Yes—usually. After leaving a job, you can generally move an eligible 401(k) distribution to an IRA or to your new employer’s retirement plan if that plan accepts rollovers. You may also be able to leave the money in your former employer’s plan. The right choice depends on the account type, the distribution you receive, each plan’s rules, costs and investment menu, and how the transfer is handled.
What happens to your 401(k) when you leave a job?
Changing employers does not automatically close your 401(k). In many cases, you have several choices: keep the account in the former employer’s plan, transfer eligible assets to the new employer’s plan, move them to an IRA, or take the money as cash. Your former plan’s rules and the receiving account determine which choices are actually available.
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A new employer is not required to accept incoming rollovers. Before requesting a distribution, ask the new plan administrator whether it accepts rollovers, which account types it accepts, and what paperwork or check instructions it requires. An IRA provider must also be able to accept the particular distribution you are moving.
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The Internal Revenue Service describes the basic process this way: “You can ask your plan administrator to make the payment directly to another retirement plan or to an IRA.” That direct-transfer approach is usually the simplest way to avoid withholding problems.
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This article covers general U.S. rules. Tax results can differ according to whether the money is pre-tax or Roth, the type of distribution, and your personal circumstances. Confirm the details with both plan administrators and, when the tax consequences are significant, a qualified tax professional.
Your four main choices after changing jobs
| Choice | What to confirm | Main considerations |
|---|---|---|
| Leave the money in the former employer’s plan | Whether the plan lets former employees keep their accounts and whether a small-balance distribution notice applies | Compare expenses, investments, services and account features. Keep your address and contact information current so you receive notices. |
| Roll into the new employer’s plan | Whether the plan accepts rollovers and which assets or account types it accepts | Compare the new plan’s costs, investment choices, services and distribution rules with the old plan. |
| Roll into an IRA | Whether the IRA accepts the distribution and how you will invest the money | Compare fees, investment choices, services and tax treatment. An IRA is not automatically better than an employer plan. |
| Take a cash distribution | How much is taxable, how much will be withheld, and whether an additional tax or exception applies | Money you do not roll over is generally taxable. A 20% withholding rule generally applies to an eligible taxable distribution paid to you, and a 10% additional tax may apply before age 59½ unless an exception applies. |
The Department of Labor recommends comparing the practical features and costs of your alternatives rather than assuming that one destination is best for everyone.
Why a direct rollover is usually the safer method
With a direct rollover, your former plan sends the eligible amount straight to the new employer plan or IRA. The payment may be made by a check payable to the receiving account rather than to you personally. Because the money does not pass through your hands, mandatory 20% withholding generally does not apply to the amount transferred directly.
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Direct-rollover checklist
- Ask the receiving plan whether it accepts your rollover. Confirm the eligible source, account type and any required forms.
- Request the old plan’s rollover paperwork. Tell the administrator that you want a direct rollover, not a payment to yourself.
- Use the exact payee and delivery instructions. A check may need to be payable to the receiving plan or its custodian for your benefit.
- Track the transfer. Keep copies of the election, confirmation number, check details and the date the receiving account posts the money.
- Review the new account. Verify that the full eligible amount arrived and that it is coded in the intended tax category.
How an indirect rollover works—and why it is easier to get wrong
An indirect rollover occurs when the plan pays the distribution to you first. For a typical eligible distribution, you generally have 60 days from receipt to deposit the money into an eligible employer plan or IRA.
The plan generally withholds 20% of the taxable amount when it pays an eligible distribution to you. Suppose the eligible distribution is $10,000. You might receive $8,000 after withholding. To roll over the entire $10,000, you generally must deposit the full amount into the receiving account, using $2,000 from other funds to replace the withholding. If you deposit only the $8,000 you received, the $2,000 withheld is generally not part of the rollover and may be taxable.
Indirect-rollover steps
- Confirm eligibility before accepting the check. Ask the former administrator which portion can be rolled over and whether any amount is excluded.
- Record the date you receive the payment. The usual 60-day period runs from receipt.
- Calculate the gross distribution. Use the amount before withholding, not merely the net amount deposited in your bank account.
- Set aside replacement funds. If 20% was withheld and you want the entire distribution rolled over, arrange to add that amount from other resources.
- Deposit the rollover within 60 days. Follow the receiving plan’s instructions and retain proof of the deposit date and amount.
- Report the transaction accurately. A rollover is reportable even when it is not taxable; keep the plan’s tax forms and your deposit confirmation for your tax return records.
If circumstances prevent a timely deposit, do not assume the deadline is automatically waived. Contact the plan administrator and a tax professional promptly because the treatment of a late rollover depends on the facts and applicable IRS procedures.
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Tax treatment depends on the destination and distribution type
Moving eligible pre-tax 401(k) money to an eligible pre-tax employer plan or traditional IRA is generally tax-deferred. The transfer itself usually does not create current income when handled correctly, although it remains reportable.
A rollover to a Roth destination can make previously untaxed amounts taxable in the year of the conversion. Before choosing a Roth account, identify the source of the money and ask how the receiving institution will report the transaction.
