Rolling Your 401(k) Into an IRA After Job Loss Is a Decision You Should Consider Carefully

When you leave a job, it’s important to decide what to do with your 401(k), because each option affects your taxes, fees, and long-term savings.

One Reddit user shared their experience when changing jobs:

“My 401(k) is with Principal. I’m not fond of them. I haven’t talked to Principal yet because I had to pay off a loan on it. It was only $5,700. That should be processed in the next day or three. I should have a new job in 3–4 weeks. Principal says they have an option to just continue the 401. And of course I can roll it to an IRA. The new job has a 401(k), I assume standard 4% match. I don’t know who they use yet. Any advice on if I should roll to an IRA, keep that, and start a new 401 when I get the new job? Stay with Principal and consolidate once I have the new job? My current account is a bit shy of $600k. I have 20 years until retirement if I don’t retire early. Salary plus bonus is around $130k.”

Making the right choice will depend on your long-term retirement strategy. As long as you have least $5,000 in your account—which this user does—you have a few options in addition to cashing it out.

Option 1: 401(k) to IRA

Rolling over a 401(k) into an individual retirement account (IRA) allows you to move savings from a previous employer’s plan into an IRA without triggering taxes or penalties, provided the transfer is handled properly. If you have a traditional (non-Roth) 401(k), your savings remain tax-deferred investment earnings and aren’t taxed until you make withdrawals. You can keep making contributions and gain access to a broader selection of investment options. Still, you can only contribute $7,000 annually (or $8,000, if you’re age 50 or older), which is significantly less than the $23,500 (or $34,750, if you’re age 50 or older) 401(k) contribution limit in 2025. Those 401(k) limits are $24,500 and $35,750, respectively, in 2026.

For high-income earners, transferring your funds to a traditional IRA can clear the way to open a Roth IRA through a backdoor conversion, allowing future growth and withdrawals to be tax free. However, existing pretax (traditional) IRA balances can make part of the conversion taxable due to IRS pro rata rules, so you’ll want to ensure that the traditional IRA has a zero balance when contributing.

If you transfer your funds to an IRA, you’ll lose a major 401(k) benefit: the ability to take a plan loan. However, IRAs do allow penalty-free withdrawals for certain qualifying life events, such as purchasing your first home or covering education expenses.

Option 2: 401(k) to 401(k)

Once you start your new job, you may have the option to roll your old 401(k) into your new employer’s 401(k) plan. By contributing enough to qualify for your new employer’s match, you add free money to your account, which, when reinvested, benefits from compounded returns over time.

If you’re considering this option, there are two things to keep in mind.

• New plans may offer limited investment choices and higher fees.
• Rolling over your funds could temporarily pause your investment growth during the transfer.

Option 3: Leave Your Funds Where They Are

In most cases, if you have more than $5,000 in your 401(k), your former employer may let you keep your money in your existing 401(k) after you leave. The funds will keep growing even though you’re no longer working for that employer. This can be a convenient choice if you’re satisfied with the plan’s investment options and fees.

However, you won’t be able to make new contributions, which means missing out on any employer match from both your new and former employers. Depending on your employer match, this can cost you tens of thousands of dollars in the long run.

Which Choice Should You Make, and Why?

Deciding what to do with your 401(k) after leaving a job depends on your goals, timeline, and preferences, requiring you to take into account your long-term objectives, how hands-on you want to be with your savings, and the tax implications of any move.

Here’s when each option might make sense.

• Roll Over Funds into an IRA: This is ideal if you want more investment choices, lower fees, and greater control over your retirement funds. For high-income earners, this also enables a backdoor Roth IRA strategy, allowing future growth and withdrawals to be tax free.
• Transfer Funds to Your New Employer’s 401(k): This makes sense if the new plan has a higher employer match, better investment options, or lower costs, or if you simply prefer to consolidate accounts.
• Leave Your Funds with Your Old Employer: This is best if you’re satisfied with your old plan’s investments and fees and don’t want to take immediate action. This option keeps your funds invested and growing, though you won’t be able to make any more contributions to the account.