[UNITED STATES] When transitioning out of a job, tying up loose ends and supporting your team isn’t the only thing you need to think about. If you’ve been contributing to a 401(k) through your employer, it’s essential to decide what to do with that retirement account as you move on.
Some employers will let you keep your retirement savings in the old 401(k) plan. However, this could result in higher fees and make it more difficult to manage your overall retirement portfolio. That’s why many financial professionals recommend considering a 401(k) rollover.
According to recent data from the Employee Benefit Research Institute (EBRI), nearly 40% of workers cash out their 401(k) plans when they switch jobs—often due to a lack of understanding around rollover options. That decision can come with steep tax penalties and significantly reduce long-term growth potential. Knowing your options is crucial to safeguarding your retirement funds.
Rolling over your 401(k) into an Individual Retirement Account (IRA) can help you keep your retirement savings growing in a tax-advantaged environment. IRAs may also offer lower fees and broader investment choices, giving you more control over your retirement strategy.
Experts consistently urge savers to assess investment options and associated costs before choosing a rollover destination. In fact, a 2023 report from the Investment Company Institute found that IRA fees can be up to 30% lower than those associated with certain employer-sponsored retirement plans—an important consideration for cost-conscious investors.
In this guide, we explore how to roll over a 401(k) into an IRA, plus what else you should keep in mind when planning your financial future.
The Basics of a 401(k) Rollover
As remote work and freelance jobs become more common, 401(k) rollovers have become a more frequent step in personal financial planning. With more people moving between jobs or managing side gigs, juggling multiple retirement accounts can get complicated. A rollover helps consolidate those savings, making it easier to track and manage your investments over time.
What Is a 401(k) Rollover?
A 401(k) rollover allows you to transfer funds from a former employer’s retirement plan into a new one—either another 401(k) or an IRA. Typically, this involves liquidating the assets in your old account and transferring the cash to your new retirement account, where you can reinvest it.
This process should ideally happen quickly, minimizing time out of the market. Done correctly, and in accordance with IRS rules, a rollover lets you avoid taxes and penalties.
A few important caveats:
- Non-vested employer contributions aren’t eligible for rollover—you forfeit those when you leave the company.
- Special tax treatment on employer stock held in a 401(k) may be lost during a rollover.
- 401(k) rollovers are most commonly done during a job change, helping savers avoid the clutter of multiple accounts across former employers. But because these are tax-deferred plans, rollovers must follow IRS rules to avoid financial penalties.
Key IRS Rules for Rollovers
If the money from your 401(k) is sent directly to you, you have 60 days to deposit it into another retirement account to avoid taxes.
Converting from a traditional 401(k) to a Roth IRA is allowed, but the amount rolled over will be treated as taxable income.
Your new employer’s plan isn’t required to accept rollover funds—check the specific terms of the plan.
Your Rollover Options
When deciding what to do with your 401(k), you typically have two main options:
1. Roll Over to an IRA
You can move your funds into a traditional IRA or Roth IRA, or into a SEP or SIMPLE IRA (the latter must be open for at least two years). IRAs generally offer broader investment options and potentially lower fees than employer plans.
“This type of rollover may make sense if your 401(k)’s investment options are limited,” says Kenneth Chavis, a senior wealth advisor at Versant Capital Management. “A traditional IRA gives you access to a wider range of publicly traded investment vehicles.”
The growing popularity of self-directed IRAs—offering exposure to real estate, private equity, and other alternative assets—has also made IRA rollovers appealing, though these accounts come with higher risk and more rigorous oversight.
2. Roll Over to Another Employer Plan
If your new employer offers a retirement plan, you may be able to roll your previous 401(k) into the new one. This can make managing your retirement savings simpler by consolidating everything into one account.
Note: If you have between $1,000 and $5,000 in your old plan and don’t request a rollover, your former employer may automatically transfer your savings into an IRA of its choosing. If your balance is below $1,000, the plan could liquidate your holdings and send you the money—minus a mandatory 20% tax withholding.
Your former plan administrator must provide written details outlining your options.
Direct vs. Indirect Rollovers
The way you transfer your funds matters. Mistakes can trigger taxes or delay reinvestment.
Direct Rollover
This is the simplest and safest option. Your old plan transfers the funds directly to your new account—either by check made out to the new custodian or via electronic transfer. This route avoids withholding and simplifies compliance.
Indirect Rollover
With an indirect rollover, the funds are sent to you, and it’s your responsibility to deposit them into a new account within 60 days. If you miss the deadline, the IRS treats the funds as a taxable distribution—and you could face penalties.
Moreover, employer-sponsored plans must withhold at least 20% for taxes during an indirect rollover. You’ll still need to contribute the full original amount (including the withheld 20%) to avoid that portion being taxed. Due to this added complexity, direct rollovers are generally preferred.
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