401(k) Rollover to IRA: How to Do it in 4 Steps

Key steps include initiating your rollover without incurring taxes and finding the right home for your money.

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A rollover is a transfer of money from an old retirement account to an individual retirement account (IRA). A 401(k) rollover is when you transfer money from an old 401(k) account to an IRA. You'd most likely need to do a rollover when you leave a new job to start a new one. 

What do you do with your 401(k) when you leave your job?

You may change jobs several times throughout your career, which means you could end up with several retirement accounts. Some options you have for an old 401(k) include:

Each rollover option has different tax implications, to it's crucial you understand each before making a decision. This article will focus on how to rollover a 401(k) into an IRA.

How to complete a 401(k) rollover to an IRA in 4 steps

If you decide to do a 401(k) rollover to an IRA, typically the money from an old 401(k) must go into the new IRA account within 60 days. Here's how to start and finish a 401(k) to IRA rollover in 4 steps:

1. Choose which type of IRA account to open

An IRA may give you more investment options and lower fees than your old 401(k) had.

  • If you do a rollover to a Roth IRA, you’ll owe taxes on the rolled amount.

  • If you do a rollover to a traditional IRA, the taxes are deferred.

  • If you do a rollover from a Roth 401(k), you won't incur taxes if you roll to a Roth IRA.

2. Open your new IRA account

You generally have two options for where to get an IRA: an online broker or a robo-advisor. The option you choose depends on whether you'd rather have your investments managed for you, or you'd rather do it yourself.

  • If you're not interested in picking individual investments, a robo-advisor can do that for you. Robo-advisors build personalized portfolios using low-cost funds based on your preferences, then rebalance those funds over time to help you stay on track, all for a much lower fee than a conventional investment manager.

  • If you want to build and manage your own investment portfolio, an online broker lets you buy and sell investments yourself. Look for a provider that charges no account fees, offers a wide selection of low-cost investments and has a reputation for good customer service.

» Ready to get started? Explore best IRA accounts for 2021

3. Ask your 401(k) plan for a direct rollover or remember the 60-day rule

Direct rollovers

These two words — "direct rollover" — are important: They mean the 401(k) plan cuts a check directly to your new IRA account, not to you personally.

Here are the basic instructions:

  1. Contact your former employer’s plan administrator, complete a few forms, and ask it to send a check or wire for your account balance to your new account provider.

  2. The new account provider gives you instructions for how the check or wire should be made out, what information to include and where it should be sent. You can opt for an indirect 401(k) rollover instead, which essentially means you withdraw the money and give it to the IRA provider yourself, but that can create tax complexities. We generally recommend a direct rollover.

Indirect rollovers

If you do an indirect rollover, the plan administrator may withhold 20% from your check to pay taxes on your distribution. To get that money back, you must deposit into your IRA the complete account balance — including whatever was withheld for taxes — within 60 days of the date you received the distribution. (The exception to this is if you want to open a Roth IRA, which will require taxes paid on the distribution, unless your money was in a Roth 401(k).)

For example, say your total 401(k) account balance was $20,000 and your former employer sends you a check for $16,000 (that’s the full account minus 20%). Assuming you’re not planning to go the Roth route, you'd need to come up with $4,000 so that you can deposit the full $20,000 into your IRA.

At tax time, the IRS will see you rolled over the entire retirement account and will refund you the amount that was withheld in taxes.

4. Choose your investments

Once the money is rolled over into your new IRA account, select your investments.

  • Low-cost index mutual funds or ETFs often make sense for many people. You might be tempted to pick individual stocks and bonds, but this is rarely the best approach for anyone but a professional investor. It’s easier to get diversification and better long-term results from mutual funds or exchange-traded funds (ETFs). You can read our article on index funds vs mutual funds to learn more about this.

  • Lots of 401(k)s allocate money into target-date funds, which buy shares of other mutual funds with the goal of shifting investments automatically over time as you approach a specific date, such as retirement. If you like that approach, you likely can find a similar (and perhaps less expensive) target-date fund for your IRA at an online broker.

  • If you opened your new account at a robo-advisor, that company’s algorithms select your investments based on questions you answer.

» Find out more about how to invest your IRA

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What are the advantages of rolling over a 401(k) to an IRA?

Doing a 401(k) rollover to an IRA offers perks that can include more diverse investment selections than a typical 401(k) plan, perhaps cheaper investments and lower account fees. It's also a way to keep your retirement funds organized and ensure you have easy access to them. And while some 401(k) plans pass account management fees along to the employees, many IRAs charge no account fees.

