own them directly—you won't have to worry about making changes to your account should you change jobs again in the future. IRA providers may also offer a wider array of investment options and services than either your old or new employer-sponsored plan. 

The cons: Once you roll your funds into an IRA, they may no longer be eligible for a future rollover into a 401(k) plan, and RMDs apply at age 73, regardless of whether you're employed. Also, you'll need to specify how the funds in your traditional IRA are to be invested. Until you do so, the money will remain in cash or a cash equivalent, such as a money market account, rather than invested. 

4. Convert into a Roth IRA

The pros: Withdrawals are entirely tax-free in retirement, provided you're over age 59½ and have held the account for five years or more. Roth IRAs are also exempt from RMDs.

The cons: Because Roth IRAs are funded with after-tax dollars, you'll have to pay taxes on your existing 401(k) funds at the time of the conversion. If you make a withdrawal before you're 59½, you may be subject to income tax on the earnings and a potential 10% early withdrawal penalty on the withdrawal amount, if you do not qualify for an exception.3

5. Cash out

The pros: In a word: liquidity. If you leave your job during or after the year you turn 55, you can withdraw money directly from your 401(k) without early withdrawal penalties.

The cons: Withdrawals are subject to mandatory 20% federal withholding and, in some cases, mandatory state withholding. However, if you fail to move the money into a qualified retirement plan within 60 days, it is taxed as ordinary income, plus a 10% penalty if you're under age 59½, which means you could end up paying significantly more than 20%, depending on your federal and state income tax rates. You may also negatively impact your retirement goals.

Effective January 1, 2023, SECURE Act 2.0 changed the age at which RMDs kick in from 72 to 73. An individual who turned 72 in 2022 is covered by the prior RMD rules.

2 SECURE 2.0 reduces the penalty for missing an RMD due for 2023 and beyond. It does not impact missed RMDs in 2022 or before. If you don't take your RMD by the IRS deadline, a penalty tax on insufficient or late RMD withdrawals applies: 50% for tax years before 2023 and, under the new law, 25% for 2023 onward. If the RMD is corrected timely, the penalty can be reduced. Follow the IRS guidelines and consult your tax advisor.

3 Read here for the rules on qualified distributions from a Roth IRA, or distributions that are not subject to tax or penalty.

A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options, which may include but not be limited to keeping your assets in your former employer's plan; rolling over assets to a new employer's plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply). Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. All expressions of opinion are subject to changes without notice in reaction to shifting market, economic, and geopolitical conditions. Data herein is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Investing involves risk including loss of principal.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

© 2023 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.