Read time: 5 to 6 minutes
Switching jobs? It happens a lot. In fact, the average worker changes employers about once every 4 years.1 If you’re starting a new job, consider this important but sometimes overlooked question: What should you do with the money in your former employer’s retirement plan? Let’s go over your options and some pros and cons for each.
Leave your money in the plan
If you have at least $5,000 in your account, you can usually leave your money in your former employer’s plan at Vanguard. If you're happy with the plan, you may want to leave your money there.
Some pros
- You can continue using Vanguard Digital Advisor® to manage your investments.
- The plan may offer low-cost investment options not available elsewhere.
- You won’t pay taxes on your money until you take a distribution or withdrawal.2
- Your plan may offer you the flexibility to take partial distributions or installment payments.
- If you have a plan loan, you can use electronic bank transfers to continue making payments.3
Some cons
- You can’t continue contributing to the plan.
- You usually need at least $5,000 in your account.
- Your withdrawals may be limited depending on the plan’s options.
- Once you reach age 73, you’ll need to start taking required minimum distributions (RMDs). Note: Roth 401(k) money is not subject to RMDs.
Roll the money over to an IRA
An IRA is a personal, tax-deferred account that gives investors an easy way to save for retirement. You can move your money to an IRA, which offers a wide range of investment choices.4
If you’re interested in this option, consider a Vanguard IRA®. Why? The average Vanguard fund expense ratio is 82% less than the industry average.5 Over time, that means more money stays in your account instead of going toward expenses—whether you leave your money in the plan or roll it over to a Vanguard IRA. And if you enroll your IRA in Digital Advisor, you can continue using that Vanguard advice service.
If you’re interested in this option, consider a Vanguard IRA®. Why? The average Vanguard fund expense ratio is 82% less than the industry average.5 Over time, that means more money stays in your account instead of going toward expenses—whether you leave your money in the plan or roll it over to a Vanguard IRA. And if you enroll your IRA in Digital Advisor, you can continue using that Vanguard advice service.
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You can choose between a traditional or Roth IRA, depending on your situation and when you want your tax break—now or later. You can also explore whether a Roth conversion makes sense for you.
Some pros
- You won’t pay taxes on your money until you take a distribution or withdrawal.2
- You’ll continue to have access to Digital Advisor to manage your investments if you enroll in the service.
- You may have more flexibility to use the money for a first-time home purchase or education expenses.
- You can choose between a traditional or Roth IRA, depending on when you want your tax break.
Some cons
- An employer plan may offer lower-cost investments, depending on your investment choices. Your costs may vary based on your mix of investments.
- Once you reach age 73, you’ll need to start taking RMDs from a traditional IRA. Note: Roth IRA money is not subject to RMDs.
HELPFUL HINT
If you invest in a company stock fund in your employer plan, please consult with a tax advisor for more information on tax treatment before moving your balance to an IRA.
Roll the money over to your new employer’s plan
If your new employer’s plan accepts rollovers, you can bring the balance over from your former employer’s plan.
Some pros
- All your retirement plan savings will be in one place.
- You won’t pay taxes on the money until you take a distribution or withdrawal.2
- You may have access to investment options or services that your previous employer’s plan didn’t offer.
Some cons
- Your investment options may change based on what your new plan offers.
- The cost of those investments may be higher, depending on the plan.
- Your new employer may not offer advice services like Digital Advisor.
- If you’re no longer employed by your current employer when you reach age 73, you’ll need to start taking RMDs. Note: Roth 401(k) money is not subject to RMDs.
Cash out your savings
You can cash out your entire retirement plan balance when you leave an employer. But that could have a major impact on your savings—and your retirement readiness. And you could owe a lot of money to the IRS. Add up all the taxes and penalties, and it could mean years of progress wiped out in a single day. So carefully consider this option before you act.
Some pros
- The money is yours now to use as you like.
- You can use the money for emergency expenses or to help you pay off debt.
- If you’re age 55 or older, you may be able to avoid the 10% federal penalty tax.6
Some cons
- The federal government withholds 20% of your check toward your taxes.
- If you cash out before age 55, you’ll likely owe a 10% federal penalty tax minus any Roth or after-tax money.6
- You’d also likely owe income tax on the money next time you file your taxes.
- Cashing out your savings means it won’t be invested anymore, so the money won’t be able to grow.
HELPFUL HINT
Take time to weigh your withdrawal options. You may want to talk them over with a financial advisor.
It’s time to make a decision
Review the options and decide what makes sense for you. When you’re ready, we’re here to help. And, if you decide to leave your money in your former employer’s plan, don’t forget to complete your Digital Advisor profile for personalized investment management and access to powerful financial planning tools.
