What you need to know

401(k) Rollover

Leaving behind an old 401(k) can be a costly mistake. Here's what you need to know about rollovers.

The basics: What is a 401(k) rollover?

When you leave a job, you may not realize that the money in your employer-sponsored 401(k) plan can leave with you. A 401(k) rollover allows you to transfer your balance into another retirement account — like an individual retirement account or your new employer’s 401(k) plan — while still keeping the money tax-deferred.

For many people, the best choice is to convert the 401(k) into an IRA, which will open the door to more investment choices. Of course, you can also leave your 401(k) with your old employer, if you’re happy with the plan. However, if you do that, you won’t be able to make additional contributions to it.

The three main types of 401(k) rollovers are:

  • 401(k) to traditional IRA: Allows you to keep your money tax-deferred, and may offer more investment options, possibly with lower fees.
  • 401(k) to Roth IRA: Also offers access to more investment options, though you’ll pay taxes on the rolled amount because it will be treated like a Roth conversion. (The exception is if you’re rolling over a Roth 401(k).)
  • Old 401(k) to 401(k) with a new employer: May be a sensible choice if you prioritize keeping your money in one account, and if your new employer’s plan allows rollovers and offers low-cost investment options (more on fees below).

For this guide, we’re going to focus on a 401(k)-to-IRA rollover. If you want to roll your old 401(k) into a 401(k) at a new employer, contact your current 401(k) plan administrator for rollover instructions.

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Arielle O'Shea, NerdWallet investing and retirement specialist

Why should you roll over your 401(k)?

The decision of whether to roll over your 401(k) to an IRA will depend on several factors. For many people, an IRA can offer benefits not found in a 401(k), including:

  • Lower fees: There are several IRA providers that charge no fees to maintain your account, but 401(k) plans frequently charge participants costly administrative fees.
  • Large investment selection: The typical 401(k) offers a curated selection of 20 or so investments. In an IRA, you’ll get access to a range of investment options, including stocks, bonds, mutual funds, index funds and exchange-traded funds. That wider selection also means you can easily shop around for funds with low expense ratios. Over the years, even small fees can have a big impact on overall retirement savings, which is why you want to minimize them wherever you can. Use the calculator below to compare the cost of investment fees.
  • Access to low-cost advice: For many people, selecting investments is a confusing and stressful experience that often leads to sub-optimal portfolio construction and investment returns. If your new 401(k) provider doesn’t offer investment guidance and you want assistance, you can roll over your old 401(k) into an IRA with a robo-advisor. These services will manage your investments for you for a low annual fee.

If you still aren’t sure if you should roll over your 401(k), see our full list of the pros and cons of rolling over your 401(k) to an IRA.

How to roll over a 401(k) to an IRA or Roth IRA

There’s a right way to do this and a wrong way. You don’t want the 401(k) provider to cut a check in your name, and you don’t want to cash out your balance. In both scenarios, you’re at risk of owing up to a third of your balance to the IRS.

To protect your balance from taxes and penalties, there are certain steps you must take.

Roll over your 401(k) to an IRA in four steps

  1. Decide on a Roth or a traditional IRA. If you roll into a Roth IRA, you’ll owe taxes on the rolled amount.
  2. Open a rollover IRA account. Check out our detailed list of best IRA accounts to find a provider that offers exactly what you need.
  3. Ask your 401k plan for a “direct rollover.” These two words are important: They mean that the 401(k) plan will cut a check directly to your new IRA account, not to you personally.
  4. Make your investment choices. Your 401(k) balance will come into your new account as cash, so you’ll need to invest it.

For complete details, read about how to roll over a 401(k) to an IRA.

Ready to roll over your 401(k) to an IRA? Find the best provider for you

When deciding where to open a rollover IRA, the choice often boils down to two options: an online broker or a robo-advisor.

  • An online broker may be a good fit for you if you want to manage your 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.
  • A robo-advisor may make sense if you want account management. These services build your portfolio out of low-cost funds and then rebalance it as needed for a fraction of the cost of a human financial advisor. If you are unsure how this works, check out our explainer on what is a robo-advisor to see if it’s the right choice for you.

Note that your choice of IRA provider is not the biggest driver of your portfolio’s growth — the investments you select will determine that. However, selecting the right provider is critical for keeping fees low and gaining access to the investments and resources you need to manage your savings.

Use this tool to browse provider recommendations based on your preferences, or check out our selection of the best IRA providers if you’d like more context.

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