Changing jobs is an exciting step in anyone’s career. Whether you are moving to a new employer, starting your own business, or pursuing a new opportunity, there are several important financial decisions to make. One of the most important involves deciding what to do with the money in your existing 401(k) retirement plan.

For many Americans, the most common solution is to roll over their 401(k) funds into an Individual Retirement Account (IRA). In fact, rollovers represent the largest source of new IRA funding in the United States. Industry research estimates that more than $850 billion in retirement assets are rolled over every year, and that number is expected to exceed $1 trillion annually in the coming decade. These numbers highlight just how often workers move their retirement savings when changing employers.

Understanding your options when leaving a job can help ensure your retirement savings continue to grow in the most tax-efficient and flexible way possible.

Understanding the Difference Between a 401(k) and an IRA

A 401(k) plan is an employer-sponsored retirement account that allows employees to contribute a portion of their salary toward retirement savings. Many employers also provide matching contributions, which is one reason the 401(k) remains one of the most popular retirement vehicles in the United States. However, because the plan is sponsored by an employer, the investment options are typically limited to a preselected menu of mutual funds or target-date funds chosen by the plan administrator.

An Individual Retirement Account, or IRA, works differently. An IRA is not tied to an employer and can be opened through a financial institution or custodian selected by the investor. As a result, IRAs generally provide significantly greater flexibility and control. Investors typically gain access to a wider range of investments and can tailor their retirement strategy to match their long-term financial goals.

This added flexibility and control is one of the primary reasons many individuals choose to roll their 401(k) funds into an IRA after leaving a job.

When Can You Move Money Out of a 401(k)?

Funds in a 401(k) plan usually cannot be withdrawn or transferred freely while you remain employed by the company sponsoring the plan. In most situations, a triggering event must occur before funds can be moved out of the plan.

The most common triggering event is leaving the employer that sponsors the plan. Other triggering events may include retirement, disability, termination of the plan, or in some cases reaching age 59½ and becoming eligible for what is known as an in-service distribution.

For most workers, however, changing jobs is the most common opportunity to move their retirement savings.

Your Options When Leaving an Employer

When you leave a company, you generally have several choices regarding what to do with your 401(k) balance. One option is to leave the funds in your former employer’s plan, assuming the plan allows it. Another option is to roll the funds into your new employer’s retirement plan if the new plan accepts rollovers.

A third and often more attractive option is to roll the funds into an Individual Retirement Account. Finally, you may choose to withdraw the funds entirely. However, this option typically triggers income taxes and may also result in a 10 percent early withdrawal penalty if you are under age 59½.

Because of the tax consequences associated with cashing out retirement funds, most financial professionals strongly recommend avoiding that option whenever possible.

What Is a 401(k) Rollover?

A 401(k) rollover occurs when retirement funds are transferred from an employer-sponsored retirement plan into another qualified retirement account without triggering taxes or penalties.

When the rollover is completed properly, the transaction is treated as a tax-free movement of retirement funds. This allows investors to preserve the tax advantages of their retirement savings while moving the funds into an account that may offer greater flexibility.

There are two ways to complete a rollover: a direct rollover or an indirect rollover.

Direct Rollovers

A direct rollover is the most common and safest method of moving retirement funds. In a direct rollover, the funds move directly from the former employer’s 401(k) plan to the new retirement account. Because the account holder never takes possession of the funds, the transaction is not treated as a taxable distribution.

Direct rollovers also avoid mandatory withholding taxes and eliminate the risk of accidentally missing the 60-day rollover deadline.

For these reasons, direct rollovers are generally recommended whenever possible.

Indirect Rollovers

An indirect rollover works differently. In this situation, the retirement plan distributes the funds directly to the participant. The participant then has 60 days to deposit those funds into another retirement account.

However, this approach can create complications. Most employer plans are required to withhold 20 percent of the distribution for federal taxes. To complete the rollover successfully, the individual must replace the withheld amount using personal funds when depositing the money into the new account.

If the full amount is not redeposited within the 60-day period, the distribution becomes taxable and may also be subject to a 10 percent early withdrawal penalty.

Because of these risks, indirect rollovers are generally less desirable than direct rollovers.

SECURE Act 2.0 and Retirement Portability

The SECURE Act 2.0, enacted in recent years, introduced several reforms designed to strengthen the U.S. retirement system. Although the law did not dramatically change rollover rules, it did place a greater emphasis on improving the portability of retirement savings when workers move between jobs.

One emerging trend is the use of automatic portability systems. These systems are designed to help smaller retirement accounts move automatically when employees switch employers. The goal is to prevent workers from cashing out retirement savings when they change jobs.

Even with these developments, many investors continue to prefer rolling their retirement funds into IRAs because of the broader investment flexibility those accounts provide.

Why Many People Choose to Roll Over to an IRA

Rolling over a 401(k) into an IRA can provide several advantages. One of the most significant benefits is access to a much broader range of investment opportunities. While employer-sponsored plans typically limit participants to a small selection of mutual funds, an IRA allows investors to choose from a wide variety of investments, including stocks, bonds, exchange-traded funds, and alternative assets.

Another advantage is greater control over retirement assets. When funds are held in an IRA, the investor, not the employer, decides how those assets are invested and managed.

In some cases, IRAs may also provide lower overall fees, depending on the custodian and the investments selected.

Finally, rolling retirement accounts into a single IRA can simplify financial management by consolidating multiple accounts in one place.

Rolling a Former Employer 401(k) Into a Self-Directed IRA

For investors seeking even greater flexibility, a former employer’s 401(k) can also be rolled into a Self-Directed IRA (SDIRA). This type of IRA allows investors to move beyond traditional stock market investments and access a broader range of alternative assets.

Once the rollover is complete, the Self-Directed IRA may be used to invest in assets such as real estate, private equity, private lending, startups, cryptocurrency, and precious metals.

This expanded investment flexibility is one of the primary reasons many investors choose Self-Directed IRAs when they leave an employer.

By rolling over their 401(k) into a Self-Directed IRA, investors gain the ability to diversify their retirement portfolio beyond traditional Wall Street investments.

Conclusion

Changing jobs often creates an important opportunity to reevaluate your retirement strategy. Because 401(k) plans are tied to employers, many individuals choose to move their retirement savings into an IRA once they leave a company.

With hundreds of billions of dollars rolled over each year, rollovers have become the most common way Americans fund their IRAs. When executed properly, a rollover allows retirement funds to move from one account to another without triggering taxes or penalties.

For investors seeking greater control, broader investment choices, and the ability to diversify into alternative assets, rolling a former employer’s 401(k) into a Self-Directed IRA can be a powerful strategy.