What to Do with Your 401(k) When Leaving Your Employer

Key Takeaways

• If you leave your job at age 55 (or 50 for public service workers), you can avoid the 10% early withdrawal penalty by keeping funds in the 401k until age 59.5, preserving liquidity without penalty
• Rolling to an IRA at a brokerage firm often provides better investment flexibility and allows you to build a coordinated, diversified portfolio across all your accounts, especially important as you approach retirement
• Check if your 401k offers special fixed-rate options like stable value funds or guaranteed income contracts—if they pay higher rates than outside options, keep those funds in the plan while rolling out the rest
• Administrative limitations in 401k plans (restrictions on monthly distributions, pro-rata withdrawal rules, blackout periods, separate RMD tracking at age 72) can significantly impact retirement spending flexibility over 20-30 years, making an IRA rollover more manageable
• If you have employer stock in your 401k, you may qualify for Net Unrealized Appreciation tax treatment, which requires rolling out the entire balance in the same calendar year to access preferential capital gains rates