Roughly 9 million Americans change jobs every year according to BLS Job Openings and Labor Turnover Survey data. Each one faces a decision on the 401k account they leave behind. There are four choices. You can leave the money in the old plan. You can roll it into the new employer's plan. You can roll it to an Individual Retirement Account. You can cash out. Three of those four choices come with significant hidden costs. The right answer depends on the size of your balance, the quality of your old plan, the quality of your new plan, and what you plan to do with the money over the next thirty years.
Leaving the money in the old plan is fine if the plan is good. Most people do not check whether their old plan is good. A good plan has institutional share class index funds with expense ratios under 0.10 percent, a low recordkeeping fee under $50 per year, and a stable employer offering reasonable transparency. Federal employees with TSP balances should leave them in TSP because the G fund and L funds are nearly impossible to replicate elsewhere. Large corporate plans at companies like Microsoft, IBM, Google, and Apple are typically excellent and worth keeping. Small plan 401ks at sub-100-employee companies are often expensive and worth rolling out.
Rolling to the new employer's 401k makes sense in three situations. First, if the new plan accepts rollovers and offers institutional share class index funds at low cost. Second, if you want consolidated balances for simplicity. Third, if you plan to use the new plan's loan provision in the future. Rolling in increases the loan limit basis. The mechanical process takes 4 to 6 weeks for a direct trustee-to-trustee transfer. Indirect rollovers where the check comes to you require depositing the funds within 60 days and trigger 20 percent mandatory withholding that you have to make up out of pocket.
Rolling to an IRA at Fidelity, Vanguard, or Schwab is the default recommendation from most fiduciary financial planners for one structural reason. IRAs offer wider investment choice. The four largest 401k plans in America offer about 24 fund options on average. An IRA at Fidelity has access to 3,400 mutual funds and every ETF traded in the United States. The IRA route allows tax-loss harvesting if invested in taxable instruments wrapped, supports Roth conversions in slow years, and gives you full control over fund selection. The cost of the rollover at Fidelity, Vanguard, and Schwab is zero.
Cashing out is the worst option. The IRS treats a 401k cash distribution before age 59 and a half as ordinary income plus a 10 percent early withdrawal penalty. A $50,000 balance taken as cash at age 35 in the 22 percent federal bracket produces $11,000 in federal tax, $5,000 in early withdrawal penalty, plus state tax depending on where you live. The $50,000 becomes about $32,000 net of tax. The $50,000 left invested for 30 years at a 7 percent real return becomes $381,000. Cashing out costs you nearly $350,000 in real future dollars.
The Rollovers as Business Startups structure, called ROBS, allows entrepreneurs to roll a 401k or IRA into a C corporation to fund a business launch without triggering the early withdrawal penalty. The structure requires creating a C corp, adopting a 401k plan inside the C corp, rolling the prior balance into the new C corp 401k, and using the funds to purchase stock in the C corp. ROBS specialists like Guidant Financial and Benetrends charge $5,000 to $7,000 in setup fees plus annual administration. The structure works but introduces audit risk and liquidity tradeoffs. Most planners recommend it only when alternative funding has been exhausted.
The choice between Traditional and Roth deserves attention. If your old 401k held pre-tax money, rolling to a Traditional IRA preserves the tax-deferred status. Rolling to a Roth IRA triggers a taxable event on the converted amount. The math favors a partial Roth conversion in years when income is low, such as the year of a job change with limited W-2 wages. A 25 percent bracket worker who converts $20,000 in a year of $40,000 of W-2 income may pay 22 percent on the conversion. The same conversion at $150,000 of income next year would face the 24 to 32 percent brackets.
Plan administrators are required by Department of Labor regulation to provide a Special Tax Notice within 30 days of a separation event. The notice spells out distribution options, withholding rules, and rollover deadlines. Many participants miss the 60-day clock because the paperwork sat unopened. Set a calendar reminder. Initiate the rollover before the 60 days run. The right move for most people leaving a job with a balance under $250,000 is a direct rollover to a low-cost IRA at Fidelity, Vanguard, or Schwab, with the money invested in a target date fund or a three-fund index portfolio while you decide on a longer term plan. The wrong move is doing nothing for two years and forgetting the account exists.