What you do with an old 401(k) after a job change isn’t the simple decision you may think it is. Your decision depends on age, income, investment preferences, timelines, tax situation, and long-term financial priorities.
Here are three commonly searched questions or concerns associated with deciding what to do with a 401(k) after changing jobs:
- “Should I roll over my 401(k) to an IRA or leave it with my old employer?”
- “What are the tax consequences if I cash out my 401(k) after leaving my job?”
- “Can I move my old 401(k) into my new employer’s plan?”
The answers to these questions become more important after you decide to change jobs.
In our blog, we’ll explore answers to these questions further and provide insight into how you can make thoughtful financial decisions if you’re planning to change jobs or have recently changed jobs.
Know Your Options: Leave It, Rollover IRA, or Roth Conversion
You typically have three main choices if you’ve left a job with a 401(k). Each path has trade-offs. Understanding which is the right fit starts with how the account fits into your broader financial planning strategy and your current stage of life:
- Leave it in your former employer’s plan: This can be a simple option if it offers low fees and solid investment choices, but you’ll lose the ability to contribute and may have limited support or access. It can also be easy to lose track of the investments over time, especially if you change jobs again.
- Roll it over into a traditional IRA: An IRA may offer a broader range of investments, more control, and the ability to consolidate multiple accounts, but it’s important to compare fees and understand how it fits into your overall financial planning and tax strategy.
- Convert it to a Roth IRA if it makes tax sense: Converting to a Roth IRA could be a strategic move if you’re in a lower-income year. Though you’ll pay taxes on the conversion, future growth and qualified withdrawals may be tax-free. This option works best when coordinated with a long-term tax and investment strategy.
Yes, you can roll over your current employer’s 401(k) balance into your new employer’s 401(k) plan, and it is legal, provided the new employer’s plan allows such rollovers (most do, but confirm with the plan administrator). This is considered a direct rollover if the funds are transferred directly between the plans without you touching the money.
Key Points:
- Legality: Direct rollovers are permitted under IRS rules, as outlined in the Internal Revenue Code Section 401(a)(31).
- Adverse Consequences: If the transfer is a direct employer-to-employer rollover and you never receive the funds, there are typically no adverse tax consequences:
- No Taxes or Penalties: Since the money moves directly between qualified retirement plans, it’s not treated as a taxable distribution. You avoid the 20% mandatory withholding tax and the 10% early withdrawal penalty (if under 59½).
- No Loss of Tax-Deferred Status: The funds continue to grow tax-deferred in the new 401(k).
- Potential Considerations:
- Ensure the new 401(k) accepts rollovers and check for any restrictions, such as waiting periods before you can roll funds in.
- Compare the investment choices and fees in the new 401(k) plan with your current plan. Some 401(k) plans have limited or higher-cost options than others or an IRA.
- Confirm that all funds are fully vested before transferring if your current employer’s 401(k) includes employer matching contributions. Unvested amounts may be forfeited.
- Coordinate with both plan administrators to ensure a smooth transfer. You’ll likely need to complete rollover paperwork for both plans.
- Direct rollovers are usually processed within a few weeks, but delays can occur. Ensure the transfer is completed within 60 days if an indirect rollover (where you receive a check) is mistakenly done to avoid tax issues.
- You could also roll the 401(k) into an IRA instead of the new employer’s plan, offering more investment flexibility and potentially lower fees. However, this depends on your financial goals and whether you prefer consolidating retirement accounts in one place.
Consider working with a Birmingham CFP® professional to discuss which option is right for you.
Compare Fees, Services, and Investments (Per DOL Guidance)
The Department of Labor recommends that anyone considering a 401(k) rollover compare the fees, investment options, and services between their previous employer’s 401(k) and any potential IRA. This is especially true if you’re working with a financial advisor.
You shouldn’t assume an IRA is always the right choice. A thoughtful comparison is key. When you work with a fee-only fiduciary financial advisor, they can guide you through the decision-making process, including:
- Reviewing whether your 401(k) has low-cost index funds or proprietary options with higher fees
- Checking if your plan offers guidance or retirement planning tools
- Comparing those features against other options that may be suitable for your situation
RMDs and Age-Based Planning Considerations
The legal requirements and clarifications behind the RMD and age-based financial planning considerations are also important. This IRS provision offers a potential tax-planning opportunity for high earners working past traditional retirement age, especially those looking to manage taxable income in retirement.
RMD Age Requirement:
Under current IRS rules, you must begin taking required minimum distributions (RMDs) from traditional IRAs and most 401(k)s starting the year you turn 73 (or 75 if born in 1960 or later, per SECURE Act 2.0). The first RMD can be delayed until April 1 after turning 73, but each subsequent RMD must be taken annually by December 31.
