Should You Really Rollover a 401(k) To a New Employer? – Avoid This Mistake + FAQs

In many cases, yes – rolling over your old 401(k) into your new employer’s plan can be a smart move. It lets you keep all your retirement savings in one place, makes it easier to manage, and preserves the tax-deferred growth of your money (meaning you won’t pay taxes just for moving it).

If your new 401(k) has lower fees or better investment options than your old one, rolling over can even help your nest egg grow faster. Plus, it’s nice to have one login and one statement instead of juggling multiple accounts.

However, rolling over isn’t automatically the best choice for everyone. If your old 401(k) plan has exceptionally low costs or unique investment options you can’t get in the new plan, you might hold off.

Some people prefer to roll over into an IRA (Individual Retirement Account) they control, which can offer even more investment choices (thousands of funds, stocks, etc.), albeit with different considerations. And, of course, if you’re not careful, moving money around can lead to mistakes (like accidentally cashing out and triggering taxes 🥴).

Bottom line: compare the fees, investment choices, and any special features of your old 401(k) vs. your new one (and even an IRA) before deciding. Most of the time, a well-managed new employer plan is a great new home for your savings. To give you a snapshot, here are the key pros and cons of rolling over to your new employer’s 401(k):

🚫 Things to Avoid When Rolling Over a 401(k)

When deciding on a rollover, keep an eye out for these common pitfalls that could cost you money or hassle:

• Cashing out your 401(k) early: This is almost always a bad idea ❌. If you simply withdraw the money (instead of rolling it over), you’ll owe income taxes and a 10% early withdrawal penalty if you’re under 59½. You also lose all the future tax-free growth on that money. Sadly, about 4 in 10 people do cash out when leaving jobs, often thinking the balance is too small – but even a few thousand dollars can grow significantly over time. Unless it’s a true emergency, avoid draining your 401(k).

• Taking a “check” (indirect rollover): Whenever possible, do a direct rollover (trustee-to-trustee transfer) rather than having your old plan cut you a check. With a check, your employer must withhold 20% for taxes by law. You then have 60 days to deposit the full amount into the new plan or an IRA. If you’re late or don’t replace that withheld 20% out of pocket, the withheld amount becomes taxable (and penalized if you’re under 59½). 💸 In short, it’s easy to mess this up. Avoid the indirect rollover headache; do a direct transfer to be safe.

• Ignoring fees and investments: Don’t roll your money over without comparing investment options and fees. If your new employer’s 401(k) has high fees or poor choices, blindly rolling into it could hurt you. Likewise, not rolling over when your old plan was expensive would also hurt. Always check things like expense ratios, any management fees, and what funds or stocks you can invest in. You want to avoid moving from a good low-cost plan to a higher-cost one.

• Forgetting about old accounts: Maybe you choose not to roll over right away. That’s fine – as long as you don’t lose track. One thing to avoid is leaving behind “orphan” 401(k) accounts and forgetting about them. Over time, it’s easy to lose track of passwords, statements, or even forget the account exists (especially if the company changes plan providers). Also note: if your balance is small (usually under $5,000), your old employer may eventually force it out of the plan (either by mailing you a check or rolling it into a default IRA). Always stay on top of where your money is.

• Not checking the new plan’s rules: Before you initiate a rollover, double-check that your new employer’s plan will accept rollovers (most do, but a few might not). Also see if you need to wait until you’re eligible to join the plan – some companies have a waiting period (like 30 or 90 days). You might need to hold the old 401(k) for a bit before moving it. Make sure you fill out any necessary forms correctly. In short, paperwork mistakes are something to avoid – when in doubt, ask the plan administrator for help so you don’t accidentally do something that causes a tax event.

🔑 Key Terms: 401(k) Rollover Lingo Explained

To make an informed decision, it helps to understand some key terms and concepts related to 401(k)s and rollovers. Here’s a quick glossary:

• 401(k) Plan: A retirement savings plan offered by employers. You contribute money from your paycheck (often pre-tax, which lowers your taxable income). Many employers also match a portion of your contributions. Money in a 401(k) grows tax-deferred – you don’t pay tax on it until you withdraw. With a traditional 401(k), withdrawals in retirement are taxed as income. (Some plans offer a Roth 401(k) option – contributions are after-tax, but then withdrawals in retirement are tax-free.)

• IRA (Individual Retirement Account): A personal retirement account you can open on your own (not through an employer). You can roll your 401(k) money into an IRA when you leave a job. Like 401(k)s, Traditional IRAs are tax-deferred (you pay taxes at withdrawal) and Roth IRAs grow tax-free (you pay taxes upfront, no tax on qualifying withdrawals). IRAs often offer more investment choices than 401(k)s, but have lower annual contribution limits and different withdrawal rules.

