What to Do With an Old 401(k)
Four options, and the default of leaving it is rarely the best one. The fee comparison that decides it, and the rollover mistake that triggers a tax bill.
When you leave a job, the balance stays where it is until you do something about it. That default is not automatically wrong, and it is a decision being made by inaction, which is a bad way to make a decision worth tens of thousands of dollars.
The four options
| Option | Tax now | Main argument for | Main argument against |
|---|---|---|---|
| Leave it in the old plan | None | Nothing to do; institutional pricing can be excellent | Easy to lose track of; you cannot contribute |
| Roll into the new employer's plan | None | One balance; plan creditor protection; keeps pre-tax IRA at zero | Limited to that plan's menu and fees |
| Roll into an IRA | None | Widest choice, usually the lowest fees | Can complicate a backdoor Roth later |
| Cash it out | Income tax, plus 10% if under 59 and a half | You have the money now | Ends the compounding permanently |
Small balances are the ones that get abandoned, and plans may move a very small balance out on their own. If yours is under a few thousand dollars, find out what the plan's rules say before assuming it is sitting where you left it.
The fee comparison that usually decides it
Between the three sensible options the investments are broadly interchangeable. The fee is not, and it compounds against you for as long as the balance exists.
Take a $48,000 balance, 20 years, 7% a year gross. Compound it net of the fee each year.
| Where it sits | Annual fee | After 20 years |
|---|---|---|
| A plan charging 0.62% all in | 0.62% | $165,364 |
| An IRA in broad index funds | 0.06% | $183,673 |
| Difference | 0.56% | $18,309 |
Just over eighteen thousand dollars, for a form. That is the same mechanism as expense ratios, and the Department of Labor makes the point in its own arithmetic: on a $25,000 balance over 35 years at 7%, fees of 0.5% produce $227,000 against $163,000 at 1.5%, so "the 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent".
The number you need is your plan's total cost, not the headline expense ratio of one fund. Your annual fee disclosure under section 404(a)(5) lists the administrative charges and the expenses of each investment option, and the provider must give it to you. Add the administrative charge to the expense ratio of what you actually hold.
Sometimes the old plan wins. Large employers negotiate institutional share classes that a retail IRA cannot match, and a plan at 0.04% is a plan to leave alone. Check before you move.
Direct against indirect: the 60-day trap
This is the part that costs real money, and the mistake is easy to make because the second option sounds more convenient.
A direct rollover goes from the old plan to the new plan or IRA without touching you. Nothing is withheld, no deadline starts, and there is nothing to get wrong.
An indirect rollover pays you, and you have 60 days to deposit it into another retirement account. The IRS's rollover rules carry a detail that surprises people: an eligible rollover distribution paid to you from an employer plan is subject to mandatory 20% withholding. You must still roll over the full original amount to avoid tax, which means finding the withheld 20% from somewhere else.
On the $48,000:
| Step | Amount |
|---|---|
| Distribution | $48,000 |
| Mandatory withholding, 20% | $9,600 |
| Cheque you receive | $38,400 |
| Amount you must deposit within 60 days to avoid tax | $48,000 |
| Cash you must find yourself | $9,600 |
Deposit only the $38,400 and the missing $9,600 becomes a taxable distribution, plus the additional 10% tax if you are under 59 and a half. You do get the withheld amount back through your tax return, the following year, which is no help at all in the 60 days you needed it.
The fix is one sentence on the phone: "I want a direct rollover, trustee to trustee." If the plan will only post a cheque, ask for it to be made payable to the receiving institution for your benefit rather than to you. That is still a direct rollover and no withholding applies.
What a rollover does to a backdoor Roth later
One reason to prefer your new employer's plan over an IRA, and it applies to a specific group.
If your income is above the Roth IRA limits, which for 2026 phase out between $153,000 and $168,000 for single filers and $242,000 and $252,000 for married filing jointly, the usual route is a non-deductible traditional IRA contribution converted to Roth. That conversion is taxed on a pro-rata basis across all your traditional IRA balances, not just the new contribution.
Roll $48,000 of pre-tax money into an IRA and you have created a large pre-tax balance that makes every future conversion mostly taxable. Roll it into your new employer's plan instead and your IRA balance stays at zero, and the route stays clean.
If none of that applies to you, ignore it and take the cheaper option. The choice between pre-tax and Roth generally is a separate question, worked through in Roth against traditional.
The paperwork, in order
- Find the old plan. If you have lost the login, the provider is on an old statement or in your onboarding paperwork from that job.
- Get the balance, split between pre-tax, Roth and any after-tax money. They move to different destinations.
- Get the 404(a)(5) fee disclosure and work out the total annual cost.
- Compare it against your new plan's disclosure and against an IRA at a low-cost provider.
- Open the receiving account first. A cheque with nowhere to go is how the 60 days gets wasted.
- Call the old provider and ask for a direct rollover, trustee to trustee, naming the receiving institution and the account number.
- Check whether the old plan is selling your holdings. Most rollovers move as cash, which means several days out of the market.
- When it lands, invest it. A rollover that arrives as cash and sits there is the most common expensive mistake after cashing out.
- Check the allocation matches your target, and keep contributing to the new plan at least to the full match while this is in progress.
When this does not apply
If you left at 55 or later. Distributions from the plan of the employer you separated from at age 55 or older can avoid the additional 10% tax. Rolling that balance to an IRA gives the exemption up. If you might need the money before 59 and a half, leave it.
If you hold employer stock with a large gain. Net unrealised appreciation is a specific tax treatment that a rollover destroys. Take advice before moving it.
If you have an outstanding plan loan. An unpaid balance is usually treated as a distribution when you leave. Deal with the loan before the rollover, not after.
If the old plan is genuinely cheaper. Some large-employer plans cost a few basis points. Leave it, and put a calendar reminder to check it once a year so it does not become a balance you forget.
If you are facing real hardship. Cashing out is the worst option financially and it is not always the worst option available. If it comes to that, understand the full cost first, and check whether the plan offers a loan or a hardship distribution with better terms.
Next steps
- List every old plan you have ever had and find the current balance of each.
- Request the fee disclosure for each one this week.
- Work out the total annual cost of each, and compare it against an IRA at 0.06%.
- Decide where it goes, then open the receiving account before you call anyone.
- Ask for a direct rollover in those words, and confirm no withholding will apply.
- Diary the arrival, and invest it the day it lands.
Sources and assumptions. Rollover rules, the 60-day deadline, the mandatory 20% withholding on an eligible rollover distribution paid to you from an employer plan, and the additional 10% tax before age 59 and a half are the IRS's, from rollovers of retirement plan and IRA distributions. The 2026 Roth IRA phase-out ranges are from IRS Notice 2025-67 as announced. The fee quotation and the 28% figure are from the Department of Labor's A Look at 401(k) Plan Fees. The $48,000 balance, the 7% gross return and the 0.62% and 0.06% fee levels are assumptions for the worked example; yours are in your own fee disclosure. This is general information and not tax advice. Checked 20 September 2026.
