What happens to your 401(k) when you leave a job?

Most people change jobs many times over their lives. Each move is a chance to keep your retirement savings together, or to lose track of them.

Option 1: Leave it where it is

Is your balance over $7,000? Most plans let you leave the money in place. It keeps growing, and you can move it later.

• Good if: Your old plan has low fees and good investment choices.
• Watch for: You can't add new money, and it's easy to forget about an account you no longer see.

Option 2: Roll it into your new employer's plan

If your new job has a retirement plan that accepts rollovers, you can move your old balance into it.

• Good if: You like keeping everything in one place and the new plan has low-cost options.
• Watch for: Some plans make you wait before you can join or roll money in.

Option 3: Roll it into an IRA

You can open an IRA and move your 401(k) money into it. Traditional 401(k) money goes into a traditional IRA, and Roth 401(k) money goes into a Roth IRA.

• Good if: You want more investment choices or plan to change jobs again.
• Watch for: Fees on some IRA investments, and pushy sales pitches for expensive products.

Option 4: Cash it out

You can take the money as cash, but it usually costs a lot.

Here's an example. Say you're 35 and cash out a $10,000 traditional 401(k). Your plan has to hold back 20% ($2,000) for federal taxes. When you file, you'll owe income tax on the full $10,000 plus a 10% early withdrawal penalty of $1,000. Depending on your tax bracket and state taxes, you could lose $3,000 or more, and the money stops growing.

- When it might make sense: As a true last resort in a crisis, after other options are exhausted.

How to roll over the right way

Ask for a direct rollover. Your old plan sends the money straight to your new plan or IRA. No taxes are withheld, and there's no penalty.

If your old plan sends you a check instead, you have 60 days to deposit it into another retirement account. However, the plan will have withheld 20% for taxes. To avoid owing tax on that 20%, you'd have to make it up from your own pocket. That's why direct rollovers are much better.

What if your balance is small?

If you don't make a choice, your old employer may act for you:

• Under $1,000: The plan may cash you out and mail a check, minus taxes.
• $1,000 to $7,000: The plan may move your money into an IRA in your name, often invested very conservatively.

Two things to check before you leave

• Vesting: Your own contributions are always yours, but your employer's match may not be fully yours until you've worked there several years. Check your vesting schedule before you set your last day.
• Outstanding loans: If you borrowed from your 401(k), leaving your job may make the loan due. If it isn't repaid by your tax filing deadline for that year, it's treated as a withdrawal (you’re on the hook for taxes and penalties).

Leaving at 55 or older

If you leave your job in or after the year you turn 55, you can usually take money out of that employer's 401(k) without the 10% penalty, but you'll still owe income tax. This is called the rule of 55.