Leaving a job: the four things that can happen to the old plan

How it works

Leaving the money in the old plan is allowed when the vested balance is above a small threshold the plan sets, and the account keeps its fund menu and fees. A rollover to a new employer's plan is allowed where that plan accepts rollovers, and the money keeps its plan protections. A rollover to an IRA opens the whole market of funds, and a direct rollover from one custodian to the other involves no tax and no withholding. A cash out is a taxable distribution: the plan must withhold 20 percent for federal tax, the full amount is taxed as income, and a worker under 59 and a half owes the 10 percent (2025, verified on the official page) percent addition unless an exception applies. A check made out to the worker starts a sixty day clock to complete a rollover.

What it gives

A direct rollover moves the full balance with no tax and no withholding.

Staying in a large employer plan can keep access to very low cost institutional funds.

Consolidating into one account makes required distributions and beneficiary forms easier to track later.

What it costs, or where the catch is

A cash out loses 20 percent to withholding at once and more at tax time, plus the penalty when under 59 and a half.

Money moved to an IRA loses the rule of 55 and some creditor protections that plans carry.

Small balances can be forced out by the plan into an IRA or a check if the worker does nothing.

A worked example

Jonah, age 34, leaves a job with $28,000 in the plan. A direct rollover to an IRA moves all $28,000 with no tax. If he cashes out instead, the plan withholds 20 percent, $5,600, and sends $22,400. At tax time the $28,000 is income taxed at 22 percent, $6,160, plus the 10 percent addition, $2,800, so the total cost is $8,960 and he keeps $19,040 of his $28,000.

Where it goes wrong

The common miss is taking a check made out personally, spending the 60 days, and discovering the whole balance became taxable income with the penalty on top.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: Rollovers of retirement plan and IRA distributions. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.