Cash that is not rolled over is generally included in taxable income. If you are under age 59½, the taxable amount may also be subject to a 10% additional tax unless an exception applies. The age threshold is not a guarantee that an exception is available; determine whether a specific exception fits your situation.
Withholding is not the same as your final tax bill. The 20% amount withheld is generally a payment toward taxes, while the amount ultimately owed depends on your income, deductions, tax rate and whether the distribution was eligible for rollover.
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Distributions that cannot be rolled over
Not every payment from a 401(k) qualifies. IRS guidance identifies several examples of amounts that are generally ineligible or subject to special restrictions:
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- Required minimum distributions.
- Hardship distributions.
- Certain corrective distributions.
- Some periodic payments.
- Other specified payments that the tax rules exclude from rollover treatment.
Because a single account can contain more than one type of money or payment, ask the former plan administrator to identify the eligible and ineligible portions before you elect a rollover. Do not assume that the entire check can be transferred merely because it came from a 401(k).
Small balances can be moved without your consent in some cases
Former employers may use involuntary-distribution rules for small accounts. Department of Labor participant guidance describes the following thresholds:
- A plan may make an immediate distribution without your consent when the balance is below $5,000, subject to the plan’s rules.
- For an involuntary distribution above $1,000, the plan generally must automatically roll the funds into an IRA it selects unless you choose another option.
These rules do not mean every plan will act identically. Read the notice from the former plan, check the election deadline and provide a current mailing address. If you do nothing, the plan’s default process may determine where the money goes.
How to decide where the money should go
Compare fees and investment choices
Request the expense information for both employer plans and, for an IRA, the account and investment costs you would pay. Compare the available investments, administrative services and any limitations that matter to you. A lower-cost option is not useful if it lacks the investments or services you need, and a broader menu can carry higher expenses.
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Consider account features and future administration
Employer plans and IRAs can differ in how distributions, beneficiary designations, investment changes and account communications are handled. Ask who will service the account, how statements are delivered and what happens if you later change jobs again.
Check tax compatibility
Identify whether the old account is pre-tax, Roth or contains more than one source. Confirm that the receiving account can accept each source and learn whether moving untaxed money to a Roth destination would create taxable income.
Do not let convenience hide a deadline
Leaving the balance in the old plan may be allowed, but a plan can later send notices about a small-balance distribution. An IRA may be easy to open, while a new employer plan may offer consolidation. Make the choice deliberately and retain the account information either way.
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- Collect the account facts. Obtain the latest statement, identify the account type and ask whether any pending distribution or special source is present.
- List the available destinations. Confirm whether the old plan permits you to remain, whether the new plan accepts rollovers, and whether the IRA you are considering accepts the money.
- Compare the options. Review fees, investments, services, tax treatment and the administrative burden of keeping more than one account.
- Choose a direct rollover when appropriate. This generally avoids mandatory withholding on the amount transferred directly.
- Confirm the exact transfer instructions. Check the payee name, mailing address, electronic-transfer details and any forms required by both administrators.
- Verify completion. Match the amount received to the eligible amount sent, then save confirmations and tax documents.
- Monitor notices. Update your address and review future statements so an unclaimed or small balance does not move under a default rule without your awareness.
Common mistakes and how to avoid them
- Assuming the new plan must accept the rollover. Acceptance is optional, so obtain confirmation before requesting the distribution.
- Requesting the check in your own name without planning for withholding. A participant-paid distribution generally triggers 20% withholding and starts the 60-day clock.
- Rolling over only the net check. To move the full gross distribution, you generally need to replace the withheld amount from other funds.
- Including an ineligible payment. Required minimum distributions, hardship payments and certain other amounts generally cannot be rolled over.
- Treating a Roth move as automatically tax-free. Untaxed money transferred to a Roth destination can create taxable income.
- Ignoring a small-balance notice. A plan may distribute or automatically roll over a small account under the applicable thresholds.
- Failing to keep records. Save the election form, check or transfer confirmation, deposit date, amount and tax forms.
Key numbers to remember
| Number | What it means | Qualification |
|---|---|---|
| 60 days | Typical deadline for depositing an eligible distribution paid to you into another eligible plan or IRA | IRS participant guidance; applies to the usual indirect-rollover situation. |
| 20% | General mandatory withholding on the taxable portion of an eligible employer-plan distribution paid to the participant | IRS participant guidance; direct rollovers generally avoid this withholding on the amount transferred. |
| $5,000 | Balance below which a plan may make an immediate distribution without consent | Department of Labor participant guidance; plan rules and notices control the actual process. |
| $1,000 | Threshold referenced for automatic IRA rollovers of certain involuntary distributions above that amount | Department of Labor participant guidance; the participant can generally elect another option before the deadline. |
| Age 59½ | Age before which a 10% additional tax may apply to a taxable early distribution | IRS participant guidance; exceptions can change the result. |
Bottom line for a job change
You can generally roll over an eligible 401(k) distribution when you change jobs, but the destination and transfer method matter. First confirm that the new plan or IRA accepts the money and that the specific distribution is eligible. Compare the old plan, new plan and IRA on fees, investments, services and tax treatment. When possible, use a direct rollover; it usually avoids the 20% withholding and the risk of missing the 60-day deadline that accompany a payment made to you.
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