401(k) Rollover: A Beginner’s Guide

You can roll funds from an old 401(k) into another tax-advantaged retirement account, cash it out, or keep it with an old employer.

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If you're close to retirement or changing jobs, you may need to figure out what to do with the savings in your 401(k) account. This is where a 401(k) rollover comes in handy.

What is a 401(k) rollover?

A 401(k) rollover is when you move money from a 401(k) into another tax-advantaged retirement account. You have 60 days from the date you receive the cash or assets from your 401(k) to put it into another retirement plan.

There are four main options you can choose from when trying to figure out the best thing to do with your old 401(k):

  1. Roll your old 401(k) into an individual retirement account (IRA).

  2. Roll your old 401(k) into a new employer's 401(k) plan.

  3. Keep your old 401(k) with your former employer.

  4. Cash out your 401(k) (Beware of penalties and taxes).

Each option has different tax implications, so it's important you understand them before making a decision.

401(k) rollover to IRA

Rolling over your 401(k) to an IRA has its benefits, including more investment choices, and sometimes lower fees.

There are three types of 401(k) rollovers you can do if you decide you’d like to roll your assets into an IRA:

  • A rollover from a traditional 401(k) to a Roth IRA – you’ll owe taxes on the rolled-over amount.

  • A rollover from a traditional 401(k) to a traditional IRA – the taxes are deferred.

  • A rollover from a Roth 401(k), to a Roth IRA – you won't incur taxes.

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

How to roll a 401(k) into an IRA

Here's how to start and finish a 401(k) to IRA rollover in three steps.

1. Choose which type of IRA account to open

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

2. Open your new IRA account

You generally have two options for where to get an IRA: a robo-advisor or an online broker.

  • If you're not interested in picking individual investments, a robo-advisor might be a good option. 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, usually 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 our picks for best IRA accounts

3. Ask your 401(k) plan for a direct rollover

Here are the basic instructions for a direct rollover:

  1. Contact your former employer’s plan administrator, ask for a direct rollover, complete a few forms, and ask for a check or wire of your account balance to be sent 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.

Indirect rollovers - remember the 60-day rule

If you would prefer not to do a direct rollover, you can opt for an indirect 401(k) rollover instead. This essentially means you withdraw the money and give it to the IRA provider yourself, but that can create tax complexities. A direct rollover might be easier.

Why? 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.

Investing the money in your IRA

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

  • Index funds: You can put index funds in your IRA, which is a fund that aims to mirror the performance of a market index such as the S&P 500.

  • ETFs: These investments often make sense for many people because they’re a basket of assets, such as stocks or bonds, that can be bought and sold during market trading hours. ETFs are a good way to diversify a portfolio.

  • Stocks: Individual stocks are also an investment option for IRA accounts.

  • Mutual funds: These are investments that combine money from investors to buy stocks, bonds, and other assets. Mutual funds are another way to create diversification in your portfolio.

  • Real estate: You can hold real estate in your IRA, but you'll need to do so by means of a self-directed IRA.

  • Cryptocurrency: Bitcoin, Litecoin and Ethereum are all examples of alternative investments you can choose.

  • Target-date funds: 401(k)s often 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 probably can find a similar (and perhaps less expensive) target-date fund for your IRA at an online broker.

Those who would rather automate the investing process can use a robo-advisor for this. When you open a new account at a robo-advisor, that robo-advisor’s algorithms usually will select your investments based on questions you answer.

Rolling your old 401(k) over to a new employer

To keep your money in one place, you may want to transfer assets from your old 401(k) to your new employer’s 401(k) plan. Doing this will make it easier to see how your assets are performing and make it easier to communicate with your employer about your retirement account.

To roll over from one 401(k) to another, contact the plan administrator at your old job and ask them if they can do a direct rollover. These two words — "direct rollover" — are important: They mean the 401(k) plan cuts a check directly to your new 401(k) account, not to you personally.

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 stay organized with 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.

Keeping your 401(k) with a former employer

If your ex-employer allows it, you can leave your 401(k) money where it is. Reasons to do this include good investment options and reasonable fees with your former employer’s plan. Keep in mind that you may not be able to ask the plan administrator any questions, you may pay higher 401(k) fees as an ex-employee, and you can’t make additional contributions.

Another noteworthy thing to consider is that your former employer could decide to move your old 401(k) account to another provider. If your balance is between $1,000 and $5,000 and your former employer wants to close your old 401(k) account, your former employer can, but it is required to transfer the balance to an IRA in your name and notify you in writing. For balances under $1,000, your former employer can send you a check, which you'd need to put in a retirement account within 60 days to avoid taxes and penalties.

Cashing out your 401(k)

The last option you have for an old 401(k) account is cashing it out, but that may come at a high cost. You can ask your former employer for a check, but as with the indirect rollover, your former employer may withhold 20% to pay Uncle Sam for your distribution. The IRS also may classify this cash out as an early distribution, meaning you incur a 10% penalty and potentially taxes unless it’s a qualified distribution.

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Frequently asked questions

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).

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

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.

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.

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.

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).

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