What to Do With Your IRA After Leaving a Job?

When you leave a job, deciding what to do with your IRA after leaving a job comes down to four paths: leave the account with the current custodian, roll it into your new employer’s retirement plan, transfer it to a personal IRA, or cash it out. Each path has a different tax cost, and one in particular — a SIMPLE IRA moved the wrong way inside its first two years — carries a 25% penalty rather than the usual 10%. The mechanics of how you move the money matter as much as where you send it.

Leave the Account Where It Is

Doing nothing is a legitimate holding pattern. Your IRA stays at the same institution, in the same investments, and keeps growing tax-deferred. Your former employer stops contributing, but nothing else changes. This buys time to compare alternatives without a clock running.

The risk is inertia. Some custodians require a minimum balance on inactive accounts, and if yours drops below the threshold they can force a distribution. You also lose any plan-level fee negotiation your employer provided. Over years, orphaned accounts tend to drift off the radar, which creates problems when required minimum distributions eventually begin or when heirs try to locate the money.

Roll Into Your New Employer’s Plan

If your new job offers a 401(k) or 403(b), you can consolidate the old IRA into that plan, provided the new plan accepts incoming rollovers. Not every plan does. Check the summary plan description or ask the plan administrator before you initiate anything.¹

Consolidating keeps everything in one place and often gives you access to lower-cost institutional share classes. There is also a creditor-protection benefit worth knowing about. Employer plans covered by ERISA have strong federal protection from lawsuits and judgments, while IRA creditor protection outside of bankruptcy varies by state.² If asset protection is a concern, rolling into an ERISA plan is generally the safer destination.

One caveat applies only if you also had employer stock in a former 401(k) with significant unrealized gains. Rolling that stock into a new plan or IRA gives up the net unrealized appreciation strategy, which lets you pay capital gains rates rather than ordinary income rates on the growth. That strategy requires taking the stock out as actual shares in a lump-sum distribution. It does not apply to SEP or SIMPLE IRAs.

Transfer to a Personal IRA

Moving the funds into a personal traditional or Roth IRA is the most common choice when you want wider investment options. Employer plans typically limit you to a menu of 20 to 30 funds. A personal IRA at a brokerage opens up thousands of individual stocks, bonds, and ETFs, which lets you build a portfolio shaped to your own timeline and risk tolerance.

The SIMPLE IRA Two-Year Rule

If the account you’re moving is a SIMPLE IRA, stop and check the dates. During the first two years after you began participating in the SIMPLE plan, you can only move those funds into another SIMPLE IRA. Transferring the money to a traditional IRA, a 401(k), or any other non-SIMPLE account inside that window triggers a 25% early withdrawal penalty on top of ordinary income tax.³ The penalty is 25%, not the usual 10%, and it applies even if you are moving the money straight into another retirement account.⁴

The two-year clock starts on the date you first participated in the employer’s SIMPLE plan, not the date you left the job. If you started participating in March 2024, you are locked into SIMPLE-to-SIMPLE transfers until March 2026. After the two years, you can roll the funds into a traditional IRA, a 401(k), or a 403(b) without penalty.³

Roth Conversions and the Pro-Rata Rule

Converting traditional IRA funds to a Roth IRA is appealing because future Roth withdrawals come out tax-free. The conversion itself, though, counts as ordinary income in the year you do it, so the full converted amount is added to that year’s taxable income.⁵

If you have ever made nondeductible (after-tax) contributions to any traditional IRA, the IRS will not let you cherry-pick the after-tax portion. The pro-rata rule treats all your traditional, SEP, and SIMPLE IRA balances as one combined pool when calculating how much of a conversion is taxable. The taxable percentage equals the total pre-tax balance divided by the combined balance across those accounts.⁵ If 90% of the combined pool is pre-tax, 90% of any conversion is taxable regardless of which specific account you convert from. You report the conversion and track your basis on Form 8606.⁶

Cash Out

Cashing out is the most expensive choice. The full distribution is added to your ordinary income for the year and taxed at your marginal bracket. If you are under 59½, you also owe a 10% early withdrawal penalty on the taxable portion, and if the distribution comes from a SIMPLE IRA within the first two years of participation, that penalty jumps to 25%.⁷

Withholding works differently depending on account type. For IRA distributions, including SEP and SIMPLE, the default federal withholding is 10% and you can elect to waive it entirely.⁸ For a 401(k) cash-out from a former employer, the mandatory withholding is 20% with no opt-out.⁹ Either way, withholding is only a prepayment. If your actual bracket is higher, you’ll owe the balance at filing.

Exceptions to the 10% Early Withdrawal Penalty

The 10% penalty has a longer list of exceptions than most people expect. Each waives the penalty only, not the income tax. For IRA distributions, the penalty does not apply if the money goes to:⁷

Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
Health insurance premiums while unemployed, available if you received unemployment compensation for at least 12 consecutive weeks.
Higher education expenses — tuition, fees, books, and required supplies for you, your spouse, or your children. This exception applies only to IRA distributions, not 401(k) withdrawals.
A first-time home purchase, up to $10,000 over your lifetime. A married spouse can take another $10,000 from their own IRA.
Total and permanent disability, as determined by a physician.
Substantially equal periodic payments calculated on your life expectancy, taken at least annually. Once started, they must continue for at least five years or until age 59½, whichever is later.
Birth or adoption, up to $5,000 per child for qualified expenses.
Federally declared disasters, up to $22,000 for qualified individuals who suffered economic loss in the disaster area.
An IRS levy on the account.

