What to Do With Your 401(k) When You Retire or Leave a Job: Stay, Roll Over, or Withdraw

When you retire or leave an employer, a 401(k) generally has four paths: leave it in the plan, roll it into an IRA, roll it into a new employer’s plan, or take it as cash. Direct rollovers avoid withholding and immediate tax. Cashing out is taxable, and a 10% additional tax may apply before 59½. Each path has trade-offs.

That is the short version. The details matter most for people retiring before 59½ or before Medicare, because a rollover can close a door that the plan held open. This guide covers the four options, how rollovers work, when each path may fit, and how the choice connects to your taxes.

What are your options for a 401(k) when you leave an employer?

The IRS describes four general options for a workplace retirement account other than a pension, on its page about terminating employment:

1. Leave the money in the old plan. This may suit you if you like its investments or fees. The plan may require you to move a small balance, so ask the administrator about its rules.
2. Roll it into a new employer’s plan. First confirm that the new plan accepts rollovers, and compare its fees and investment choices.
3. Roll it into an IRA. A traditional IRA rollover generally preserves tax deferral. Moving untaxed money to a Roth IRA generally makes that amount taxable for the year.
4. Cash it out. Untaxed amounts are generally included in income, and an additional 10% tax may apply if you are under 59½, unless an exception applies.

None of the four is right for everyone. The choice turns on costs, investment options, access rules, and your tax picture.

When might leaving the money in the plan make sense?

Leaving a 401(k) with a former employer can keep investment choices and fees you already know, and the plan may offer institutional options that cost less than comparable retail ones. It also leaves your choices open, because you can usually roll the money later.

The larger reason for people retiring early is access. The Rule of 55 can remove the 10% early withdrawal tax on money you take from the 401(k) of the employer you leave, if you leave in or after the year you turn 55. It reaches only that plan, and it generally does not follow money you roll into an IRA. Whether it applies depends on the plan’s rules, so read the plan document and ask the administrator before you give notice.

The trade-offs are real. You may have several old plans to track, the plan may charge fees or limit partial withdrawals, and its investment menu may be narrower than you want.

When might a rollover to an IRA make sense?

A rollover to an IRA can put several old accounts in one place and widen investment choices. It can also make it easier to run withdrawals and Roth conversions on your own schedule, which matters in the years before required distributions.

The costs and limits:

• Access before 59½. An IRA does not have the Rule of 55. Penalty-free access before 59½ generally needs another route, such as a series of substantially equal periodic payments (72(t)), which has strict rules.
• Fees and services. Compare the total cost of the IRA with the plan, not only the investment fees.
• Protections. Legal protection of retirement money from creditors can differ between a plan and an IRA, and it varies by state. Ask an attorney if this matters to you.

Our guide on retiring at 57 shows how access, health insurance, and the Social Security gap fit together.

What is the difference between a direct rollover and a 60-day rollover?

In a direct rollover, you ask the plan administrator to send the money straight to another plan or an IRA. The IRS explains that the 20% mandatory withholding generally does not apply.

In a 60-day rollover, the money is paid to you, and you have 60 days to deposit it in an eligible plan or IRA. The payer generally must withhold 20% of a taxable eligible distribution, even if you plan to roll it over. To roll over the full amount, you must replace the withheld portion from other funds. If you roll over only what you received, the withheld portion is generally taxable and may face the early-distribution tax.

For example, on a hypothetical $10,000 distribution, $2,000 would be withheld and $8,000 paid to you. To roll over the full $10,000, you would deposit $8,000 plus $2,000 from another source within 60 days. A direct rollover avoids that problem.

Can you roll a 401(k) into a Roth IRA?

Generally yes, but it is a taxable event for pre-tax money. Moving pre-tax 401(k) money to a Roth IRA is included in income for the year, the same as a Roth conversion. Roth 401(k) money can generally move to a Roth IRA without that tax.

Because the converted amount counts as income, it can raise your tax bracket, change how much of your Social Security is taxed, and push your income past a Medicare premium threshold two years later. Our post on the Roth conversion window explains why the years between your last paycheck and your first required distribution matter, and our answer on IRMAA covers the Medicare side.

What if you hold company stock in the plan?

Special tax rules may apply. If your distribution includes employer stock, net unrealized appreciation (NUA) treatment may let you defer tax on the stock’s appreciation until you sell the shares, but generally only when the stock is distributed in kind as part of a qualifying lump-sum distribution. Rolling the stock into an IRA generally gives up that treatment. The rules are detailed, so read IRS Topic 412 and work through the numbers with your CPA before you direct the distribution. Our post on deferred compensation covers related executive-pay issues.

How does the choice affect your taxes in the early retirement years?

Where the money sits changes which accounts you can draw from and how. Required minimum distributions start at 73, or 75 if you were born in 1960 or later. If you are still working for the employer that sponsors the plan, you can generally delay RMDs from that plan, per the IRS RMD FAQs, but old plans and IRAs follow the normal rules.

The planning question is how the choice fits your withdrawal order. Our post on withdrawal sequencing shows how taxable, pre-tax, and Roth accounts work together, and the guide to the first ten years of retirement covers why the early years carry so much weight.

What does this look like for a hypothetical couple?

Hypothetical example for illustration only. It is not a recommendation or a projection.

A couple in their late 50s has left their employers in the same year. One has a 401(k) at the employer they just left. The other has two older accounts from earlier jobs. They plan to live on savings until Social Security, and they want health coverage options before 65. Their questions are:

• Access. Does the Rule of 55 apply to the plan they just left, and would a rollover end it?
• Cost. What do the plan and an IRA each cost in fees and services?
• Taxes. Would any Roth rollover push income past a threshold in that year?
• Order. Which account funds which year, so withdrawals do not stack up?

The answers depend on their plans and numbers, so another couple’s path may differ.

What are the limits and risks?

• A rollover cannot always be undone. Moving money changes the rules that apply to it, including access before 59½.
• Cashing out is costly. It adds to income in one year and may trigger the additional tax.
• Plan rules vary. Plans differ on partial withdrawals, rollovers in, and small balances.
• Tax law changes. Confirm the current rules with your plan administrator and your tax professional before you act.

Educational only. Nothing here is a recommendation about your own accounts.

Sources and as-of date

These points reflect the following IRS sources as read on October 20, 2026:

• IRS: Retirement topics, termination of employment
• IRS: Rollovers of retirement plan and IRA distributions
• IRS Topic 413: Rollovers from retirement plans
• IRS Topic 412: Lump-sum distributions and Publication 575
• IRS: Required minimum distributions FAQs
• IRS Topic 558, additional tax on early distributions, for the Rule of 55

Tax law changes. Confirm the current rules with your plan administrator and your tax professional.

What should you do next?

Whether to stay, roll over, or withdraw depends on facts in your own accounts: which plan holds the money, when you leave, what the plan allows, and how withdrawals affect taxes and health coverage in the same years. That is the access question inside our Early Retirement Feasibility work. A good first step is the free Risk Analysis, which takes a few minutes and gives you something concrete to bring to a conversation. When you are ready to look at your own plan, schedule a consultation with Robert Boeck, and bring your CPA into the discussion before you move any money.