• Rollover: In this context, a rollover means moving your retirement funds from one account to another without incurring taxes or penalties. For example, when you leave your job, you can “roll over” your 401(k) balance into your new employer’s 401(k) or into an IRA. A proper rollover keeps your money tax-sheltered.

• Direct Rollover: A transfer of funds directly from one retirement account to another. You never touch the money – it goes straight from your old 401(k) plan to your new plan or IRA. This is the safest, recommended way to move money because it avoids any tax withholding or deadlines.

• Indirect Rollover (60-day rollover): A rollover where your old plan sends the money to you (often as a check), and then you have up to 60 days to deposit it into the new retirement account. As mentioned, the old plan will withhold 20% for taxes, so you’d have to come up with that amount from other funds to roll over the full balance. If you miss the 60-day window, the distribution becomes taxable and potentially penalized. Indirect rollovers are tricky – you generally want to avoid them unless absolutely necessary.

• 59½ Rule (Early Withdrawal Penalty): Normally, retirement accounts are meant for retirement-age withdrawals. If you take money out of a 401(k) or Traditional IRA before age 59½, you’ll owe a 10% early withdrawal penalty on top of regular taxes, unless an exception applies. (Roth IRAs allow you to withdraw your contributions any time without penalty, but not the earnings.) This is why cashing out a 401(k) too early is painful.

• Rule of 55: A special rule for 401(k) (and 403(b) ) plans. If you leave your job (quit, laid off, or retire) in or after the calendar year you turn 55, you can withdraw from that employer’s 401(k) plan without the 10% penalty. This can be useful if you need to tap your 401(k) in your late 50s. Note: this rule does not apply to IRAs, and it only applies to the 401(k) of the employer you left at age 55+, not any earlier or later plans.

• Vesting: This refers to ownership of employer contributions. Your own contributions to a 401(k) are always 100% yours. But if your employer gives matching or profit-sharing contributions, those might vest over time (e.g., 25% per year). If you are not fully vested when you leave, the unvested portion of employer contributions is forfeited (you can’t roll over money that isn’t yours yet).

• Required Minimum Distribution (RMD): To ensure the government eventually collects taxes on tax-deferred savings, they require you to start taking money out at a certain age. As of now, RMDs kick in at age 73 (for those born 1951-1959) and will be 75 for younger folks due to recent law changes. Traditional 401(k)s and IRAs require RMDs. One perk of a 401(k) is that if you’re still working for that employer at 73+, you may be able to delay RMDs on that 401(k) until you retire. IRAs don’t have that exception (and Roth IRAs have no RMDs for the original owner at all).

• ERISA Protection: 401(k) plans are governed by a federal law called ERISA (Employee Retirement Income Security Act). One benefit of ERISA is that it generally protects 401(k) money from creditors and lawsuits. If you ever ran into serious debt or bankruptcy, funds in a 401(k) are typically shielded. IRAs have some protection too, but it’s not as uniform – in bankruptcy, up to about $1.3 million in IRA assets are protected by federal law (and more if it was rolled over from a 401(k)), and outside bankruptcy, state laws vary on how well they protect IRA assets. The key point: 401(k)s have very strong federal protections.

Detailed Examples: Real-Life 401(k) Rollover Scenarios

To see how these factors play out, let’s look at a few hypothetical scenarios. These examples show when rolling over is smart versus when it might not be the best move:

Evidence and Legal Considerations (Federal 🏛️ & State)

Rollover trends and data: The practice of rolling over 401(k) money is very common. In fact, IRAs (which many 401(k)s get rolled into) now hold even more money than 401(k) plans. As of 2024, Americans had about $8.9 trillion in 401(k) accounts and $15+ trillion in IRAs. That IRA total is huge partly because of rollovers – when people retire or change jobs, a lot of money flows from workplace plans into IRAs. Many others choose to roll into a new employer’s 401(k) instead, or sometimes leave the money in the old plan. Studies in recent years show a mix of behaviors: roughly half of people keep their 401(k) with the old employer for a while, others roll over to an IRA or new plan, and unfortunately some cash out. The key point is that rollovers are normal and supported by laws to be tax-free transactions if done right.

