The "rule of 55"
If you leave your job in or after the year you turn 55, you may be able to withdraw from that employer's 401(k) without the 10% penalty. Rolling to an IRA gives up that option until 59½.
401(k) rollovers
What to Do With Your 401(k) When You Leave Work
Retiring or changing jobs means deciding what happens to a retirement plan you may have built over decades. There's more than one right answer, and a few costly wrong ones. Paul helps you compare your options before you move a dollar.
Should I roll over my 401(k)?
When you leave an employer, you can usually leave your 401(k) where it is, move it to a new employer's plan, roll it into an IRA, or cash it out. The right choice depends on fees, investment options, when you'll need the money, your age, and how the account fits your retirement income plan. Cashing out is rarely the best option because of taxes and possible penalties.
Your four options, side by side
| Option | Worth considering if… | Keep in mind |
|---|---|---|
| Leave it in your old plan | Your plan has low costs and good investment choices, or you left at 55 or older and may need withdrawals soon | Fewer investment choices; managing several old accounts gets complicated |
| Move it to a new employer's plan | You're still working and like the new plan | Only works if the new plan accepts rollovers |
| Roll it into an IRA | You want more investment choices and to combine accounts into one income plan | IRA costs and services vary; compare them to your plan's before you decide |
| Cash it out | Rarely the right move | Taxed as income, and a 10% penalty may apply if you're under 59½ |
Details that are easy to miss
Direct vs. indirect rollovers
A direct rollover moves money between institutions without tax withholding. If a check is made out to you, 20% may be withheld, and you have 60 days to complete the rollover.
Company stock
If your 401(k) holds your employer's stock, special tax rules (net unrealized appreciation) may make it worth handling separately.
Roth money
Roth 401(k) dollars should go to a Roth IRA to keep their tax-free status.
Pension decisions
If you also have a pension, the choice between a lump sum and a lifetime payment is usually permanent. Decide it alongside your 401(k).
How Paul helps
- 1
Review what you have
Plan statements, fees, investment options, and any pension choices.
- 2
Compare your options in writing
Including costs and services, so you can see the trade-offs.
- 3
Fit it into your income plan
Which account you'll draw from first, and when.
- 4
Handle the paperwork
If you decide to move money, making sure it's done as a direct rollover.
Straight answers
Frequently asked questions
No. Many plans let you leave the money where it is. You'll still need to start required minimum distributions at 73 (or 75 if born in 1960 or later).
LPL Financial and its representatives do not provide tax or legal advice.