Your 401(k) is yours — it doesn’t disappear when you quit. But what you do with it matters enormously. The best move for most people: roll it to an IRA for lower fees and more investment options.
Your Four Options
| Option | Taxes | Penalty | Fees | Best For |
|---|---|---|---|---|
| Roll to an IRA | $0 | $0 | Typically lowest | Most people |
| Roll to new employer’s 401(k) | $0 | $0 | Varies | One-account simplicity |
| Leave in old plan | $0 | $0 | Old plan fees | Good plan with low fees |
| Cash out | Full income tax | 10% if under 59½ | N/A | Almost never recommended |
The Cost of Cashing Out
$50,000 cashed out at age 35, 22% bracket:
| Item | Amount |
|---|---|
| 401(k) balance | $50,000 |
| Federal tax (22%) | -$11,000 |
| 10% early withdrawal penalty | -$5,000 |
| State tax (~5%) | -$2,500 |
| You receive | $31,500 |
| Lost growth over 25 years (8%) | $342,400 |
| True cost | $360,900 |
Cashing out a $50,000 401(k) at 35 costs you over $360,000 by retirement.
Vesting: What You Actually Own
| Years of Service | Cliff Vesting | Graded Vesting |
|---|---|---|
| Less than 1 year | 0% of match | 0% of match |
| 1 year | 0% | 0% |
| 2 years | 0% | 20% |
| 3 years | 100% | 40% |
| 4 years | 100% | 60% |
| 5 years | 100% | 80% |
| 6 years | 100% | 100% |
Your own contributions are always 100% vested. Only the employer match has a vesting schedule.
What Happens by Balance Size
| Balance | What Happens If You Do Nothing |
|---|---|
| Under $1,000 | Employer may cash you out (check mailed, taxes withheld) |
| $1,000-$5,000 | Employer may roll into an IRA for you automatically |
| $5,000-$7,000 | Employer may force distribution or auto-rollover |
| Over $7,000 | You can leave it in the plan indefinitely |
IRA Rollover: Step by Step
| Step | Action | Key Detail |
|---|---|---|
| 1 | Open an IRA (if you don’t have one) | Fidelity, Vanguard, Schwab are popular choices |
| 2 | Contact your old 401(k) plan administrator | Request a direct rollover (trustee-to-trustee) |
| 3 | Provide your new IRA account information | Custodian name, account number, address |
| 4 | Plan sends funds directly to the IRA | Takes 1-3 weeks |
| 5 | Invest the funds in your IRA | Don’t leave it in cash/money market |
Important: Always choose a direct rollover (check made payable to new custodian). If the check is made payable to you, the old plan withholds 20% for taxes, and you have 60 days to deposit the full amount (including the withheld 20% from your own funds) to avoid penalties.
IRA vs. 401(k) Comparison
| Feature | IRA | 401(k) |
|---|---|---|
| Investment options | Virtually unlimited | Limited to plan menu |
| Average fees | 0.03-0.20% (index funds) | 0.50-1.50% (plan average) |
| Loan option | No | Yes (if plan allows) |
| Creditor protection | Varies by state | Federal protection (ERISA) |
| Rule of 55 | No | Yes (penalty-free at 55 if separated) |
| Required minimum distributions | Age 73 | Age 73 (or retirement if later, for current employer) |
The Bottom Line
For most people, rolling to an IRA is the best option — lower fees, more investment choices, and full control. Leave it in the old plan only if the plan has excellent low-cost funds. Never cash out unless it’s a true financial emergency and you’ve exhausted every other option.
To understand all your withdrawal options, see what happens if you withdraw 401(k) early and before you withdraw from your 401(k). Return to the 401(k) Withdrawal Rules hub.
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy