Is it ever better to leave money in an old employer's 401(k)?

By Kaz · Published 28 September 2026 · How this site checks figures

Summary

Yes, in some situations, and the IRS names them. It lists three reasons to keep the old account: "you like the plan's investment options," "the plan has low fees," or you want to move the balance to a new employer's plan later. The list leaves out what happens if you need the money before age 59½. The plan and the IRA have different exceptions to the 10% additional tax, and which set helps depends on your age when you leave and what you would spend the money on.

Age 55 favors the plan; tuition and a first home favor the IRA

Take someone who leaves at 57 and plans to live on the old 401(k) until 60. The IRS exempts plan distributions after an employee "separates from service during or after the year the employee reaches age 55," and its table marks that exception "yes" for qualified plans and "no" for IRAs. Left in the 401(k), those withdrawals escape the 10% additional tax. Rolled to an IRA first, the same withdrawals owe it until age 59½.

Now take someone who leaves at 45 and expects to spend part of the balance on college costs or a first home within a few years. The table runs the other way: "qualified higher education expenses" and "qualified first-time homebuyers, up to $10,000" are exceptions for IRAs and not for qualified plans. One exception works in both places, a series of substantially equal payments.

The conditions for the age-55 exception, and what breaks it, are in the article on the Rule of 55.

No loans once the money is in an IRA

"IRAs and IRA-based plans (SEP, SIMPLE IRA and SARSEP plans) cannot offer participant loans," the IRS says, and a loan from an IRA would be a prohibited transaction. A 401(k) can lend, though the IRS adds that a plan sponsor "is not required to include loan provisions." Whether a former employee can still borrow from the old plan depends on that plan's rules.

The fee you don't see on the statement

The Department of Labor sorts 401(k) costs into plan administration fees, investment fees, and individual service fees for features like loans, and says the investment side is "by far the largest component." Those charges come out of your returns, not out of your account as a line item.

Your quarterly statement lists administrative and individual service fees, but the DOL notes that it "does not include charges paid indirectly from your investments." The fund-level costs are in the investment disclosure the plan provides before you first direct your investments and every year after that. Comparing that document with an IRA's fund expenses tells you more than the statement does. What a one-point gap in annual charges adds up to over 25 years is worked out on the page about the cost of a 1% fee.

Sources

Written by Kaz, an independent publisher.
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