Most employees are content to leave their retirement plans alone when they feel comfortable at a job.

However, when you eventually leave your job, you’ll be confronted with the right decision of what to do with your 401(k). Without matching contributions, is it smarter to cash out your earnings or roll it over to an individual retirement account? What if you are offered a new employer’s plan?

The earlier you start planning for this transition, the more you can maximize your retirement savings and secure your financial future.

What Happens to Your 401(k) When You Leave a Job?

When you leave a job, your 401(k) account will still belong to you, but you will miss out on matching contributions from your employer. Generally, there are several options available to maximize your 401(k) savings, including:

  • Rolling over to an individual retirement account (IRA).
  • Entering a new employer plan.
  • Leaving funds in the current plan and contributing to them.

Deciding which distribution option to choose depends on several factors, such as your employer’s vesting schedule, tax implications (e.g., withdrawing funds before retirement age), and long-term retirement goals.

My preferred distribution option is to roll it over to an IRA, especially if you won’t enjoy matching contributions from your new employer, and here is why.

The Benefits of Rolling Over to an IRA

There are numerous benefits to rolling over your old 401(k) to an IRA:

  • Broader Range of Investment Options. By rolling over your 401(k) to an IRA, you will gain access to a wider pool of investments compared to the limited selection offered by your employer. For example, self-directed IRAs allow you to invest in stocks, bonds, and even lesser-known options like precious metals or real estate investment trusts (REITs). The growth potential of these investments is far superior to the stock market your 401(k) limits you to.
  • Competitive Expense Ratios. Employer-sponsored 401(k) plans often charge administrative and investment fees ranging from 0.50% to 2% on all assets managed without employer subsidies for these fees. In contrast, IRAs provide lower-cost investment options with expense ratios typically ranging from 0.12% to 0.75% (excluding self-directed IRAs, which may have higher custodial and transaction fees).
  • Improved Tax Liability. You can effectively reduce your tax liability by converting a pre-tax 401(k) to an IRA. Future qualified withdrawals from a Roth IRA can be tax-free, which is particularly beneficial if you anticipate earning more income shortly before retirement. You will have the option to choose a traditional Roth-structured SDIRA, depending on your investment objectives.

401(k) vs. IRA: Pros and Cons

Two of the most popular investment choices for retirees are 401(k)s and IRAs. Both hold unique benefits that you can leverage, depending on your financial circumstances. Let’s explore the pros and cons of each:



  • Employer Matching Contributions. Many employers offer matching contributions (e.g., 3%), allowing you to boost compound interest even further.
  • Higher Contribution Limits. Up to $22,500 annually (as of 2023) if you are under 50 years old. If you are 50 or older, your contribution limit increases to $30,000.
  • Borrowing Against Your Account Balance. Borrowing against your account balance in case of emergencies is possible. However, we do not recommend it.


  • Limited control over investment choices
  • Early withdrawal penalties (before the age of 59½) of 10% of the amount withdrawn, which is added to your taxable income for greater tax liability



  • Greater Control. IRAs allow for greater control over your investments and the selection of providers, such as banks and brokerage firms, enabling you to align your investment choices with your risk tolerance and financial goals.
  • Tax-Deductible Contributions. Contributions made to traditional IRAs can be tax-deductible in the year they are made. This can reduce your overall taxable income, providing potential tax advantages. However, it’s important to note that Roth IRAs use after-tax contributions, which can lead to tax-free qualified withdrawals upon retirement.
  • Alternative Investments: Self-directed IRAs allow you to invest in non-traditional assets, such as gold, Bitcoin, rental properties, promissory notes, private equity, and more.


  • No Employer Contributions. Unlike 401(k) plans, IRAs do not offer employer contributions. Individuals are solely responsible for funding their accounts, limiting the potential for additional retirement savings through employer matching.
  • Lower Contribution Limits Than 401(k)s. IRAs have lower contribution limits compared to 401(k)s. As of 2023, the maximum annual contribution to an IRA is $6,500, with an additional catch-up contribution limit of $1,000 for individuals aged 50 or over. In contrast, 401(k) plans allow for higher annual contributions, with a maximum of $22,500 (as of 2023), including catch-up contributions.


IRAs offer greater tax benefits and flexibility if you choose a self-directed account. Rollovers are also easy and won’t cost you much.

However, 401(k)s offer higher contribution limits and matching contributions. If you don’t have access to matching contributions or plan to invest more than $6,500 annually, an IRA is the preferred choice. Besides, you can always build more money by putting your IRA to work rather than taking from your discretionary income.

Maximizing Investment Options with a Self-Directed IRA

One powerful tool for retirement planning I mentioned is the Self-Directed Individual Retirement Account (SDIRA), which offers several advantages over IRAs, including access to a wider range of investments beyond traditional stocks and bonds.

What Is a Self-Directed IRA?

SDIRAs provide access to a wider range of investments beyond traditional stocks and bonds. This allows individuals to explore alternative assets such as real estate, private equity, precious metals, and more, enabling greater diversification and potentially higher returns.

What Are the Benefits of a Self-Directed IRA?

One benefit of an SDIRA is greater control and flexibility over your investment choices. Unlike traditional IRAs that rely on a limited number of options, SDIRAs allow you to tap into alternative investment opportunities like mortgage notes, commodities, natural resources, real estate, and cryptocurrency. This enables you to create a more balanced, customized investment portfolio that aligns with your financial goals.

