- You can roll over a 401(k) to an IRA or another 401(k) plan to keep your tax-deferred savings growing.
- Be wary of indirect rollovers, as there can be tax consequences for not following IRS regulations.
- Circumstances such as outstanding loans or lower fees with your old plan may make a rollover impractical or unwise.
When leaving a place of employment, you need to think about more than just closing out projects and setting your colleagues up for success. If you have a 401(k) account through the employer you're leaving, you need to decide what to do with your old 401(k) plan.
Some plan sponsors allow you to leave your retirement savings in your old 401(k) retirement plan, but you could end up paying overly high fees, or it might make managing your retirement portfolio more difficult. As such, you'll want to consider a 401(k) rollover.
With the best rollover IRA options, you can continue growing your retirement savings in a tax-advantaged retirement plan while potentially gaining benefits like more investment choices and clarity over your retirement strategy.
In this 401(k) rollover guide, we'll walk you through how to roll over a 401(k) to an IRA and other considerations related to this retirement planning issue.
Understanding 401(k) rollovers
What is a 401(k) rollover?
A 401(k) rollover is when you transfer funds from one 401(k) retirement account — typically from a previous employer — into a new retirement account, such as another employer's 401(k) or an individual retirement account (IRA). This typically involves the previous plan administrator selling the assets within your account to then transfer cash to the new account, where you would then choose your investments. Ideally, this happens quickly so you don't miss much time being invested in the market, and if you follow the proper transfer process, you can avoid extra taxes, even though you may be buying and selling assets.
Important: Non-vested funds are not eligible for rollovers. You lose that money when leaving your employer. Also, company stock held within your 401(k) could lose certain tax advantages if rolled over.
A 401(k) rollover is common when someone switches jobs, to consolidate retirement accounts rather than having multiple ones at all the companies they've ever worked for.
Rollovers are subject to IRS rules because a 401(k) is a tax-advantaged plan. To avoid additional taxes, penalties, or fees, you'll need to carefully follow IRS guidelines and the processes that the account providers may require.
Some of the IRS rules you need to be aware of include:
- If you receive a distribution of funds from your 401(k) paid directly to you, you have 60 days to roll over the funds into a new retirement plan before the rollover becomes taxable.
- You can roll over from a traditional 401(k) to a Roth IRA, but that would be a conversion to a Roth IRA account, meaning you'll need to pay taxes on the distributed amount as if it were income.
- Your new retirement plan does not have to accept rollover funds from your previous 401(k); it depends on the specific plan.
Rollover options
When it comes to rolling over your 401(k), you have two main options:
Roll over to an IRA: This often involves rolling to a traditional IRA or Roth IRA, but you can also roll into a SEP IRA, or a SIMPLE IRA can accept rollovers if open for at least two years. Rolling over to an IRA can expand your investment options and may offer a better fee and management structure.
"This type of rollover may make sense if the investment options within your 401(k) are lacking or too confining for how you'd like to invest your retirement dollars," says Kenneth Chavis, a senior wealth advisor with Versant Capital Management. "A rollover to a traditional IRA will allow you free range of investment options, including the entire universe of publicly traded investment vehicles, as opposed to the investment menu within your 401(k) plan."
- Roll over to another employer-sponsored plan: This often involves rolling from your previous employer's 401(k) to your new employer's 401(k), but you can also roll from a 401(k) into other types of employer-sponsored plans like a 403(b). Consolidating your 401(k)s, or other employer-sponsored plans, into one can help you streamline the management of your retirement accounts.
Note that if you don't elect a rollover and have between $1,000 and $5,000 in your old 401(k), your previous plan has the ability to automatically roll your funds over into an IRA of its choosing. Or, if you have less than $1,000, the plan might liquidate your holdings and send you the funds, minus a 20% withholding for taxes.
The specifics depend on what your plan offers, but your plan is required to give you a written explanation of your options.
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Types of rollovers: Direct vs. indirect
Be careful how funds are moved, as you can wind up making the process more of a hassle than it needs to be and possibly triggering taxes. There are two ways to roll over 401(k) funds:
- Direct rollover: With a direct rollover, your previous retirement plan moves your money directly to the new retirement plan or IRA account. To make this direct rollover, you generally need to fill out paperwork with the plan administrator that you want to roll over from and provide them with information about the new account you want to roll into. They'll then typically either write a check or electronically transfer 401(k) funds to the new financial institution overseeing your retirement account, or they'll mail you a check made out to the financial institution, which you would then send to that company to deposit on your behalf.
Indirect rollover: With an indirect rollover, funds are sent to you in your own name, and you then would deposit them into another retirement plan yourself. You must do this within 60 days, with the countdown starting the day after you receive the funds. Otherwise, the money is treated as a regular distribution for tax purposes, meaning you could incur additional income taxes and possible early withdrawal penalties. There are very few exceptions to this 60-day rule.
