Options for Rolling Over a Retirement Account After a Job Change

Why this decision matters

When you leave an employer, the retirement account you built—401(k), 403(b), or similar—doesn’t disappear. Your choice to leave the money, move it, or withdraw it has immediate tax consequences, affects future investment options and fees, and can change how easy it is to manage savings across jobs. Done right, a rollover keeps money working for retirement; done wrong, you can lose a large chunk to taxes and penalties.

Authoritative guidance on rollover procedures and limits is available from the IRS and consumer protection agencies. For details on tax rules and timelines, see the IRS rollover guidance (Retirement Topics—Rollovers) and the CFPB’s consumer primer on rollovers (Internal Revenue Service; Consumer Financial Protection Bureau).

Sources: IRS (Retirement Topics—Rollovers) — https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-rollovers; CFPB — https://www.consumerfinance.gov/consumer-tools/retirement/retirement-account-rollover/

The common options explained

1) Leave the money in your former employer’s plan

• Pros: No immediate action required; employer plan protections and potentially lower institutional investment costs. If the plan has good investments and low fees, staying put can be fine.
• Cons: Limited control, fewer investment choices, potential plan maintenance fees, and less convenient consolidation.
• Practical note: Some plans require a minimum balance (often $5,000) to remain; smaller balances may be cashed out or moved automatically. Check your plan’s summary plan description or contact the plan administrator.

2) Roll the money into your new employer’s plan

• Pros: Consolidates accounts for simplicity, may permit continued access to plan loans, and preserves tax-deferred status. Good when the new plan has low fees and strong investment options.
• Cons: Not all plans accept rollovers; new plan rules determine whether after-tax or Roth portions are accepted. Compare fees and fund menus before moving.

3) Roll into a traditional IRA

• Pros: Broad investment choices, often lower-cost fund families, and more control over withdrawals and estate planning choices.
• Cons: IRAs may not allow plan loans, and some creditor protections differ from employer plans (ERISA protections extend to many workplace plans). If you think you’ll change employers frequently, an IRA can reduce future paperwork.

4) Roll into a Roth IRA (convert)

• Pros: Future qualified withdrawals are tax-free after meeting Roth rules; no required minimum distributions (RMDs) from Roth IRAs for original owners.
• Cons: Converting pre-tax account dollars to a Roth triggers current income tax on the converted amount. Evaluate your tax bracket and whether you can pay the tax from non‑retirement funds.

5) Cash out (withdraw)

• Pros: Immediate access to money.
• Cons: Almost always the most expensive choice. Distributions from employer plans are taxable if pre-tax, and if you’re under age 59½ a 10% early withdrawal penalty usually applies. Plus many plans withhold 20% for federal taxes if you take a distribution rather than a direct rollover.

Direct vs. indirect rollovers — critical differences

• Direct (trustee‑to‑trustee) rollover: The plan transfers funds directly to the new plan or IRA. No withholding; the transaction is not taxable. This is the safest method to avoid surprises.
• Indirect rollover (you receive the distribution): The plan will typically withhold 20% federal income tax for distributions that are eligible for rollover. You have 60 days to deposit the entire distribution (including the withheld amount) into a new retirement account to avoid tax and penalty. To claim the withheld amount, you must make up the 20% out of pocket and then recover it as a tax refund when you file.

Key rule: The 60‑day rollover deadline is strictly enforced by the IRS. Also, the once-per-12‑month restriction applies to indirect IRA‑to‑IRA rollovers, not to trustee‑to‑trustee transfers or rollovers from employer plans. See IRS guidance for the latest specifics.

