Leaving a job is a big transition. Whether you’re moving to a new company, taking time off, or shifting into retirement, one of the biggest financial questions you’ll face is: What should I do with my 401(k) after leaving my job?

Many people let these accounts linger—sometimes forgetting about them entirely. According to Fidelity, the average 401(k) balance in 2025 is around $127,000, but NerdWallet reports that the average American will pay $207,000 in fees to banks and investment companies over their lifetime. 

In other words, mishandling your 401(k) or ignoring it could cost you more in fees than the account is even worth today.

This guide will walk you through the essentials:

• What a 401(k) is and how it works
• Whether a 401(k) is the same as an IRA
• When and how you can pull money from your 401(k)
• The tax treatment of 401(k) contributions
• A clear comparison of 401(k) vs IRA
• And most importantly, your options for handling a 401(k) after leaving a job
  
  

Here’s why we don’t love your 401k 

What is a 401(k)?

A 401(k) is a type of retirement savings plan offered by employers in the United States. Named after the section of the Internal Revenue Code that created it, a 401(k) allows employees to contribute a portion of their salary into a tax-advantaged investment account.

Key features:

• Employer-sponsored: You can only participate if your employer offers a plan.
• Tax-advantaged: Most contributions are made with pre-tax dollars, reducing your taxable income for the year.
• Investment growth: Your money is invested—usually in mutual funds or ETFs—and grows tax-deferred until withdrawal.
• Employer match: Many companies match a portion of your contributions, essentially free money toward retirement.

For many workers, a 401(k) is their first and largest retirement savings vehicle.

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How Does a 401(k) Work?

When you contribute to a 401(k):

1. Payroll deductions: Contributions are automatically deducted from your paycheck.
2. Tax advantages: Contributions are typically pre-tax, which lowers your taxable income.
3. Investment selection: Funds are invested in a menu of options chosen by your employer (stocks, bonds, mutual funds).
4. Employer match: If your employer offers one, they’ll contribute additional funds, usually a percentage of your salary.
5. Growth: Investments grow tax-deferred, meaning you don’t pay taxes until you withdraw.

This system makes retirement savings automatic and relatively painless. However, fees can quietly erode returns if you don’t actively manage the account.

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Why isn’t my 401(k) growing????

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Is a 401(k) an IRA?

No. While both are retirement accounts, a 401(k) is not the same as an IRA (Individual Retirement Account).

Fundamentally, a 401(k) is an employer-sponsored and managed account, which means it comes with restrictions on investment choices. Whereas an IRA is an individual-owned account, meaning you open it yourself through a bank, brokerage, or financial institution.

The key difference? Control and flexibility.

With a 401(k), your employer sets the investment menu, and you can’t order anything that isn’t on the menu. With an IRA, you can choose from a much wider range of investments—stocks, ETFs, real estate funds, and more.

One reason we don’t love 401(k)s is specifically because of that menu. The recent market crash? A lot of retirees and pre-retirees were looking at their 401(k) statements with tears in their eyes. We don’t like taking that kind of risk with your life savings.

This distinction becomes crucial when deciding what to do with an old 401(k). That’s the hard part.

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When Can You Pull From a 401(k)?

Just in case you were wondering, we wanted to answer this question. 

Access to your 401(k) is restricted until retirement age (generally 59½). If you withdraw before then, you’ll face both taxes and penalties. Standard withdrawal rules:

• Before 59½: Withdrawals are subject to a 10% penalty plus income taxes.
• At 59½ or later: Withdrawals are taxed as ordinary income but without penalty.
• At 73 (as of 2025): Required Minimum Distributions (RMDs) must begin.

But know that there are some exceptions: Certain “hardship” withdrawals are allowed without penalty, including:

• Buying a first home
• Education expenses
• Medical bills
• Certain emergencies

BE CAREFUL WITH THIS. A recent client considered this and decided that borrowing against his 401(k) often ends up costing him more in the long run. You may be forced to “buy back in” at higher market prices, eroding your gains.

Is a 401(k) Pretax?

Yes—most 401(k) contributions are pre-tax. This means money goes in before income taxes are taken out, lowering your taxable income in the contribution year.

There are two main types of 401(k)s:

• Traditional 401(k): Pre-tax contributions, taxable withdrawals.
• Roth 401(k): After-tax contributions, tax-free withdrawals in retirement.

Most employers offer the traditional option, though Roth 401(k)s are becoming more common.

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The REAL Difference Between a 401(k) and a Pension 

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What to Do With a 401(k) After Leaving a Job

Now the big question: what should you do with that old 401(k)?

Every time you change jobs (and the average American changes jobs every 5–7 years), you may leave behind an old 401(k). If you ignore it, it becomes what advisors call an “orphaned account.” That’s when fees pile up and growth stalls.

Here are your main options:

1. Leave It With Your Old Employer

• Pros: No immediate action required. You can worry about moving on to your next job and your investments keep growing.
• Cons: Limited investment choices, potential for high fees, easy to lose track.

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

• Pros: Keeps retirement savings consolidated in one account. Potentially higher contribution limits.
• Cons: Still limited to employer’s plan choices.

3. Roll It Into an IRA

• Pros: More control, more investment options, often lower fees.
• Cons: No employer match. Must manage it yourself or work with an advisor.

NOTE: This is what a recent client did. The client rolled old 401(k)s into an IRA managed by a colleague, gaining more flexibility and avoiding unnecessary fees. He wanted to be able to access it when he wanted and have it working for the next several years before retirement. 

4. Cash It Out (Not Recommended)

• Pros: Immediate access to funds.
• Cons: Taxes + 10% penalty if under 59½. Significant erosion of long-term retirement savings.

For example, cashing out $100,000 early could leave you with only ~$65,000 after taxes and penalties—plus you lose decades of compound growth.

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Why Fees and Inattention Really, Really Matter

One of the most overlooked risks in retirement planning is fees. The average American may pay more in fees over their lifetime than they ever accumulate in their account, about $207,000.

Neglected accounts are abused the most by fees:

• You forget about them.
• Fees keep charging.
• Investment performance stagnates.

Rolling over into an IRA—or at least consolidating accounts—reduces these risks.

Retirement Planning (And Better Money Management): How to Decide

Here’s a framework:

1. Check for employer match: If your new employer offers a strong match, contribute enough to capture it.
2. Assess fees: Review the expense ratios in your old 401(k). If they’re high, consider rolling over.
3. Think about access: Do you need flexibility before retirement age? If so, contributing beyond the match into taxable brokerage accounts may give you more liquidity, as highlighted in the client story.
4. Diversify: Don’t assume the 401(k) is your only option. Non-qualified investment accounts, Roth IRAs, and HSAs can all play a role.

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A Real-World Example, Our Client Scott

Our client had multiple old 401(k)s. After changing jobs, he wasn’t contributing anymore, which meant:

• No more employer matches.
• High fees eating into gains.
• Money “just sitting there.”

By working with an advisor, he:

• Located all accounts.
• Rolled them into an IRA with broader choices.
• Adjusted new contributions to focus only on employer match, redirecting the rest into more flexible accounts.

This gave him greater control, lower costs, and more flexibility for future needs.

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Please Don’t Leave Your 401(k) Behind

Your 401(k) is a powerful retirement tool—but only if you actively manage it. Leaving old accounts behind or over-contributing without strategy can cost you tens of thousands in fees and missed opportunities.

Key takeaways:

• A 401(k) is not an IRA—don’t confuse the two.
• You can’t pull from your 401(k) penalty-free until 59½, with few exceptions.
• Most 401(k)s are pre-tax, but Roth options exist.
• IRA vs 401(k) depends on control vs contribution limits.
• After leaving a job, your best options are rolling into a new plan or an IRA.

If you have old accounts floating around, take action. Consolidate, roll over, and review your retirement strategy regularly. Tthe earlier you take control, the more freedom you’ll have—not just in retirement, but in life.

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Frequently Asked Questions About 401(k)s

What should I do with my 401(k) after leaving a job?

You can leave it with your old employer, roll it into your new employer’s plan, roll it into an IRA for more control, or cash it out (not recommended due to taxes and penalties).

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Can I cash out my 401(k) when I quit my job?

Yes, but it usually triggers income tax plus a 10% early withdrawal penalty if you’re under age 59½. Rolling it over is typically a better option.

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Is a 401(k) the same as an IRA?

No. A 401(k) is an employer-sponsored plan, while an IRA is opened individually. 401(k)s allow higher contributions but offer limited investment choices, while IRAs provide more flexibility.

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When can I withdraw from a 401(k) without penalty?

You can begin penalty-free withdrawals at age 59½. Some exceptions apply for hardship withdrawals, but most early withdrawals result in taxes and penalties.

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Is a 401(k) pre-tax or after-tax?

Most 401(k) contributions are pre-tax, which lowers your taxable income today. Some employers also offer Roth 401(k)s, which are funded with after-tax dollars but allow tax-free withdrawals in retirement.

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What happens if I forget about an old 401(k)?

Your account will remain invested, but fees can eat away at your balance over time. Many people lose track of old accounts. Consolidating into an IRA or new plan helps avoid “orphaned” 401(k)s.

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Which is better: IRA or 401(k)?

It depends on your goals. A 401(k) is better for maximizing employer matches and higher contributions. An IRA provides greater investment choices and often lower fees. Many people use both.

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How many 401(k)s can I roll into an IRA?

There’s no limit. You can roll multiple old 401(k)s into a single IRA, simplifying your retirement strategy and potentially lowering fees.

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