Leaving a job with a 401(k) is a decision point where a lot of people lose real money — usually by cashing out, by triggering withholding with an indirect rollover, or by just leaving the money at the old employer and forgetting about it. The right move is straightforward once you know the mechanics. Here is how to do it cleanly in 2026.
What changed in 2026
- Auto-portability expanded. New Labor Department rules require larger plans to offer auto-portability — small balances under ~$7,000 can now be automatically transferred to a new employer's plan when you change jobs, instead of being cashed out.
- Secure Act 2.0 raised the forced-distribution threshold. Old employers no longer must push out balances under $1,000 automatically; the threshold moved to $7,000.
- More IRA providers offer zero-fee rollovers. Fidelity, Schwab, and Vanguard all handle rollovers with no fees and excellent guidance.
The core decision: IRA or new employer 401(k)?
| Factor |
IRA |
New employer 401(k) |
| Investment options |
Broad — any stock, ETF, mutual fund |
Limited to plan menu |
| Fees |
Often lower (index ETFs at 0.03%) |
Varies; may be high |
| Backdoor Roth |
Complicated if you have pre-tax IRA balance |
Roll into 401(k) first to clear this |
| Creditor protection |
Varies by state; up to $1M federal bankruptcy |
Strong federal protection |
| RMD timing |
Must start at 73 |
Can delay if still employed at that company |
| Loan option |
No |
Yes (if plan allows) |
Rule of thumb: IRA is better for most people because of investment flexibility and lower fees. Roll into a new employer 401(k) if you plan to do a backdoor Roth IRA and already have pre-tax IRA money, or if you want maximum creditor protection.
Step-by-step: direct rollover to an IRA
- Open the receiving IRA at your broker of choice (Fidelity, Schwab, Vanguard, or similar) if you do not have one. Confirm the account type: traditional 401(k) → traditional IRA; Roth 401(k) → Roth IRA.
- Get the rollover instructions from the new IRA custodian — typically a mailing address and account number for the check, or wire instructions.
- Contact the old plan. Call or log into the old 401(k) provider and request a direct rollover. Give them the payee name and mailing address.
- Confirm "direct rollover." The check should be made out to "[New Custodian] FBO [Your Name]" — NOT to you personally.
- Receive and deposit. The check arrives in 1–2 weeks. If mailed to you, deposit it at the new custodian immediately (you have 60 days, but do not wait).
- Invest the proceeds. Cash sitting in an IRA earns almost nothing. Move it into your chosen index funds.
Why "direct" matters: the indirect rollover trap
An indirect rollover means the old plan sends the check to you. Federal rules require 20% mandatory withholding — so if your 401(k) has $50,000, you receive $40,000 and the IRS holds $10,000.
To avoid tax, you must deposit the full $50,000 into the IRA within 60 days — meaning you must come up with the missing $10,000 out of pocket. You get the withheld amount back as a refund the following year, but the 60-day clock does not pause for it.
Always request a direct rollover.
Rolling into a new employer 401(k)
- Wait until your new plan is open (usually 30–90 days after hire).
- Ask new plan if they accept rollovers (most do).
- Get incoming rollover instructions from new plan.
- Contact old plan and request a direct rollover to the new plan.
- Confirm funds land and are invested.
Roth 401(k) rollover
Roth 401(k) → Roth IRA: same direct rollover process. The receiving account must be a Roth IRA. The rollover preserves the tax-free status.
Note: Roth 401(k) money that rolls into a Roth IRA follows the Roth IRA 5-year rule from the date the Roth IRA was first opened — not from when the Roth 401(k) started.
Common mistakes
Cashing out instead of rolling over. For a $50,000 balance at age 35, cashing out after taxes and the 10% penalty leaves ~$30,000–$35,000 and destroys decades of compound growth.
Missing the 60-day window on an indirect rollover. After 60 days, the distribution becomes taxable and penalty-eligible.
Rolling pre-tax into a Roth without expecting the tax bill. Converting traditional 401(k) to Roth IRA is legal but the converted amount is taxable income in the year of conversion. Plan for it.
Forgetting outstanding 401(k) loans. A loan balance that is not repaid before rollover becomes a taxable distribution.
Not checking the vesting schedule. Employer match may not be fully yours if you leave before the vesting cliff.
What to skip
- Leaving small balances behind. Multiple orphaned 401(k)s are easy to lose and often carry higher fees.
- Rollovers into annuities pushed by advisors — insurance products inside IRAs often carry high ongoing costs.
- Spending the rollover. No matter how tempting, a 401(k) at 35 is worth 5–10× its face value by retirement if left alone.
FAQ
How long does a rollover take?
Direct rollovers typically take 2–4 weeks from request to the funds landing and being investable. Allow up to 6 weeks for complex situations.
Is there a limit on how many rollovers I can do?
Direct rollovers (trustee-to-trustee) are unlimited. Indirect IRA-to-IRA rollovers are limited to one per 12-month period per individual.
Do I owe taxes on the rollover?
A direct rollover from traditional 401(k) to traditional IRA (or Roth 401(k) to Roth IRA) is not a taxable event. A conversion from traditional to Roth is taxable.
What if my old employer is unresponsive?
Contact your state's unclaimed property agency if assets go missing. The Department of Labor has a plan search tool for abandoned plans.
Where to go next