Tax rules on rollovers (federal law): A rollover, if done properly, is not a taxable event. The IRS allows you to transfer your retirement funds from one qualified plan to another without triggering taxes. To avoid taxes, you must roll over to another qualified account (like from a 401(k) to another 401(k) or IRA) and do it either directly or within that 60-day window if the money comes to you first. There’s no federal income tax on a direct rollover, and you won’t incur the 10% penalty either. (By contrast, if you cash out instead of rolling over, that distribution is taxable and penalized if you’re too young.) One thing to watch: if you roll a Traditional 401(k) into a Roth IRA, that counts as a Roth conversion – you’ll owe taxes on the converted amount (since Roth accounts are after-tax). Generally, you’d only do that if you’re prepared for the tax bill. Most people roll traditional-to-traditional (or Roth-to-Roth) to keep it tax-neutral.

Small balance rules: Under federal law, 401(k) plans can force out small accounts after you leave the company. If your balance is under $1,000, the plan can cash you out (sending you a check, with taxes and penalty on that money unless you roll it over quickly). For balances from $1,000 to $5,000, the plan can auto-roll your money into an IRA for you (typically an IRA with very low-risk, low-return investments) if you don’t respond with instructions. These rules exist so that plans can clear out tiny accounts, but they might not invest your money optimally. This is why if you have a small old 401(k), it’s often better to proactively roll it over to your new plan or an IRA you choose, rather than leave it idle.

401(k) loans when leaving: If you had taken a loan from your 401(k) and then leave your job, be aware that your loan usually comes due quickly. If you can’t repay it within the plan’s grace period, the outstanding loan balance is treated as a distribution (taxable income, plus penalty if under 59½). Recent federal law changes give you until the tax filing deadline of the year you left to come up with that money and roll it into an IRA, but that’s still a short window. Importantly, you cannot roll over an outstanding loan to a new employer’s 401(k) – it must be paid off or it will be defaulted. This is a consideration if you have an existing loan; you might plan to pay it off before rolling the rest of your funds.

Differences in state laws: While federal rules govern the tax aspects of rollovers, state laws come into play mostly around asset protection and taxation of distributions. The good news is that a direct rollover isn’t a taxable event in any state (states follow the federal lead on that). Where state differences matter is creditor protection. Some states fully protect IRA assets from creditors (similar to 401(k)s), while others offer less protection and rely on the federal bankruptcy limit (~$1.3 million for IRAs, although rollover IRAs often get separate protection). For example, states like Texas and Florida broadly shield IRA assets from creditors, whereas others may allow creditors to reach IRA funds outside of bankruptcy. So, if you’re very concerned about lawsuit or creditor protection and you live in a state with weaker IRA protections, you might lean toward keeping funds in a 401(k) (old or new) which has that strong ERISA shield. On the other hand, if your state fully protects IRAs, rolling to an IRA doesn’t expose you to more risk in that sense.

Federal age rules (55 vs 59½): We discussed the “Rule of 55” earlier – that’s a federal provision. It’s worth emphasizing: if you think you may need to access funds between age 55 and 59½, keeping money in the 401(k) of the job you left at 55+ is beneficial. No state can alter that federal early withdrawal exception for 401(k)s. IRAs uniformly require 59½ (except for certain specific hardship exemptions). Also, required minimum distribution ages are set by federal law (currently 73, moving to 75 in a decade or so), and state tax codes will tax those distributions according to their own rules. Some states don’t tax retirement income or give exemptions (which might influence where you retire, but not so much whether to roll over).

Notable court rulings: There have been court cases highlighting how 401(k)s and IRAs are treated under law. In Patterson v. Shumate (1992), the U.S. Supreme Court ruled that funds in an ERISA-qualified retirement plan (like a 401(k)) are generally shielded from creditors in bankruptcy. This affirmed that your 401(k) is off-limits to most creditors. Later, in Clark v. Rameker (2014), the Supreme Court held that inherited IRAs (ones you receive as a beneficiary) do not get bankruptcy protection, because they aren’t considered “retirement funds” of the owner. While this case was about inherited IRAs, it underscores that money you saved in a 401(k) and then rolled to your own IRA does retain protection (since it’s your retirement money), but if your heirs keep it in an IRA, their protection may vary. Bottom line: the law favors protecting retirement funds you set aside for yourself (especially in 401(k)s), and rollovers are designed to preserve that status.

Comparing Your Options: Old 401(k) vs New 401(k) vs IRA vs Cash-Out

When you leave a job, you generally have four options for your 401(k). Here’s a side-by-side comparison of these choices and when each might make sense:

1. Leave the money in your old 401(k)

Pros: You don’t have to do anything immediately – the money stays invested, and you keep the same funds and low fees (if your old plan was good). Your 401(k) retains its strong ERISA protection against creditors. If you separated from that job at age 55 or older, you preserve the ability to use the Rule of 55 for penalty-free withdrawals.
Cons: You generally can’t contribute to an old 401(k) once you’ve left the company, so the account might sit stagnant (apart from investment growth). Having multiple accounts can be hard to track over time. In some cases, plans charge ex-employees certain administrative fees. You’ll also need to keep track of plan communications (address changes, etc.). Eventually, you’ll have to take RMDs from that old 401(k) starting in your 70s if you haven’t moved it.

