Pros and cons of rolling over your 401(k) to a new employer

What happens to a 401(k) when you leave a job?

Employees in the United States change jobs every 4.2 years on average.¹ So what do you do if you've invested in a 401(k) and are leaving the company? Read on to explore some considerations when deciding what to do with your 401(k).

Options available for an old 401(k)

You have a few options for dealing with your 401(k) when you leave a job.

1. Leave the money where it is – According to the Pension Rights Center, if your 401(k) account has a balance of $7,000 or more, you can maintain the funds in your previous employer's account and simply manage your investments.² However, you will be unable to make additional contributions to that 401(k).
   
   
2. Roll it over to an IRA – You may roll over your 401(k) to an Individual Retirement Account (IRA) without paying fees or penalties.
   
   
3. Cash it out – You may choose to cash out your 401(k). This option is generally not recommended, as your 401(k) contributions were, of course, intended to support your retirement. If you decide to cash out now, not only will you be subject to taxes, but if you're under age 59½, you'll pay a 10% early withdrawal penalty applies as well.
   
   
4. Roll it over to a new 401(k) – The fourth option is to roll over your previous 401(k) into your new employer's 401(k). This option allows you to move the money penalty-free and will continue building value toward your retirement savings.

Direct vs. indirect rollovers

If you decide to roll over your 401(k), there are 2 different types of rollovers: direct and indirect. With a direct rollover, your previous plan provider sends the funds directly to the new provider of your retirement account. This method allows you to avoid paying taxes and penalties. This is in contrast with an indirect rollover, in which the cash in your account is released to you. With an indirect rollover, you must pay taxes and early withdrawal penalty fees on the funds, and can then deposit what remains in your new 401(k).

Pros of rolling over to a new 401(k)

Rolling over a 401(k) to a new employer's plan is a good way to maintain your retirement savings in one place and to continue making progress toward your retirement savings goals. If you conduct a direct rollover, you maintain the full value of the account, without having to deduct taxes and penalties.

If you choose to roll over funds from one 401(k) to another, you'll need to contact the administrator of your former employer's 401(k). Often the Human Resources team at your former company can help point you in the right direction. You'll be asked to provide the account information for your new 401(k) plan. The administrator of the old 401(k) will then deposit the funds directly into your new 401(k) and funds should be reflected on your next statement.

Some of the benefits of rolling over your 401(k) include:

Potential for lower fees

Every plan has a unique fee structure. If your new plan has lower administrative or investment fees than your previous 401(k), rolling over the funds could save you money, leaving you more savings to grow toward retirement. Take some time to review both plans side-by-side to compare and contrast fee structures.

Ease of management

If you invest in a 401(k) plan at every employer where one is offered, your retirement savings can get spread out if you change jobs as often as the average employee. It can become difficult to manage multiple accounts, monitoring investment performance, collecting tax documents and generally having a picture of your overall savings. By rolling over your 401(k), you can consolidate your savings into a single account for easier management and oversight.

Early retirement

The "Rule of 55" is a provision put in place by the IRS that lets you take penalty-free withdrawals from your current employer's 401(k) if you leave in or after the year you turn 55. If you consolidate all your 401(k)s into your latest employer's plan, all those funds qualify under this rule, potentially allowing you to access the funds to retire early. If you roll the funds over into an IRA, you will be unable to take minimum distributions until you are 59½.

Cons of rolling over a 401(k)

Rolling over your 401(k) is not the best option for every situation. Here are some possible reasons why you would prefer not to roll over to a new 401(k).

Time and research

You should not assume that either your old or your new 401(k) is superior to the other. Typically, plans are just different, each with their own strengths and weaknesses. For this reason, it's important to take time to compare plans. Which offers investment options that best meet your personal growth goals and investment philosophy? Does one have higher administrative fees than the other? Are there factors to consider regarding how easy or difficult it is to make changes to your plan? Making an educated decision requires time and research.

Tax implications of rollovers

If one of your holdings in your old 401(k) has experienced significant growth, you may qualify for Net Unrealized Appreciation (NUA). This provision allows you to transfer the stock to a taxable brokerage account and pay ordinary income tax only on the original purchase prices. Later, when you sell the stock, the appreciation is taxed at a lower long-term capital gains rate, but the benefit is lost if you roll the stock into an IRA or a new 401(k). Also, if for any reason, you have reason to believe you will be unable to complete the direct rollover process within 60 days, you may be looking at paying taxes and penalties, reducing the value of your retirement savings.

Fewer investment options

If your new employer's 401(k) does not offer all the investment options of your previous plan, you may choose to leave the money where it is to continue maximizing the growth of your money.

Higher fees

All 401(k) plans come with administration fees. Fee structures can get quite complicated, involving anything from investment fees, charged as a percentage of your fund's assets and cover operating costs, to administrative fees and individual service fees. Take some time to calculate all fees to determine if one plan involves significantly higher expenses than the other to determine if a rollover is right for you.

More ways to prepare for retirement

There's no time like the present to begin putting together a strategy for retirement. Your 401(k) is a single element among a variety of financial instruments and practices that go into building a strong retirement plan. Other financial instruments including Individual Retirement Accounts, life insurance and annuities, which may also help you better prepare for retirement. Learn more about annuities and the importance of life insurance with resources in our Learning Center.

Sources:

1. U.S. Bureau of Labor Statistics, Employer Tenure Summary, September 26, 2024.
2. Pension Rights Center, "What you need to know about auto enrollment," June 13, 2025.

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