Another benefit of self-directed IRAs is the potential for tax advantages. Contributions to SDIRAs can help reduce your taxable income, while Roth SDIRAs offer the advantage of tax-free qualified withdrawals upon retirement. It is highly recommended to consult a professional tax advisor to understand all tax implications and make fully informed decisions.

Lastly, self-directed IRAs often come with lower fees. You can expect not to pay any custodial transaction or account valuation fees, which can easily accumulate to thousands of dollars over ten or twenty years. This can lead to significant savings and allow your investments to grow more efficiently.

How to Open an SDIRA

Opening an SDIRA is easy and straightforward. Here are five steps to open an SDIRA:

Scout Custodians.

Select a custodian that specializes in SDIRAs. Custodians are required to manage an SDIRA account. Pay close attention to custodial fees, third-party reviews, and their expertise in managing portfolios aligned with your investment goals.

Set Up An Account.

Once you’ve identified a custodian, gather all necessary supporting documentation, open an account, and pay any required fees. The required documentation may vary among custodians but generally includes government-issued photo IDs and proof of employment.

Fund Your SDIRA.

The next step is to fund your SDIRA. This can be done by transferring cash or moving funds from an existing 401(k) or traditional IRA through a rollover. You can set up automatic withdrawals to transfer funds to your newly established account regularly, such as bi-weekly or monthly.

Choose Your Investment Strategy.

With SDIRAs, you have unlimited potential with your investment strategy. You can select from diverse options, including stocks, bonds, real estate, precious metals, and more. If you have any questions about your investment strategy, it’s advisable to consult a financial advisor for guidance.

Active SDIRA Management.

Once you’ve funded your SDIRA and selected your investments, monitoring their performance is important. Regularly check on the performance of your assets at your preferred interval, maintain communication with your custodian to ensure compliance with IRS regulations, and complete all necessary paperwork for tax purposes.

Opening and maintaining an SDIRA is relatively straightforward. However, adhering to all applicable tax laws and continuously monitoring your portfolio is essential. Implementing an effective asset allocation strategy that aligns with your investment goals will help you maximize the potential of your SDIRA.

Tips to Leverage Funds in an SDIRA

Whether you’re considering investing in real estate, startups, or using your life insurance policy to fund investment opportunities within your SDIRA, there are so many creative ways to earn money in your retirement account using an SDIRA.

Invest in Rental Properties.

Investing in rental properties like condos and single-family homes allows you to generate passive cash flow, which is an excellent complement to your retirement income. Similar to stocks and bonds earning compound interest, your rental properties have the opportunity to appreciate, further expediting growth.

Syndicate a Real Estate Flip.

One of our favorite short-term profit opportunities, flipping real estate allows you to achieve high returns from property renovations and resale. Real estate syndication allows you to borrow other people’s money and earn a fee for executing a deal that can help build your SDIRA. SDIRA funds are a great source of wealth to syndicate a deal with, which you might not normally have access to. I’ve personally managed over $1.4 billion in real estate transactions. However, it wasn’t until I started using self-directed retirement accounts that I was able to help my clients and myself take home from each transaction by avoiding taxes.

Invest in Startups.

Investing in startups gives you exposure to emerging technologies. Everyone wishes they could have invested in Facebook but probably wouldn’t have the money anyways. Use your retirement accounts to secure your financial future with this high-risk, high-reward type of investment.

Use Life Insurance to Get Funds for Investments.

If you have a life insurance policy with a cash value component, it is possible to execute a strategy called premium financing, which allows you to access the cash value and death benefit. This can be used to invest in SDIRA assets. For premium finance, please consult your life insurance company to learn about eligibility criteria and financial requirements. Premium financing does come with higher fees, but you’ll never have to borrow through a bank again.

Why You Shouldn’t Cash Out a 401(k)

Although it may be tempting to withdraw 401(k) funds for emergency expenses or larger purchases, there are several reasons why you should not cash out a 401(k).

Firstly, if you withdraw funds from your 401(k) before retirement, it will be subject to penalties and treated as ordinary income, potentially pushing you into a higher tax bracket. Secondly, early withdrawal penalties will deduct 10% of the amount withdrawn, further diminishing your returns. Additionally, it’s important not to overlook the lost opportunity for compounding interest. Even small contributions to your retirement account can build up significantly through the power of compounding over time.

Of course, if you cash out your 401(k), you could miss out on the opportunity to double or triple your money using an SDIRA account.

Remember, your retirement plan should be viewed as a long-term investment vehicle. Early cashouts will only diminish your returns.


What happens to a 401(k) when you quit?

When you leave a job, you have several options with your 401(k) plan. You can leave it in your previous employer’s plan, roll it over to a new employer’s plan, roll it over to an IRA, or cash it out entirely. However, we do not recommend the last option as it will subject your distribution to additional taxes and penalties if you’re under 59½ years of age.

How long can you keep a 401(k) after leaving a job?

After leaving a job, you can keep money in your old 401(k) indefinitely. However, you should expect your employer and brokerage to provide options to roll over funds or cash out the balance, especially if your account balance is below a certain amount. Be sure to familiarize yourself with your employer’s rules regarding company departures.

Can an employer take back their 401(k) match?

Once a 401(k) contribution is made, employers cannot take back the contribution. However, they can implement a vesting schedule that matches contributions after a certain period (e.g., three years). They can also amend 401(k) terms to cut or eliminate future matching contributions, but contributions already made to your account would not be affected.

Can I cash out my 401(k) from a previous employer?

Yes, it is possible to cash out your 401(k) from a previous employer. Just be aware of the tax consequences, early withdrawal penalties, and the potential loss of investment growth by cashing out early.