What Happens to a Small 401(k) When You Switch Jobs—and How Roth Accounts Are Different

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When you're switching jobs, the last thing on your mind might be what happens to your retirement account.

But if you don't keep track, you could miss out on your savings arriving as a check in the mail or your money being rolled into an individual retirement account (IRA)—where it may remain in cash, like a money market fund, unless you invest it.

What happens to your account typically depends on how big the balance is and the type of account you have: a traditional 401(k), where contributions are deducted from your income and you pay taxes when you take distributions in retirement, or a Roth 401(k) where you pay taxes on your upfront contributions and take distributions tax-free later on.

With small balances of $1,000 or less, regardless of the type of account, an employer has the option of cashing out the account and sending you a check.

If your small balance 401(k) is forced out and subsequently rolled into an IRA, remember that you need to invest your money—otherwise it could end up in cash and you could miss out on compounding from investing in the stock market. And if you have a Roth 401(k), once your money ends up in a Roth IRA, you can't move it back to a workplace retirement plan.

You can then roll over that money into an IRA or take it as an early withdrawal, paying the 10% penalty in addition to any taxes you owe. With a Roth 401(k), you won't pay taxes or a penalty on your initial contributions, but you'll generally pay both the penalty and taxes on the investment earnings.

If you have a larger balance, between $1,000 and $7,000 in a 401(k), your employer has the option of leaving your retirement savings in the 401(k) or automatically rolling it into an IRA. Employers may choose to roll over the money into an IRA to save money on 401(k) administration fees.

When Roth 401(k)s are rolled over, they're placed in Roth IRAs and when traditional 401(k)s are rolled over, they're placed into traditional IRAs. An individual can then roll over their traditional IRA into their current employer's retirement plan, known as a reverse rollover, if the employer permits it.

However, if your Roth 401(k) is rolled over into a Roth IRA, you cannot do a reverse rollover or put your Roth IRA funds into your workplace retirement plan. According to the IRS, Roth IRAs can only be rolled over into another Roth IRA.

A bipartisan bill, known as the 'Retirement Rollover Flexibility Act', reintroduced in Congress last year, aims to fix this issue. This bill would allow workers to roll over their Roth IRAs into their workplace retirement plans.

“Workers shouldn’t lose track of their retirement savings just because they change jobs,” said Michael Bennet (D-CO), a senator who reintroduced the bill, in a press release last year. “Right now, outdated rules prevent Roth retirement accounts from moving with workers the way traditional accounts can. This bill fixes that gap—ensuring all workers can consolidate their retirement savings, reduce fees, and keep their nest egg growing no matter where their career takes them.”

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