Complicating this issue, with indirect rollovers from an employer-sponsored plan, the plan is required to withhold at least 20% for taxes. Yet you must then deposit the full amount, pre-withholding, into the new account to avoid that withholding amount being considered a taxable distribution. This complexity is partly why a direct rollover is often preferred.
Benefits of rolling over your 401(k)
- Greater investment choices: Rolling over to a new IRA or 401(k) may offer better investment options. IRAs generally offer you greater control over how your funds are invested, or you might prefer the fund menu for your new employer's 401(k).
- Potential for lower costs: Moving to a new retirement plan could mean paying lower costs. For example, IRAs often do not have maintenance fees, whereas some 401(k) plans charge members a monthly fee — especially if you're no longer employed at the company, meaning the employer would no longer cover maintenance fees on your behalf.. Also, the investment funds within your old 401(k) might charge high fees, so moving to a new account could mean picking funds or other types of investments that cost less overall.
- Simplifying your retirement accounts: Having your retirement savings all in one place is easier to manage. You can get a more holistic view of your retirement investments, rather than trying to figure out what's happening across different accounts.
How to roll over your 401(k) to an IRA
Step-by-step guide to rolling over your 401(k)
1. Choose the right IRA account
You can roll over your 401(k) assets into a new traditional or Roth IRA. The tax advantages for 401(k)s and IRAs are the same, though traditional accounts differ from Roth ones (traditional is based on pre-tax contributions, Roth is based on post-tax). So, many people roll over from the same type of account, e.g., traditional 401(k) to traditional IRA or Roth 401(k) to Roth IRA.
However, you could roll from a traditional to Roth if you pay taxes on the conversion (so that you're essentially putting post-tax money into the Roth and can later withdraw it tax-free).
Aside from the tax structure, you have to choose a financial institution where you'll open the account. When deciding which of the best IRA accounts is right for your rollover, consider your preferred investment style, risk tolerance, investment options, goals, and fees. A few IRA providers, like Webull and Robinhood, may offer an IRA match or bonus benefits on contributions and transfers.
2. Contact your 401(k) plan administrator
To initiate the rollover, contact your 401(k) plan administrator and request a direct rollover. This may be a simple process of filling out some online forms, but it varies by plan. If you don't know your 401(k) plan administrator, contact your old employer's HR department for the contact information. You can also use platforms like Capitalize or Beagle, which find and manage 401(k) rollovers for you.
Some 401(k) plan administrators do not allow for direct rollovers. In that case, you'll have to do an indirect rollover by requesting a distribution from the account and then depositing the full amount (including enough to cover any withholding) into your new retirement account.
3. Initiate the rollover process
Completing a rollover can take a few weeks or more. Your specific plan provider can provide you with a particular timeframe. You shouldn't be charged taxes or penalties during this process, as even with indirect rollovers, the 60-day window doesn't start until the day after you receive the funds.
Remember that non-vested funds are not eligible for rollovers. Unfortunately, you'll have to say goodbye to those assets.
4. Invest your rollover funds
When rolling over your funds, you might have to specify a particular investment fund that the money will go into, or the funds might go into a cash-like account with your new retirement account provider. From there, you can decide how you want to invest the funds. That said, with a new 401(k), you'll be limited to the investment options available through your employer. IRAs tend to offer more investment opportunities, such as a wide range of low-cost ETFs that tend to be well-suited for long-term retirement investing.
Make sure you file the appropriate taxes on your rollover. You shouldn't owe taxes if you do a direct rollover, but you'll still receive a 1099-R and must report the rollover when filing your taxes.
Tax implications of a 401(k) rollover
In many cases, a 401(k) rollover does not trigger taxes, particularly if you do a direct rollover. However, there are some possible tax implications, such as the following:
Roth IRA conversions and tax considerations
Converting a traditional 401(k) to a Roth IRA has tax consequences. You would need to pay income taxes on the amount you roll over from a 401(k) to a Roth IRA. This isn't a penalty, but converting untaxed retirement savings in a 401(k) to taxed retirement savings in a Roth account is necessary.
The rollover process is similar to the traditional 401(k) to traditional IRA process. The difference is that you'll have to pay the conversion taxes, and your 1099-R should reflect this conversion, which you'll report with your income tax filing.
Handling indirect rollovers and tax withholdings
Indirect rollovers are subject to the 60-day rollover rule, which requires the rollover to be complete within 60 days, starting the day after receiving the funds, to avoid the transfer being classified as a distribution. If you take over 60 days, you may be required to pay income tax on the distribution amount. A 10% early withdrawal penalty fee may also apply if you are under 59½.
