401(k) Rollovers: Pros, Cons, and How to Do It
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 take money out of your 401(k) and move those funds into another tax-advantaged retirement account, preserving the tax protections. Many people roll their 401(k) into an individual retirement account (IRA).
You have 60 days from the date you receive the cash or assets from your 401(k) to put it into another retirement plan. You can (and often should) opt for a direct rollover instead, which means the money goes directly into the new account.
Four options for rolling over your 401(k)
There are four main possibilities for what to do with your 401(k) if you leave a job: You can roll it into an IRA, into a new 401(k), leave it where it is, or cash it out. Each option has different tax and financial implications .
1. 401(k) rollover to an IRA
Rolling over your 401(k) into an IRA can have several benefits, including more investment choices and, in some cases, 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 traditional IRA. Taxes on the money rolled over and any investment earnings are deferred until you take distributions in retirement, so provided you follow the rules, there should be no immediate tax implications.
- A rollover from a traditional 401(k) to a Roth IRA. Because your 401(k) contributions were made pre-tax, and a Roth IRA is an after-tax account, you'll owe taxes on the rolled-over amount in the year of the rollover. However, as you won't owe taxes on qualified distributions from the Roth IRA in retirement.
- A rollover from a Roth 401(k) to a Roth IRA. You won't incur taxes on this type of rollover, because a Roth 401(k) and a Roth IRA are both funded with after-tax dollars.
» Ready to get started? See the best IRA providers for a 401(k) rollover
Pros
- No taxes or penalties: With a direct 401(k) rollover into a traditional IRA, taxes continue to be deferred until you withdraw money.
- Wider investment selection: You get access to a range of investment options, including stocks, bonds, mutual funds, index funds and exchange-traded funds.
- Potentially lower costs: You can find an IRA provider that charges no fees to open or maintain an account. Many 401(k) plans charge participants administrative fees, though some generous employers pick up the tab. An IRA provider also offers a larger selection of investment choices, which means you may be able to select investments with lower costs.
- Low-cost options for investment management: You can open your IRA at a robo-advisor, a computer-run investment management company. Many of them charge less than 0.50% to manage your account for you, which means they pick your investments and manage them over time. (Check out our top picks for the best IRA accounts.)
Cons
- Limited creditor protection: 401(k)s (and properly executed rollover IRAs) are protected in bankruptcy and against claims from creditors. But overall IRA protection from creditors varies by state, and bankruptcy protection is limited.
- No option for IRA loans. Unlike 401(k)s, the IRS does not permit the option to borrow money from your IRA.
- RMDs with traditional IRAs. Traditional IRAs are subject to earlier RMDs compared to 401(k) plans, regardless of work status.
What to consider: Rolling over your 401(k) into an IRA has several benefits, including more investment choices and, in some cases, lower fees. That said, there are some drawbacks given that IRAs and 401(k)s have different plan rules.
2. Roll your old 401(k) over to your new employer's plan
Generally, there aren't any tax penalties associated with a 401(k) rollover into another 401(k), as long as the money goes straight from the old account to the new account. To roll over from one 401(k) to another, contact the plan administrator at your old job and ask if you can do a direct rollover.
Pros
- Easier account management. Consolidating plans into a single place may make it easier to manage the accounts within your financial portfolio.
- Keep 401(k) benefits. Continue to receive tax-deferred growth, option for 401(k) loans (if available) and option to delay RMDs past age 73 if still working.
- Gaining new plan options. New 401(k) plan may offer more investment options and lower fees compared to the old plan.
Cons
- Losing old plan options. Investment options, fees, and other plan rules may be less favorable than your old 401(k) provider.
- May affect appreciated company stock. Rolling appreciated company stock into an IRA or another employer plan can eliminate any potential tax benefits from net unrealized appreciation (NUA).
What to consider: Every 401(k) plan is different, so be sure to compare both the new and old 401(k) plan in terms of investment options, fees, and plan rules to understand the implications of completing the rollover.
3. Keep your 401(k) with a former employer
If your former 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 at certain balances, your former employer can decide to move your old 401(k) account to another provider. If your balance is between $1,000 and $7,000 and your former employer wants to close your old 401(k) account, 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.
Pros:
- Maintain 401(k) benefits. Funds within the account continue to receive tax-advantaged growth.
- Keep investment options and cost. May have access to investment options at a lower cost compared to new 401(k) plan provider or IRA brokerage.
- Higher protection against creditors. Under federal law, 401(k) balances have more protection than IRA accounts, which are only protected in bankruptcy proceedings.
Cons:
- Contributions are restricted. No longer able to contribute or take out a 401(k) loan after leaving employer.
- Potentially higher fees. Fees and expenses may be higher or different compared to your new employer’s 401(k) plan or IRA.
- Small balances may be transferred. Accounts with a balance between $1,000 and $7,000 can be transferred to an IRA without your approval.
What to consider: Leaving your 401(k) with your current provider might make sense if you have access to investments that either aren’t accessible or offered at a higher cost elsewhere. However, make sure to read the fine print if you’re no longer with your employer to understand how things might change for your 401(k).
4. Cash 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.
If this is what you want to do, get full details on cashing out your 401(k) and the pitfalls to look out for.
The importance of a direct 401(k) rollover
These two words — "direct rollover" — are so important: They mean the 401(k) plan cuts a check or initiates a transfer directly to your new retirement account.
If you do an indirect rollover — which means your plan administrator sends you the money, and you take the step of depositing it into the new account — the plan administrator may withhold 20% from your check to pay taxes on your distribution.
To get that money back, you must deposit 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).)
At tax time, the IRS will see that you rolled over the entire retirement account and will refund you the amount that was withheld in taxes.
Frequently asked questions
Is a rollover IRA the same as a 401(k)?
No, a rollover IRA is not the same as a 401(k) plan, though the two are connected. A rollover IRA is an individual retirement account used to move money from an employer-sponsored retirement plan, such as a 401(k), without incurring income taxes and an early withdrawal penalty for a direct 401(k) withdrawal. Typically, you'd take on this process when you change jobs or retire.
Is there a limit on the amount of money I can roll over to an IRA?
There is no limit on how much money you can roll over into an IRA. These rollover funds don't count towards your annual direct contribution limit to your IRA.
After I create a rollover IRA, can I contribute money to it?
Yes. The only cautions here are the IRA contribution limits, and — if you choose a Roth IRA for your rollover — your ability to contribute may be further restricted based on your income. 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.
Can I have more than one rollover IRA?
Yes. There is no limit to the number of IRAs you can have. However, you may find it easier if you keep the number of IRAs low, as this will make it easier to keep track of your funds and assess things like asset allocation.
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- 1. IRS.gov. Rollover Chart. Accessed Jan 29, 2026.
- 2. U.S. Committee on Finance. SECURE 2.0 Act of 2022.
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