2. Roll over to your new employer’s 401(k)

Pros: Your retirement savings get consolidated with your current plan – one account to monitor, one set of fees. If the new 401(k) has better or cheaper investment options, your money benefits from that. You can continue contributing to the same account and get any employer match going forward (new contributions, not the rolled amount). Loans are usually available if needed. Also, if you plan to work past age 73, keeping money in the 401(k) means you won’t need to take RMDs from it while working.
Cons: You might have to wait until you’re eligible to join the new plan (some employers have a waiting period) before you can roll money in. The new plan might have limited investment choices or higher fees than you’d like. You are subject to the new plan’s rules – for example, some plans don’t allow partial withdrawals while you’re still employed (whereas in an IRA you have more flexibility). Overall, this option depends on the quality of your new 401(k) plan.

3. Roll over to an IRA

Pros: An IRA opened by you can offer the widest range of investment options – stocks, bonds, funds, even alternative investments – far beyond a typical 401(k) menu. You have full control over the account, and you can shop around for an IRA provider with low fees or specific services. It’s a good way to consolidate multiple old 401(k)s into one place. IRAs also allow flexible withdrawals: after age 59½ you can take out money anytime (no need to separate from an employer or deal with plan rules). You can also choose beneficiaries freely.
Cons: You can’t take loans from an IRA, unlike a 401(k). The level of asset protection for IRAs isn’t as uniform – it depends on bankruptcy law and your state (as discussed above). Managing an IRA means researching and choosing investments yourself (which can be a pro or con). Also, if you continue working and have an IRA, you’ll still have RMDs in your 70s (no “still working” exception). For very high earners, having a large Traditional IRA could complicate backdoor Roth conversion strategies (since the IRS looks at all your IRA assets when taxing conversions). In summary, an IRA is powerful but puts more responsibility on you to manage it well.

4. Cash out (withdraw the money) 🚫

Pros: The only real advantage here is immediate access to cash. If you urgently need funds and have no better source, cashing out provides money in hand. In some cases of extreme hardship or very small balances, one might consider it. Also, if you’re already over 59½ (or qualify for the 55 rule from that 401k), you can withdraw without the 10% penalty (but you’ll still owe taxes).
Cons: For most people, cashing out is a big setback to their retirement. You’ll likely pay a large tax bill and a 10% penalty if you’re younger than the eligible age. You remove that money from a tax-advantaged growth environment, losing years (or decades) of compound interest. It’s very hard to rebuild that lost savings. Statistics show many people who cash out small 401(k)s regret it later when that money could have grown. In general, you should avoid cashing out unless it’s truly necessary for your situation.

FAQ: Rolling Over 401(k) Accounts

Q: Do I have to roll over my 401(k) when I change jobs?
A: No – there’s no requirement. It’s your choice. You can leave it in the old plan, roll it to an IRA, or move it into your new employer’s 401(k) if you want.

Q: Can I leave my 401(k) with my old employer?
A: Yes – if your balance is above the minimum (often $5,000), most plans allow it indefinitely. Just keep your contact info updated so you don’t lose touch with the account.

Q: Is there a deadline to roll over after leaving my job?
A: No – no strict deadline. The 60-day rule applies only if you personally receive the funds first (indirect rollover). A direct rollover can be done anytime after you leave.

Q: Will I owe taxes or penalties on a rollover?
A: No – a properly done rollover is tax-free and penalty-free. You won’t owe income tax or the 10% early withdrawal penalty when moving your 401(k) directly to an IRA or new 401(k).

Q: Does it cost anything to roll over a 401(k)?
A: No – typically there’s no cost. 401(k) providers generally do not charge fees for transferring your balance in a direct rollover. (Always double-check with your plan, but out-of-pocket costs are rare.)

Q: Can I roll over my 401(k) if my new employer has no plan?
A: Yes – you can roll your old 401(k) into an IRA instead. A new employer plan is not required to keep your savings tax-deferred; an IRA can serve as the rollover destination.

Q: Can I roll over my 401(k) into a Roth IRA?
A: Yes – but you’ll owe taxes on the amount (this is a Roth conversion). It can make sense if you want tax-free growth later and are prepared to pay the tax bill now.

Q: Can I roll over money that isn’t vested?
A: No – any unvested employer contributions cannot be taken. You can only roll over the portion of your 401(k) balance that you are fully vested in (the part you 100% own).