Watch out for one trap. If you leave your job during or after the year you turn 55, 401(k) distributions from that employer’s plan are penalty-free. The exception does not apply to IRAs. Roll the 401(k) into an IRA first and then take a distribution between 55 and 59½, and the exemption is gone.⁷ This is one of the costliest mistakes in a retirement account transition.

Direct Transfers vs. 60-Day Rollovers

How the money moves matters almost as much as where it lands. There are two mechanisms, and the wrong one can create tax problems that didn’t need to exist.

Direct Trustee-to-Trustee Transfers

The old custodian sends the funds straight to the new custodian. The check, if there is one, is made payable to the new institution rather than to you. No withholding, no 60-day clock, no reporting complication.¹⁰ You can do unlimited direct transfers between IRAs. There is no annual cap.

Indirect (60-Day) Rollovers

The custodian sends the check to you. You then have 60 days to redeposit the full amount into a new retirement account. Miss the window by a day and the whole amount becomes a taxable distribution, with the early withdrawal penalty stacked on top if you’re under 59½.¹

Indirect rollovers also carry a one-per-year limit. You can do only one indirect IRA-to-IRA rollover in any 12-month period, and the IRS treats all your IRAs — traditional, Roth, SEP, and SIMPLE — as one IRA for this purpose. A second rollover inside the window is treated as a taxable distribution, and the amount deposited into the receiving IRA can be hit with a 6% excess contribution penalty for every year it stays there. Direct trustee-to-trustee transfers are not subject to this limit.¹

RMDs If You’re 73 or Older

If you have reached age 73, required minimum distributions change the sequence. You must take the RMD for the year before rolling over any remaining balance. An RMD itself cannot be rolled over.¹¹ Attempting to roll what should have been the RMD creates an excess contribution in the receiving account. Calculate and withdraw the RMD first, then roll over whatever you want from the rest. Your custodian can run the number, or use the Uniform Lifetime Table in Publication 590-B.

Executing the Transfer

Once you’ve picked a destination, the paperwork is routine but detail-sensitive. A wrong account number or a misdirected check can send funds into limbo for weeks.

You will need your current custodian’s name, the account number, and the specific type of IRA you hold. The receiving institution supplies its own name, mailing or wire instructions, and an account number for incoming rollovers. Most custodians put distribution request forms on their websites. On the form, select “direct rollover” or “trustee-to-trustee transfer” rather than requesting a check payable to you.

Electronic transfers through the Automated Customer Account Transfer Service run on a defined timeline. The receiving firm enters your information into the system, and the old custodian has three business days to validate or flag the request.¹² ACATS transfers typically complete faster than manual transfers that involve mailed checks.

Some custodians require a Medallion Signature Guarantee on the distribution form, particularly for large transfers or when the receiving institution is not already linked to the account. This is a specialized stamp from a participating bank, credit union, or broker-dealer.¹³ A notary public cannot provide one; it must come from a financial institution enrolled in an approved Medallion program.

Once the old custodian processes the request, your holdings are liquidated to cash and the proceeds sent to the new institution. After the money arrives, you need to pick investments in the receiving account. Until you do, the funds usually sit in a default money market or settlement account.

Tax Reporting After the Move

Every IRA distribution produces paperwork, even a nontaxable rollover. The old custodian issues a Form 1099-R with a code in Box 7 telling the IRS what kind of transaction it was. A direct rollover to an eligible retirement plan is reported with Code G.¹⁴ If you received a check and completed a 60-day rollover, the 1099-R will show the distribution code for the type of payment, and reporting it as a rollover is on you.

For IRA-to-IRA rollovers, enter the full distribution amount on Form 1040 line 4a, zero on line 4b if the full amount was rolled over, and check the rollover box on line 4c.¹⁵ Rollovers from a former employer’s qualified plan into an IRA go on lines 5a and 5b.

The receiving custodian reports the incoming rollover on Form 5498, filed with the IRS by May 31 of the following year. If you did a Roth conversion or ever made nondeductible IRA contributions, file Form 8606 with your return to track your basis and calculate the taxable portion.⁶ Skipping Form 8606 carries a $50 penalty per missed filing and, worse, can cause you to lose track of after-tax contributions, which leads to double taxation when distributions eventually come out.

Update Your Beneficiary Designations

The beneficiary form on your old IRA does not travel with the money. Any time you move retirement funds to a new account, you start fresh at the new custodian. If you don’t file a new designation, the account defaults to whatever the custodian’s standard rules say, which is often your estate. That forces the money through probate, delays distributions to heirs, and can cost a surviving spouse the option to treat the inherited IRA as their own.¹⁶ Name beneficiaries directly on the new account before you move on.

1
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
2
U.S. Department of Labor. FAQs About Retirement Plans and ERISA
3
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements (IRAs)
6
Internal Revenue Service. About Form 8606, Nondeductible IRAs
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
8
Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income
9
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
10
eCFR. 26 CFR 1.401(a)(31)-1 – Requirement to Offer Direct Rollover of Eligible Rollover Distributions
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
12
FINRA. Customer Account Transfers
13
Investor.gov U.S. Securities and Exchange Commission. Medallion Signature Guarantees – Preventing the Unauthorized Transfer of Securities
14
Internal Revenue Service. Instructions for Forms 1099-R and 5498
15
Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
16
Internal Revenue Service. Retirement Topics – Beneficiary