The IRS can waive the 60-day rule in certain situations, such as when missing the deadline is considered "beyond your control."
Comparing 401(k) rollovers to other options
401(k) rollover vs. leaving money in your old 401(k)
There are a few scenarios where leaving your 401(k) where it is might prove more beneficial than rolling it over.
"One instance where it might not make sense to roll over is if there is an outstanding loan balance or there is a plan to take a loan in the future," explains Or Pikary, CPA/PFS, CFP, and wealth advisor for Mariner Wealth Advisors. "In such a scenario, it is better to wait to move your 401(k) until the loan balance is paid in full."
Also, you may want to consider leaving your 401(k) where it is if your existing plan offers lower fees than potential rollover options or if you have access to favorable investment opportunities that you would otherwise lose. That said, it's common for people to find that a rollover is more beneficial.
401(k) rollover to an IRA vs. rolling over to a new employer's 401(k)
You may get access to a new 401(k) plan through new employment. In that case, rolling over a 401(k) from a previous employer to a new 401(k) could make sense, especially if your new plan offers lower administrative fees and better investment options.
Although 401(k)s aren't as flexible as IRAs, investing in your workplace retirement account is often more convenient to manage, such as by being able to make automatic payroll deductions. Plus, you might get the benefit of employer-sponsored matches on new contributions. Even though that generally doesn't apply to rollovers, it might sway your decision if it means consolidating everything — old and new contributions — into one account.
However, if your new 401(k) has higher fees or doesn't have the investment options you'd like, then you might prefer to choose an IRA that fits your preferences. Plenty of brokerages offer IRAs, so you may have one you're already comfortable using for non-retirement investing, in which case you might like managing your regular brokerage and retirement account with one company.
The process for rolling over a 401(k) into another 401(k) or IRA tends to look something like this:
- Enroll in the new 401(k) or open the IRA account.
- Request a direct rollover of funds from your previous 401(k) plan administrator.
- If you receive the funds yourself as an indirect rollover, deposit the gross amount (what you received plus any amount withheld for taxes) into the new account within 60 days.
- Choose your investment options.
- Report the rolled-over amount to the IRS found on Form 1099-R.
401(k) rollover vs. cashing out
One alternative to rolling over a 401(k) is to cash it out. This is where you do not redeposit funds to a tax-advantaged retirement account and keep the money instead.
However, when cashing out a 401(k), the funds distributed are taxed as part of your income. You'll also incur a 10% early withdrawal penalty and taxation if you're not 59½ or older. The IRS does offer certain exceptions for withdrawing your retirement savings early, but generally, you're looking at substantial extra costs.
Cashing out your 401(k) is not recommended, as you could lose a lot of money to taxes and penalties, along with potential long-term gains from keeping the money invested.
"As an example, if someone who is 30 years old cashed out a $50,000 401(k) and was in the 24% federal income tax bracket and 5% state income tax bracket, they would owe $12,000 in federal income tax, $5,000 early withdrawal penalty and $2,500 in state income tax for a total of $19,500 in taxes and penalties," Chavis says.
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FAQs about 401(k) rollovers
What is a 401(k) rollover?
A 401(k) rollover is a transfer of funds from a 401(k) plan from a previous employer to a new or existing retirement account, such as another 401(k) or an IRA. The rollover has a particular process vs. other types of transfers that can be done more on your own terms, however. The best way is to typically request a direct rollover, where the funds move directly from one financial institution to another, which means you can avoid paying taxes and penalties when liquidating your old 401(k) and moving the funds to a new account.
What are the benefits of rolling over a 401(k) to an IRA?
Rolling over a 401(k) to an IRA can offer benefits such as a wider range of investment options, the potential for lower fees, and the convenience of consolidating retirement accounts, which makes it easier to manage retirement savings.
Are there tax implications for a 401(k) rollover?
The tax implications for a 401(k) rollover vary depending on the method and execution. Direct rollovers don't incur any additional taxes. Indirect rollovers could trigger taxes if the correct amount isn't deposited or you don't complete the rollover within the 60-day window. Also, rolling over a traditional 401(k) to a Roth IRA would generally trigger conversion taxes, since Roth contributions are made with after-tax dollars.
Can I roll over my 401(k) while still employed?
Some employers allow in-service rollovers, which let you roll over a portion of your 401(k) funds to an IRA while still employed. Check with your plan administrator to see if this option is available.
What are the disadvantages of rolling over a 401(k) to an IRA?
Rolling over a 401(k) to an IRA could have disadvantages, such as if your old 401(k) happens to offer access to better investment options or lower fees than an IRA does. Also, rolling a 401(k) to IRA could add complexity, such as the potential for triggering taxes if you do an indirect rollover and don't follow the right process. You could also lose benefits like stronger creditor protection in a 401(k).
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