What to do with your 401(k) when you leave a job

When you leave a job, your old 401(k) doesn't automatically come with you. You have four choices. The default is leaving it behind: the money stays in the old plan, with that plan's funds and fees, and you can no longer add to it.

Option 1: Leave it in the old 401(k)

Possible if your balance is over $5,000-$7,000 (varies by plan). You keep the same investments and fees. The downside: you lose visibility, you can't make new contributions, and you may forget about it entirely.

Option 2: Roll it into your new 401(k)

Consolidates your retirement savings in one place. Easier to manage. Some 401(k)s have great low-cost institutional funds you can't access elsewhere. Some have high fees and limited choices. What to compare before rolling: each plan's fees and its fund choices.

Option 3: Roll it to an IRA

Hundreds of investment options, in an account in your own name. A rollover IRA is a type of account, and any brokerage that offers IRAs can hold one. The move is a direct rollover requested from your old 401(k), and the transfer is tax-free if done correctly.

Option 4: Cash it out (taxes plus a 10 percent penalty under 59 and a half)

You pay full income tax plus a 10% penalty if you're under 59½. A $50,000 401(k) cashed out can leave you with $30,000-$35,000. The cashed-out amount also stops compounding inside a tax-advantaged account.

Direct rollover versus indirect: the 20 percent withholding trap

In a direct rollover (a trustee-to-trustee transfer), the old plan sends the money straight to the new plan or IRA, and nothing is withheld. In an indirect rollover, the old plan pays you by check and must withhold 20% for federal income tax. You then have 60 days to deposit the full balance, including the withheld 20%, which has to come from other money. Whatever is not redeposited within 60 days is taxed as a distribution, plus the 10% early-withdrawal penalty if you are under 59½.

What this lesson is NOT

This is not advice on which option to pick. The right move depends on your old and new plans' fees and fund choices, your tax situation, and whether you want creditor protection, which a general lesson cannot judge for you. Rollover rules and deadlines are strict, so confirm the mechanics before you move any money.