Kevin Dick
Posted on Nov. 21, 2025
Whether it’s for higher pay, relocation, or a lateral career move, there are many reasons people switch jobs. Along with the obvious stressors of starting somewhere new, such as meeting new coworkers and adjusting to a new commute, there’s also the less-obvious question of what this change means for your retirement plan.
What is a Defined Contribution Plan?
Most employed people own some form of a defined contribution plan. A defined contribution plan is an employer-sponsored retirement plan where participants’ funds accumulate until a future event (typically retirement), at which point the funds may be withdrawn. The most common type is a 401(k) plan, but 403(b) plans, 457(b) plans, profit-sharing plans, SIMPLE IRAs, and a handful of other retirement accounts all fall into this category, even though each operates a little differently. For simplicity, this article will reference 401(k)s. However, when it comes to navigating a job change, most defined contribution plans can generally be viewed through the same lens.
Option 1: Leave It Where It Is
You may choose to simply leave your 401(k) with your former employer’s retirement plan provider and allow it to remain as is. While you won’t be able to make new contributions, the account will continue to be managed within the plan and your investments will still rise and fall with the market. If you want to contribute to your new employer’s retirement plan, you will simply open a new account there. This means you’ll end up with two separate 401(k)s across two different plans.
Leaving your funds in the old retirement plan means your investment choices will remain limited to the options offered by that plan. Another drawback is that sometimes the old plan will switch providers and you could lose track of where it is. Also, when plans switch providers the investment lineup could change. Finally, if an employee leaves their 401(k) behind, many retirement plans will automatically move small account balances to an IRA elsewhere. When this happens, the funds in the new IRA are held in only cash which costs investors valuable time in the market.
Option 2: Cash It Out (Generally Not Recommended)
Although it’s generally not recommended, especially for workers under the age of 59 ½, liquidating your 401(k) remains an available option. For this reason, it is important to understand the implications of doing so. First, if your account is pre-tax, any amount you withdraw will be subject to ordinary income tax. Additionally, withdrawals made before age 59 ½ are typically subject to a 10% early withdrawal penalty, regardless of whether the account is pre-tax or Roth.
There are some exceptions to the early withdrawal penalty, including the Rule of 55 where certain workers are exempt if they are over the age of 55 and have already separated from their employer (although they still need to pay ordinary income tax on funds withdrawn). In most cases, however, these taxes and penalties apply, making this approach the costliest and least advantageous option for long-term financial planning.
Option 3: Roll Over into Your New Employer’s Retirement Plan
If you prefer not to leave your retirement savings with your old employer, you can roll over the balance into your new employer’s retirement plan. This process involves transferring your account balance directly from your old 401(k) into the new plan, tax-free and penalty-free when executed as a direct rollover. The main advantages are that you can continue contributing to the same account balance, up to the annual contribution limit, and you enjoy the simplicity of consolidating your retirement accounts into one place. You also have the added option of taking a loan out against your 401(k) balance, whereas you are unable to borrow against IRAs.
There are some other considerations to keep in mind, however. For example, if you have an outstanding loan against your 401(k) and decide to change employers, you must repay the full amount or be subject to ordinary income tax and, in most cases, a 10% early withdrawal penalty. Additionally, your investment options will be limited to what the new plan offers and, if you change jobs frequently, rolling over into each new plan can become cumbersome and require additional paperwork.
Option 4: Roll Over into an IRA
Rolling your old 401(k) into an individual retirement account (IRA) is a popular choice for many people changing jobs. This option involves opening an IRA with a brokerage firm and transferring your existing retirement balance into the new account, tax-free and penalty-free when executed as a direct rollover. By moving the money out of an employer-sponsored plan, you gain full control over how your retirement assets are managed and have access to a much broader range of investment options. You can also continue contributing to the IRA, and if you choose a traditional (pre-tax) IRA you may be eligible for a tax deduction depending on your income and other factors.
Another advantage of the rollover IRA is the ability to increase your total retirement savings. For 2026, the annual contribution limit for a 401(k) is $24,500 (or $32,500 for those age 50+). By adding an IRA into the equation, you can contribute an additional $7,500 each year (or $8,600 for those age 50+), giving you more room to build long-term wealth.
The Bottom Line
Of course, every investor’s situation is unique and each option outlined above has its own tradeoffs. Rolling your 401(k) into an IRA generally provides the greatest control and flexibility, while cashing out should be viewed as a last resort. Leaving the funds where they are requires no immediate action, whereas rolling over into your new employer’s plan allows for account consolidation. Ultimately, the decision rests with the account holder and their advisor. The best choice should consider your career plans, investment preferences, and your long-term goals. However, making a deliberate, informed decision can help protect and grow your retirement savings throughout your career.
This content is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.