401(k) Strategies When You Change Jobs: Rollovers, Loans, and Decisions

Quick summary

When you leave an employer, your 401(k) choices are: roll it into your new employer’s 401(k) or an IRA, leave it in the old plan, take a loan (only if the plan allows while you remain employed), or cash out. Rolling over preserves tax‑deferred status and is usually best for long‑term growth. Cashing out is often costly due to income tax and the 10% early withdrawal penalty for most people under 59½ (IRS rules). For authoritative rollover rules see the IRS guidance on rollovers and retirement plans (IRS.gov).

Why this decision matters

Your choice affects future investment options, fees, creditor protection, and taxes. Small differences in fees or missed compound growth can materially change your retirement balance over decades. In my work advising clients for 15+ years, I’ve seen avoidable mistakes — like indirect rollovers with mandatory withholding or leaving multiple small balances that become ‘lost’ — reduce long‑term savings.

Options explained (pros, cons, and mechanics)

1) Direct rollover to a new employer 401(k)

• What it is: Trustee‑to‑trustee transfer from your old plan to your new employer’s plan. No taxes withheld; stays tax‑deferred.
• Pros: Keeps money in employer plan (which often has strong ERISA creditor protection), avoids mandatory withholding, and lets you consolidate if the new plan has good investments/low fees.
• Cons: New plan may have limited investment choices or higher fees.
• How to do it: Contact the old plan administrator and request a direct rollover to the new plan account; they will usually require your new plan’s trustee details.

2) Direct rollover to a Traditional IRA

• What it is: Transfer to a rollover IRA or existing traditional IRA via trustee‑to‑trustee transfer.
• Pros: More investment choices, potential for lower fees, easier to consolidate multiple old 401(k)s.
• Cons: IRAs generally have different creditor protection compared with ERISA plans; check bankruptcy protections or state law. Also, once funds are in an IRA, the once‑per‑12‑month indirect rollover rule for IRAs may apply if you later move money by taking distributions and redepositing them (see IRS rules).
• How to do it: Open a rollover IRA and request a direct transfer from the old plan. Avoid receiving a check yourself to prevent 20% mandatory withholding on pre‑tax amounts.

3) Rollover to a Roth IRA (conversion)

• What it is: Move pre‑tax 401(k) money into a Roth IRA and pay income tax on the converted amount in the year of conversion.
• Pros: Future qualified withdrawals are tax‑free; useful if you expect to be in a higher tax bracket later.
• Cons: Immediate tax bill; converts are irreversible once filed for that tax year. Consider timing and tax impact.
• Tip: You can roll to a Roth 401(k) at your new employer or convert to a Roth IRA — both trigger taxable events.

4) Leave the money in the old employer’s plan

• What it is: Keep your retirement savings where they are.
• Pros: If the plan has low fees and good funds, leaving it alone may be fine. You keep ERISA protections and avoid immediate paperwork.
• Cons: You may lose easy access to the account, the company could terminate small accounts, and it increases the number of accounts you manage.

5) Take a loan from the 401(k)

• What it is: Borrow from your vested balance (plans decide whether to offer loans). The maximum is usually the lesser of $50,000 or 50% of your vested balance — check plan rules and IRS limits.
• Pros: Lower interest cost than many consumer loans; interest paid back to your own account.
• Cons: If you leave the employer or are laid off, many plans require immediate repayment or accelerate the loan as a taxable distribution. If unpaid, it’s taxed as income and may be hit by the 10% early withdrawal penalty.
• In practice: I advise clients to avoid using retirement loans for long‑term cash needs when a job change is possible, because leaving employment can force repayment.

6) Cash out

• What it is: Take the distribution in cash instead of rolling it over.
• Cons: Distributions are taxable as ordinary income and most people under 59½ also pay an additional 10% early withdrawal penalty; plans usually withhold 20% if you take the distribution rather than a direct rollover. This option commonly leads to large tax bills and loss of retirement capital.

Tax and rollover mechanics to watch for

• Direct rollover vs. indirect rollover: A direct rollover avoids tax withholding because the money moves trustee‑to‑trustee. An indirect rollover is when the plan sends you a check. Pre‑tax distributions that are paid to you are subject to 20% mandatory withholding; to complete an indirect rollover tax‑free you must deposit the full amount (including the withheld 20%) into a qualifying retirement account within 60 days — most people can’t easily do that and end up recognizing the withheld portion as taxable. (IRS, Retirement Topics: Rollovers)

• Roth conversions are taxable now: Converting pre‑tax 401(k) money to a Roth account triggers ordinary income taxes on the converted amount. Plan or IRA conversions should be planned with tax withholding and cash to pay the tax in mind.