(IRS rollover guidance — https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-rollovers)

Taxes, penalties, and special situations

• Taxes: Pre-tax account rollovers to traditional IRAs or qualified plans are not taxable when done as direct rollovers. Converting pre-tax dollars to a Roth IRA creates taxable income in the year of conversion.
• Early distribution penalty: Withdrawals before age 59½ are generally subject to a 10% penalty plus ordinary income tax unless an exception applies (e.g., certain hardships, qualified reservist distributions, substantially equal periodic payments, or separation from service after age 55 for some plans).
• Required Minimum Distributions (RMDs): RMDs cannot be rolled over. If you are subject to RMDs in the year of separation, that portion is not eligible for rollover.
• Employer stock (Net Unrealized Appreciation, NUA): Special tax treatment may apply for employer stock distributed from a plan. NUA planning is complex; consult a tax pro before taking a distribution.

Practical checklist for executing a rollover

1. Compare fees and investment options in the old plan, new plan, and IRAs.
2. Check plan rules: Does the new employer plan accept rollovers? Are there minimums to leave money behind?
3. Prefer a direct trustee‑to‑trustee rollover to avoid withholding and the 60‑day risk.
4. If converting to a Roth, plan how you’ll pay the tax bill.
5. Confirm how after‑tax contributions are handled—these may be rolled separately or treated differently for conversion.
6. Keep documentation: plan statements, rollover forms, and confirmation numbers for the transaction.

Example step sequence for a direct rollover:

• Contact the old plan administrator and request a direct rollover.
• Open the destination IRA or confirm account details in your new employer plan.
• Provide the receiving account’s trustee name and account number to the old plan.
• Verify the check or electronic transfer is made payable to the new trustee — not you personally.
• Confirm receipt and investment allocation with the receiving institution.

When an IRA is usually the better choice

• You want more investment choice or access to low-cost index funds.
• You anticipate frequent job changes and prefer a single, stable account.
• You want Roth conversion flexibility or estate planning features not available in the employer plan.

When an employer plan might be better

• The old or new plan offers institutionally priced funds that are cheaper than an IRA.
• You need access to a plan loan (IRAs don’t offer plan loans).
• You value ERISA creditor protections available in many employer plans.

Common mistakes and how to avoid them

• Mistake: Accepting a distribution check payable to you. Result: 20% withholding, 60‑day deadline, taxable income if not rolled. Solution: Insist on a direct rollover.
• Mistake: Using rollover funds to pay conversion taxes. Solution: Pay conversion taxes from outside funds so the full balance remains invested.
• Mistake: Forgetting to handle after‑tax contributions properly. Solution: Ask the plan how it treats after‑tax money—special rules may allow a separate rollover to a Roth IRA.

Realistic scenarios and decision guidance

• Small balance (<$5k): Many plans will automatically cash out small balances. If forced, consider rolling to an IRA immediately to preserve tax status.
• Large balance with employer stock: Consider NUA analysis with a tax advisor because lump-sum distributions that trigger capital gains treatment on company stock may lower overall taxes.
• Near retirement (within 5 years): Weigh stability and guaranteed income options; prioritize low volatility and assess whether consolidating simplifies required distributions.

Additional resources and internal reading

• For step‑by‑step tax‑safe rollover procedures, see our guide: Rolling Over Employer Plans: Steps to Avoid Tax Traps — https://finhelp.io/glossary/rolling-over-employer-plans-steps-to-avoid-tax-traps/
• For account consolidation and timing advice, read How to Consolidate Multiple Retirement Accounts Safely — https://finhelp.io/glossary/how-to-consolidate-multiple-retirement-accounts-safely/
• For Roth-specific decisions, review Rolling a Roth 401(k) vs Rolling to a Roth IRA: Tax Considerations — https://finhelp.io/glossary/rolling-a-roth-401k-vs-rolling-to-a-roth-ira-tax-considerations/

Professional disclaimer: This article is educational and not individualized financial or tax advice. Laws and IRS guidance change; confirm specifics with a qualified tax advisor or financial planner before taking action.

Author’s note: In my practice helping people through job changes, I consistently recommend direct rollovers and documenting every step. Small administrative mistakes are a leading cause of unexpected taxes—avoid them by insisting on trustee‑to‑trustee transfers when possible.