401(k) Rollover: What to Do When You Change Jobs

The average American changes jobs 12 times in their career. Each job change creates a 401(k) rollover decision — and the wrong choice can cost 20–30% of the balance in taxes and penalties or leave your money in a high-fee orphan account.

Your four options when you leave a job

1. Leave in the old employer's plan: Easiest. No action required. Only good if the plan has good fund options and you're organized enough to track multiple accounts.
2. Roll to new employer's 401(k): Good if new plan has better investment options or you want simplicity.
3. Roll to an IRA: Usually the best option — more investment choice, lower costs, no dependency on employer.
4. Cash out: Almost never do this. On a $50,000 balance: 10% penalty ($5,000) + income tax at your marginal rate (~22% = $11,000) = $16,000 gone.

Direct rollover vs indirect rollover

Direct rollover (preferred): The money moves directly from old plan to new account without passing through your hands. No withholding, no risk of accidental taxation.

Indirect rollover: Old employer sends you a check (they withhold 20% for taxes). You have 60 days to deposit the full original amount (including the 20% withheld) into the new account. If you only deposit the check amount, the 20% withheld counts as a taxable distribution. Always choose direct rollover.

The expense ratio check

Before deciding where to roll your 401(k), check the expense ratios of options in your new employer's plan vs a rollover IRA. A plan offering only 0.50%+ expense ratio funds vs a Fidelity IRA with 0.015% index funds — the IRA wins decisively over a 20-year horizon.