• Loan acceleration: If you have a plan loan and you separate from the employer, many plans accelerate the repayment. If you cannot repay, the outstanding balance is treated as a distribution and is taxable (plus possible penalty).

• IRA once‑per‑12‑month rule: If you take an IRA distribution and try to redeposit it into another IRA (an indirect rollover), the IRS limits you to one rollover per 12 months for IRAs. This rule does not apply to direct trustee‑to‑trustee transfers or to rollovers from 401(k) plans to IRAs. See IRS Publication 590.

References: IRS Retirement Plans and Rollover pages (https://www.irs.gov/retirement-plans), Department of Labor on 401(k) plans (https://www.dol.gov/general/topic/retirement/401k).

Decision checklist: Which option to pick

Use this short decision tree when you change jobs:

1. Do you need the cash now? If yes, consider alternatives to cashing out first (emergency savings, hardship options, short‑term borrowing). Cashing out usually costs more than the cash need in the long run.
2. Are plan fees and investments at your old employer poor? If yes, roll into an IRA or new employer plan with better options.
3. Is creditor protection important (e.g., running a business, potential lawsuits)? If yes, keeping money in an ERISA‑covered employer plan may offer stronger protection than an IRA in many situations—check a lawyer or the Department of Labor guidance.
4. Expect higher taxes in retirement? Consider partial Roth conversions if you can pay the tax now without dipping into retirement assets.
5. Do you have small multiple old accounts? Consolidate to reduce fees and simplify rebalancing—roll to an IRA or to a primary employer 401(k).

Practical step‑by‑step: How to roll over (recommended approach)

1. Contact your new employer’s plan administrator (if you plan to roll there) and ask what paperwork is required and whether they accept rollovers.
2. Ask the old plan for a direct rollover and get the trustee‑to‑trustee transfer form. Do not request a check to you unless you plan to do an indirect rollover and understand the 60‑day rule and mandatory withholding.
3. Confirm whether any employer match or vesting issues affect the rollover. Only vested employer contributions move with you.
4. If rolling to a Roth, plan for the tax hit and consider doing a partial conversion across tax years if helpful.
5. Keep records: save rollover confirmations and Form 1099‑R and later Form 5498 or 1099‑R for your tax return.

Internal resources that can help: our guides on Avoiding Rollover Mistakes When Changing Jobs and Rollovers vs Transfers: Avoiding Tax Traps When Changing Employers. For details on IRA options, see our piece on How to Roll Over Old 401(k)s Without Costly Mistakes.

Real‑world examples (illustrative)

• Example A: Jane rolls $100,000 from her old 401(k) into a low‑fee rollover IRA. The old plan had expense ratios averaging 1.2% and the IRA funds total 0.30%—saving nearly 0.9% annually on $100,000 can compound into tens of thousands over a couple of decades.

• Example B: Tom left his job with a $30,000 401(k), took a distribution to cover living costs, paid 22% average federal withholding and state tax, plus a 10% penalty — his net cash was far less than the account balance and his retirement progress stalled.

Common mistakes I see (and how to avoid them)

• Allowing a plan to send you a check (indirect rollover) without planning to replace withheld funds. Always request a direct rollover when possible.
• Using a 401(k) loan for a long‑term expense when a job change is likely; the loan can convert to a taxable distribution.
• Leaving multiple small balances unmanaged — consolidate and set up an annual review.

When to get professional help

If your balances are large, you’re considering Roth conversions, or you face divorce, estate, or creditor concerns, consult a qualified financial planner or tax advisor. In my practice I run modeled scenarios showing long‑term outcomes of rollovers and conversions to help clients choose the best path.

Professional disclaimer: This article is educational only and does not constitute personalized financial, tax, or legal advice. Rules and tax rates change; consult the IRS (https://www.irs.gov/retirement-plans) or a qualified professional for guidance specific to your situation.

Authoritative sources and further reading:

• IRS — Retirement Plans and Rollovers: https://www.irs.gov/retirement-plans
• U.S. Department of Labor — 401(k) Plans: https://www.dol.gov/general/topic/retirement/401k
• FinHelp guides linked above for practical steps and common rollover mistakes.