Whenever you invest, there’s a chance you could lose the money.
Before you invest, get the details. Consider the fund’s objective, risks, charges, and expenses. The fund’s prospectus (or summary prospectus, if available) will tell you these important facts and more. So read it carefully. Call Vanguard at 800-523-1188 to get one. Or you can find one at vanguard.com.
Before you invest, get the details. Consider the fund’s objective, risks, charges, and expenses. The fund’s prospectus (or summary prospectus, if available) will tell you these important facts and more. So read it carefully. Call Vanguard at 800-523-1188 to get one. Or you can find one at vanguard.com.
1Source: Employee Tenure in 2024. U.S. Department of Labor, Bureau of Labor Statistics, 2024.
2Taxes: Taking money from your retirement account can affect how much you’ll have to pay in taxes. You’ll owe taxes on pre-tax money. You won’t owe taxes on Roth earnings as long as you are age 59½ or older and it’s been at least five years since your first Roth contribution. If required by law, Vanguard will withhold some taxes for you. You may need to pay a 10% federal penalty tax if you take money out early.
3If you have a loan and leave your employer, you can pay back the loan in full or continue making payments using electronic bank transfers. But if you don’t choose either of these options, the unpaid balance will be reported to the IRS as a withdrawal. That amount may then be subject to income tax. And if you’re younger than age 59½, you may also owe a 10% federal penalty tax.
4Whether you keep your money where it is, move it to an IRA, or move it to another employer's plan depends on your situation and preferences. Some things to consider are available investments and services, fees and expenses, and protection from creditors. Also consider withdrawal penalties, required distributions, and the tax effects of moving company stock to an IRA. There are other factors too. Weigh the pros and cons before you make your decision.
5Vanguard average mutual fund expense ratio: 0.09%. Industry average mutual fund expense ratio: 0.50%. All averages are asset-weighted. Industry averages exclude Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2023.
6Public safety workers employed by states or the federal government, and private-sector firefighters, may be eligible for penalty-free withdrawals at age 50 or over. They may also qualify if they have 25 years of service under their retirement plan and are under age 50. See IRS guidance for more info regarding early withdrawals due to separation from service.
The performance of a company stock fund depends on the price of a single stock, which can move up or down dramatically. So this type of fund can be riskier than a stock mutual fund, which may own hundreds or thousands of stocks.
Vanguard does not provide individual tax advice. You should consult your tax advisor before making any decisions as to your specific circumstances.
Vanguard Digital Advisor's services are provided solely by Vanguard Advisers, Inc. (VAI), a registered investment advisor. Please review the Vanguard Digital Advisor brochure for important details about this service. Vanguard Digital Advisor's financial planning tools provide projections and goal forecasts, which are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
2Taxes: Taking money from your retirement account can affect how much you’ll have to pay in taxes. You’ll owe taxes on pre-tax money. You won’t owe taxes on Roth earnings as long as you are age 59½ or older and it’s been at least five years since your first Roth contribution. If required by law, Vanguard will withhold some taxes for you. You may need to pay a 10% federal penalty tax if you take money out early.
3If you have a loan and leave your employer, you can pay back the loan in full or continue making payments using electronic bank transfers. But if you don’t choose either of these options, the unpaid balance will be reported to the IRS as a withdrawal. That amount may then be subject to income tax. And if you’re younger than age 59½, you may also owe a 10% federal penalty tax.
4Whether you keep your money where it is, move it to an IRA, or move it to another employer's plan depends on your situation and preferences. Some things to consider are available investments and services, fees and expenses, and protection from creditors. Also consider withdrawal penalties, required distributions, and the tax effects of moving company stock to an IRA. There are other factors too. Weigh the pros and cons before you make your decision.
5Vanguard average mutual fund expense ratio: 0.09%. Industry average mutual fund expense ratio: 0.50%. All averages are asset-weighted. Industry averages exclude Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2023.
6Public safety workers employed by states or the federal government, and private-sector firefighters, may be eligible for penalty-free withdrawals at age 50 or over. They may also qualify if they have 25 years of service under their retirement plan and are under age 50. See IRS guidance for more info regarding early withdrawals due to separation from service.
The performance of a company stock fund depends on the price of a single stock, which can move up or down dramatically. So this type of fund can be riskier than a stock mutual fund, which may own hundreds or thousands of stocks.
Vanguard does not provide individual tax advice. You should consult your tax advisor before making any decisions as to your specific circumstances.
Vanguard Digital Advisor's services are provided solely by Vanguard Advisers, Inc. (VAI), a registered investment advisor. Please review the Vanguard Digital Advisor brochure for important details about this service. Vanguard Digital Advisor's financial planning tools provide projections and goal forecasts, which are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