Still Working Exception (401(k) Only):
If you’re still employed and do not own more than 5% of the company you work for, you may delay RMDs from your current employer’s 401(k) until you retire. This rule does not apply to IRAs or 401(k)s from previous employers, as those still require RMDs once you reach the required age (73), even if you’re still working.
Rollover Implication:
Rolling an old 401(k) into a new employer’s plan (if the plan allows it) may allow you to postpone RMDs on those funds as long as you’re still employed and meet the conditions above.
This IRS provision offers a potential tax-planning opportunity for high earners working past traditional retirement age, especially those looking to manage taxable income in retirement.
Watch our video on how to manage taxes during your working years.
Is This a Lower-Income Year? Consider a Roth Conversion
If your job change came with a pay cut or a temporary pause in income, this might be a smart time to consider a Roth IRA conversion.
Converting traditional 401(k) or IRA funds into a Roth IRA means paying taxes now on the converted amount, but if done correctly, future growth and withdrawals can be tax-free.
Doing this in a lower-income year might reduce the overall tax expense for the conversion. However, this strategy should align with your broader tax planning and investment management approach, ideally guided by a financial advisor in Birmingham who understands your big picture.
Compare Investment Options: 401(k) vs. IRA
Not all 401(k)s are created equal. Some employer plans offer high-quality, low-cost investment alternatives and helpful planning tools, while others are limited to a narrow menu of expensive or outdated investment choices.
Rolling over into an IRA can offer:
- Broader investment options
- More control over asset allocation and diversification
- Better tax strategies through asset location and withdrawal sequencing
However, it may also come with increased advisor fees or more responsibility on your part for managing the portfolio.
At BCR Wealth Strategies, we help clients assess whether an IRA’s increased flexibility supports their financial goals or whether they would benefit from a 401(k) ‘s simplified structure.
Does It Fit Your Tax Strategy?
Rolling into an IRA isn’t just an investment decision. It’s also a tax strategy decision. An IRA may:
- Offer more control for Roth conversion planning
- Provide opportunities to place tax-efficient investments in the correct account (known as asset location)
- Create tax challenges if you plan to use the backdoor Roth IRA strategy (due to the pro-rata rule)
Before rolling over a 401(k), it’s worth asking whether the move will help or hinder your broader financial planning strategy. Coordinating with your advisor and tax professional is a must for making the right decision.
Consider Advice, Support, and Simplicity
Another important factor: Does your current 401(k) give you access to personal financial advice? Some plans provide general advice or even telephone support. But many don’t offer the comprehensive financial planning services you’d expect from a dedicated wealth management professional.
If your 401(k) lacks this level of support, moving to an IRA and working with a local financial advisor can help you:
- Build a retirement income strategy
- Coordinate tax planning
- Rebalance investments with your whole portfolio in mind
- Transition from working to retirement years
Additionally, if you’ve had several jobs and multiple 401(k)s, consolidating accounts can reduce paperwork, simplify withdrawals, and prevent administrative headaches for your heirs at the end of your life.
Lump Sum vs. Pension: Know What You’re Giving Up
If you’re leaving a job and are offered a lump sum payout from your pension, think carefully before taking it. Some states, like Alabama, don’t tax pension income at the state level, but once you roll that lump sum into an IRA or other retirement account, future withdrawals may be taxed differently. Keeping pension funds separate can preserve favorable tax treatment.
You’ll also want to assess the financial health of the pension plan itself. Is the company or plan stable enough to reliably provide lifetime income? Or would you be better off investing the lump sum on your own?
Comparing the lump sum amount to the present value of guaranteed monthly payments can help clarify the better option for your retirement goals.
Have More Than One Plan? Think About Your Contribution Strategy
In some cases, you may be eligible to participate in more than one 401(k) during a calendar year. For example, if you switch jobs mid-year and both employers offer a retirement plan.
You can’t exceed the employee deferral limit across all plans ($23,500 for 2025, or $31,000 if 50+), but each plan’s employer match is separate. So, coordinating contributions across plans could help you maximize employer matches and get the most from both benefits.
Working with a financial advisor in Birmingham can help you avoid unintentional excess contributions in this area.
Don’t Let Inertia Make the Decision for You
It’s easy to leave an old 401(k) untouched while settling into a new job. But over time, forgotten accounts can lead to:
- Overlapping investments and excess risk
- Missed rebalancing opportunities
- Inconsistent beneficiary designations
- Increased risk of fraud or lost login information
Reviewing and consolidating accounts can streamline your finances and make tracking progress toward your long-term goals much easier.
Final Thoughts
At BCR Wealth Strategies, our Birmingham-based team of financial planners can help you evaluate these decisions carefully and thoughtfully, so you can make informed choices without second-guessing yourself down the road.
If you’re unsure whether to roll over, convert to Roth, or leave your 401(k) where it is, consider setting up a complimentary call with us.
