MW Can I leave my 401(k) with my employer when I retire?

By Dan Moisand

There are a few options for your 401(k) when you leave a job - some are better than others.

Dear Dan,

One of my coworkers is retiring next month, and he said he was leaving his 401(k) where it is. Why would he do that? Doesn't he need to roll it to an IRA?

-IRA wondering

Dear IRA wondering

The only time a former worker needs to rollover their funds to an IRA is when they do not want to pay taxes on the distribution from the 401(k) and their vested 401(k) balance is small. Employers can force former workers with balances under $7,000 out of the plan. If such a worker were to cash that distribution check rather than rolling it over, they would owe taxes and possibly a 10% penalty if too young. If they roll it to an IRA, there is no taxable event, and the tax liability continues to be deferred.

Former workers with balances greater than $7,000 who do not want to take a taxable distribution have three basic options: leave it in your old 401(k) plan, roll it to a new employer's qualified plan if the new plan allows rollovers, or roll it to an IRA.

It's easy to see why many people choose to roll their funds out of their 401(k) and into an IRA when they leave a job. Many 401(k)s have limited investment options and some have high fees. In addition, though it is not the best reason to move the money, some former employees harbor so much resentment over their job change, they value ending any connection to their former employer and want their money elsewhere.

I can't speak for your coworker as to his reasoning but the converse of what I just wrote gives hints as to why some people may leave their funds with their former employer's plan. Some plans have terrific investment options or are inexpensive. In addition, 401(k) plans have better creditor protection in some states than IRAs.

However, sometimes accountholders aren't aware of their options. One finding of a 2024 report to Congress from the U.S. Government Accountability Office (GAO) was that nearly 60% of terminated participants who rolled over their savings to a new 401(k) plan or IRA did not know they could have left their savings in their old plan.

In practice, the most common rationale I see used by people who leave their funds with a former employer is the "age 55 exception." Normally, if one takes a distribution from a 401(k) prior to age 59 1/2, a penalty of 10% of the taxable distribution is owed in addition to the ordinary taxes.

One exception to this penalty applies when a worker separates from service in or after the year in which they turn 55. "Separate from service" means an end to employment for any reason including quitting, getting fired for cause, getting laid off, or retiring.

While the penalty is waived for such former workers, the normal taxes must still be paid and there will be mandatory federal tax withholding of 20% on any distributions made. This age 55 exception only applies to distributions from the plan of the employer the worker left. It does not apply to any other retirement plans or IRAs. The plan's Summary Plan Description $(SPD)$ will describe any other logistical requirements the plan may impose such as how often you can take a distribution.

Note that this age 55 exception is available at age 50 for certain public safety employees. Eligible workers include federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers.

It's worth mentioning that while there are good reasons to leave your funds in a former employer's 401(k) plan, there is value in simplicity. Some people have difficulty managing multiple accounts held at differing institutions and people do lose track.

If you have a question for Dan, please email him with "MarketWatch Q&A" on the subject line.

-Dan Moisand

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

January 21, 2026 15:25 ET (20:25 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.