What To Do With Your 401(k) When You Leave an Employer

Changing employers comes with the usual rituals. You hand over the laptop, grab the potted plant you kept alive against all odds, and secretly lament that you won’t be able to use that fancy espresso machine every day. Then there is your old 401(k), sitting quietly in the background, usually languishing due to lack of attention.

For high-net-worth investors, that account deserves more than an afterthought. A smart decision here can improve long-term tax efficiency, investment flexibility, and estate strategy. Here is how to think it through.

Start With a Quick Assessment

Before you move the account anywhere, take stock of a few things.

Check your vesting. Your contributions are always yours. Employer contributions, however, might not be fully vested if you leave earlier than planned. Better to know now than discover a shortfall later.

Look for an outstanding loan. If you ever borrowed from your 401(k), leaving the company can accelerate the repayment deadline. Miss it, and the unpaid amount may convert into a taxable distribution.

Evaluate the investment lineup and fees. The plan may have served you well up to this point, but that does not guarantee it is the best long-term home for your assets. High fees or a limited fund menu can quietly erode performance over time.

Option 1: Leave It in the Old Employer’s Plan

This is the “I’ll get to it later” option, and in some cases it works just fine.

If the old plan offers low costs, solid investment choices, and smooth administration, leaving the account in place keeps things simple. Your money stays invested, and nothing breaks.

The drawback is that once you leave, the account stops fitting neatly into the rest of your portfolio. You cannot contribute anymore, and it becomes one more outlier you have to remember to monitor. Think of it as the junk drawer of accounts. Not harmful, but not exactly integrated.

Option 2: Roll It Into Your New Employer’s 401(k)

If your new employer offers a strong plan and accepts rollovers, this can be a clean and efficient choice.

Everything lives under one roof. You avoid the sprawl of old accounts sprinkled across your career, and you keep all the creditor protections of an employer plan.

For high-net-worth clients, the appeal is simplicity. One plan. One fund menu. One consolidated view of retirement savings.

The key here is due diligence. Make sure the new plan actually improves your situation. Some are excellent, with institutional share classes and competitive expense ratios. Others…not so much. Compare before sending your money in that direction.

Option 3: Roll It Into an IRA

For many high-net-worth investors, this ends up being the most strategic choice.

An IRA gives you broader investment options, often lower costs, and the ability to integrate the account into your larger wealth plan. Asset location, Roth conversion opportunities, charitable giving strategies, coordination with trusts, and customized allocations all become easier in an IRA.

You also control the custodian, the investment philosophy, and the level of sophistication used to manage the account.

Just keep in mind that if you don’t already have IRA assets and are in the habit of doing backdoor Roth contributions each year, having funds suddenly in an IRA might negate the effectiveness of the backdoor Roth strategy. Legal protections differ between employer plans and IRAs, depending on your state. And make sure the rollover is done directly from custodian to custodian to avoid accidental taxation.

Option 4: Cashing Out (Almost Always a Terrible Idea)

Technically, you can do this. Realistically, it is hard to justify.

You will pay income tax. You may pay a penalty if you are under 59 and a half. And you will permanently remove dollars from a compounding environment that has been quietly working in your favor for years.

Unless you are starting a bonfire with hundred-dollar bills, this is not the path.

How To Decide What Fits You

This is not just an administrative task. It is part of your wealth strategy.

Ask yourself:

• Does the old plan still align with the rest of my portfolio?
• Is the new plan better, worse, or simply different?
• Would an IRA allow me to coordinate investments more effectively?
• Will moving assets to an IRA put a monkey wrench in my backdoor Roth IRA strategy?
• Do I want to incorporate Roth strategies in the coming years?
• How does this account fit into my estate or trust planning?

When you frame it this way, it becomes clear that the “best” choice depends on the larger financial architecture you are building, not just the easiest short-term move.

A Good Transition Point for Long-Term Planning

Leaving an employer gives you a natural opportunity to clean up your financial structure. Instead of letting your old 401(k) drift into the background, use the moment to consolidate, simplify, and align it with your broader goals.

Whether you keep it where it is, move it into a new plan, or bring it into an IRA for more strategic control, the key is choosing intentionally. Done right, this is not just housekeeping. It is optimization.

If you want help reviewing your options or folding the account into your long-term plan, your Allworth advisor is here, just an email or phone call away.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.