What to Do with a 401(k) When You Leave Your Employer

Preston Buckley | Directed IRA

For many Americans, their 401(k) is not only their largest investment account but also a key pillar of their retirement plans. When you leave your job, knowing what to do with your 401(k) is crucial to protecting and growing your hard-earned savings. Making smart decisions can unlock new opportunities, including access to diversified investments like real estate through IRAs, while the wrong move could cost you thousands in taxes, penalties, or missed growth potential. This article breaks down the essential steps to secure your savings, covering vesting, rollover options, and tax implications (learn more at directedira.com)

First, determine how much of your 401(k) is yours (vested balance). Your balance is split between your contributions, which are 100% yours, and employer contributions, which may follow a vesting schedule. Your latest 401(k) statement and your company’s vesting rules will show how much you own. For example, in a three-year vesting schedule, leaving after two years means you keep 66% of employer contributions. Knowing your vested balance lets you make informed decisions.

After leaving an employer, you typically have four options. Leaving your 401(k) behind may seem convenient, but this often means high fees, limited investment options, and little control over your money. It’s rarely the best choice. Rolling over into a new employer’s plan may feel logical, but it offers no extra employer matching and often restricts investments while imposing strict rules. Simply having a new plan doesn’t make it the ideal option.

Cashing out your 401(k) is another possibility, but it’s financially devastating. If you’re under the age of 59½, a 10% early withdrawal penalty applies, plus you’ll owe taxes that could total up to 40%. For instance, cashing out $100,000 may leave you with only $60,000 after penalties and taxes. Unless it’s an emergency or you’ve hit retirement age, avoid this option.

The most beneficial move for the majority of people is rolling over into an IRA. IRAs offer lower fees, broader investment options, and greater control. Unlike employer plans, IRAs can include stocks, ETFs, real estate, or private equity. Roth IRA conversions also become more accessible, allowing you to plan for tax-free growth. Use a direct rollover, where your current provider sends funds directly to the IRA provider. Avoid checks made out to you personally, except as a last resort, and deposit them into an IRA within 60 days to avoid penalties.

Retirement decisions are critical; make them wisely. Know your vested balance, avoid leaving funds with old employers, and think twice before cashing out or rolling into a new employer’s plan. For most, IRAs offer unmatched flexibility, control, and investment

opportunities. Choose direct rollovers to protect your retirement savings from taxes and penalties. If you’re interested in self-directing your IRA, visit us at directedira.com to learn more and book a call with our team.