Key Takeaways
- Your 401(k) is safe—don't panic
- Cashing out costs 30-50% in taxes and penalties
- Rollover to IRA gives you the most flexibility
Your 401(k) Is Safe
"What happens to my 401(k) when I leave?" — It's YOUR money. It stays yours.
The Most Important Thing to Know
Your 401(k) belongs to you. Your former employer cannot take it, reduce it, or do anything to it. It will sit in your account until you decide what to do with it.
Don't let fear push you into a costly mistake.
Your Four Options
| Option | Pros | Cons |
|---|---|---|
| 1. Leave it with former employer | Easy, no action needed | Limited investment options, may have fees |
| 2. Roll over to IRA | Most flexibility, best investment options | Requires action |
| 3. Roll to new employer 401(k) | Consolidation, possible loan provision | Depends on new plan quality |
| 4. Cash out | Immediate cash | Lose 30-50% to taxes and penalties |
2025 Contribution Limits (For Reference)
| Category | 2025 Limit |
|---|---|
| Employee deferral | $23,500 |
| Catch-up (age 50-59 or 64+) | $7,500 additional |
| Super catch-up (ages 60-63) | $11,250 additional (NEW - SECURE 2.0) |
| Combined employer + employee | $70,000 |
Option 1: Leave It (If Allowed)
Many plans let you keep your account if balance is over $7,000 (raised from $5,000 under SECURE 2.0). This buys you time to decide properly.
When this makes sense:
- You're overwhelmed and need time
- You like the plan's investment options
- Balance is under $5,000 (they may force distribution)
Option 2: Rollover to IRA (Usually Best)
Rolling to an IRA gives you:
- Thousands of investment options (vs. ~20 in most 401ks)
- Lower fees (often)
- No dependence on former employer's decisions
- Easier to manage multiple old accounts
How to do it:
- Open IRA at any brokerage (Fidelity, Schwab, Vanguard)
- Request "direct rollover" from your 401(k) administrator
- Check: money should go to new IRA, not to you
- No taxes if done properly
Option 3: Roll to New Employer's 401(k)
Makes sense if new plan has:
- Great fund options with low fees
- Loan provision you might use
- You want everything in one place
Option 4: Cash Out (Almost Never)
| Amount | Taxes & Penalties | You Get |
|---|---|---|
| $30,000 | ~$12,000 | ~$18,000 |
| $50,000 | ~$20,000 | ~$30,000 |
| $100,000 | ~$40,000 | ~$60,000 |
Plus you lose decades of compound growth.
The Alarming Statistics (2025 Data):
- 41.4% of workers cash out their 401(k) when changing jobs
- Of those who cash out, 85% take the entire balance
- Only 24.4% properly roll over their accounts
- 31.9 million forgotten 401(k) accounts exist (average balance: $66,691)
- Workers in their 20s cash out at a 51% rate
Don't be part of these statistics.
The Rule of 55 Exception
If you leave your job in the year you turn 55 or older, you can withdraw from THAT 401(k) without the 10% early withdrawal penalty.
Important details:
- Must be the 401(k) from the job you left
- If you roll it to an IRA, you lose this option
- Still owe income taxes (just not the penalty)
This is one reason to leave funds in your 401(k) if you're 55+.
What is the "Rule of 55" for 401(k) withdrawals?