In summary, it's a good way to save money, stay organized and make your money work harder.

401(k) rollover FAQs

If your ex-employer lets you, you can leave your 401(k) money where it is, but you likely can't ask HR any questions, and you may pay higher 401(k) fees as an ex-employee. To avoid that, you could do a 401(k) rollover that moves your money into your current employer’s retirement plan. Generally, there aren't any tax penalties associated with a 401(k) rollover, as long as the money goes straight from the old account to the new account.

Although this route may help you keep your financial life organized by having fewer accounts to keep track of, make sure your new 401(k) has investment options that are right for you and that you aren't incurring higher account fees.

See our full list of the pros and cons of rolling over your 401(k) to an IRA.

If you do a direct 401(k) rollover, there are typically no taxes to consider until you start withdrawing money in retirement.

If you do an indirect rollover (see Step 3 above), you have 60 days from the date you receive the distribution from your old 401(k) to get it deposited into an IRA. If you take longer than 60 days, it becomes a taxable event.

(Both of these are better than simply cashing out your old 401(k). Not only does such a move sabotage your retirement, but the IRS could hit you with a 10% early withdrawal fee.

A rollover isn't for everybody. Leaving an old 401(k) alone can have benefits, too:

  • Your 401(k) is better protected from creditors.

  • Generally you can borrow from your 401(k), which isn't possible with an IRA (though IRAs sometimes allow early withdrawals).

Rollover IRAs are subject to the same withdrawal rules as all IRAs. Unless you have qualifying circumstances, a withdrawal from an IRA before you reach age 59 1/2 is likely to come with income taxes and potentially a 10% penalty from the IRS. Here are the traditional IRA withdrawal rules and the Roth IRA withdrawal rules.

A rollover IRA can be a traditional IRA, with the same withdrawal rules. Or, you can open a rollover IRA that's a Roth - that's what you would do to roll money from a Roth 401(k). You're allowed to roll traditional 401(k) money to a rollover Roth IRA, but then you'd owe income tax on the money you rolled over. The one main difference between a traditional or Roth IRA and a rollover IRA is that you can roll over as much money as you want into the rollover IRA. If you make IRA contributions in addition to your rollover, you're limited to the annual maximum of $6,000 in 2020 and 2021, or $7,000 if you're age 50 or older.

Yes. The only cautions here are 1) contributions to an IRA are limited to $6,000 per year ($7,000 if you're age 50 or older), 2) if you chose a Roth IRA for your rollover, your ability to contribute may be further restricted based on your income, 3) if you mingle IRA contributions with IRA rollover funds in one account, that may make it difficult to move your rollover funds back to a 401(k) if, say, you start a new job with an employer with a stellar 401(k) plan, and 4) your ability to deduct your traditional IRA contributions from your taxes each year may be restricted if you or your spouse has access to a workplace retirement plan and you earn over a certain threshold. See IRA contribution limits for more details.

No. It is considered separately from your annual contribution limit. So you can contribute additional money to your rollover IRA in the year you open it, up to your allowable contribution limit.

No. But again, you'll need to abide by your annual contribution limits for future contributions to your IRA.

Yes. There is no limit to the number of IRAs you can have. However, you may find it easier if you keep your number of IRAs low, as this will make it easier to keep track of your funds and assess things like asset allocation.

Generally, you set up a rollover IRA so that you can move money from a 401(k) without paying income tax when you move the money. (If you were to simply withdraw the money from your 401(k), rather than roll it over, you'd owe income tax and probably an early withdrawal penalty.) A rollover IRA lets you move money out of a 401(k) without sacrificing the benefit of delaying your tax bill until retirement. While 401(k) and rollover IRA accounts have some similarities, they’re also quite different. Both types of accounts offer pre-tax savings: You can put money in before you pay taxes on it and you can delay your income tax payment until you take the money out in retirement. But with a 401(k), your investment choices are dictated by your employer. With an IRA, your investment choices are almost unlimited, because most brokers offer a wide array of investment options. On the other hand, 401(k)s offer a higher annual contribution limit of $19,500 in 2021 and $20,500 for 2022 ($26,000 in 2021 and $27,000 in 2022 for those age 50 or older), compared with the IRA contribution limit of $6,000 in 2021 and 2022 ($7,000 if age 50 or older). There's no limit on how much you can roll into an IRA from a 401(k).

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