How To Roll Over Your 401(k) When You Switch Jobs: A Simple Process

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Switching jobs? You may want to consider what you’d like to do with your 401(k) plan. You can either keep your 401(k) plan with your old employer, cash out, transfer your 401(k) to your new employer or roll over your 401(k) into a traditional or Roth IRA. Check out this guide on how to roll over a 401(k). 

How To Roll Over a 401(k)

Rolling over your 401(k) requires a few steps. Here’s a plan that can help: 

1. Reach Out to Your 401(k) Provider

Confirm your 401(k) balance, rollover options and any fees. Ask if a direct rollover is offered. 

2. Decide Where You Want To Roll Over Your 401(k)

You can roll over your 401(k) to your new employer’s 401(k), cash out, leave your 401(k) with your old employer, or roll over your 401(k) to a traditional or Roth IRA. 

3. Open a Rollover IRA, If Applicable

Find a low-cost IRA provider like Vanguard or Fidelity and open your traditional or Roth IRA. 

4. Submit the Required Information

Request a direct rollover from your 401(k) and provide your new IRA or 401(k) details. 

Before You Start the Rollover Process

You will need your current 401(k) balance, rollover options, your new account information–whether it is a new employer’s 401(k) or IRA, any fees or restrictions, and the time it will take for the rollover. 

Types of 401(k) Rollovers

There are two main types of rollovers, either a 401(k) to a traditional IRA or Roth IRA or a 401(k) to a new employer’s 401(k). Here’s a look at both options and the pros and cons. 

401(k) to Traditional IRA or Roth IRA

Rolling over your 401(k) to a traditional or Roth IRA is a viable option. This approach has its pros: 

• No taxes: You will not pay taxes if you convert to a traditional IRA. 
• More investment options: IRAs have more options for investment than 401(k) employer-sponsored plans. 
• Lower fees: Many IRA providers have zero monthly maintenance fees and have low-cost funds. 
• Tax-free withdrawals: Although you pay taxes when you convert to a Roth IRA, withdrawals are tax-free in retirement. 

Some of the cons you may want to consider: 

• No employer match: Unlike a 401(k), IRAs don’t have a matching contribution limit set by the employer.
• Dollar limit: You can’t add more than $7,000 per year, $8,000 if over the age of 50, while a 401(k) allows up to $23,500 in contributions in 2025.
• Pay taxes: When you convert to a Roth IRA, you pay taxes upfront. 

401(k) to New Employer’s 401(k) 

Once you leave your job, it’s easy to transfer your funds from your 401(k) to your new employer. Some of the pros of this approach include: 

• Simplified tracking: You can easily keep track of your retirement income. 
• No taxes: If you convert from one 401(k) to another, there are no tax consequences. 
• Employer matching: Transferring funds to your new 401(k) means that your new employer has the opportunity to match funds.

Some of the cons that come with this approach: 

• Limited investment choices: Most employer-sponsored 401(k) plans have a smaller selection of funds to choose from. 
• Potentially higher fees: Some 401(k) plans have higher fees than IRAs, depending on the employer’s plan.

Can I Roll Over a 401(k) to a Roth IRA?

Yes. You can roll over your 401(k) to a Roth IRA, but you will owe taxes when you do so. To roll over your 401(k) to a Roth IRA, you can request a direct rollover. You can ask that your 401(k) be directly rolled over to your Roth IRA. This is the easiest way to roll over your 401(k) to a Roth IRA. Another option is to cash out and get a check cut from your 401(k). This amount must be deposited into your Roth IRA within 60 days. Failure to do so can generate a tax penalty. 

Tax Implications

You will pay taxes when you roll over your 401(k) or convert your traditional IRA  into a Roth IRA. The upside is you won’t pay taxes on any withdrawal from your Roth IRA. If you aren’t prepared for the immediate tax liability, consider transferring smaller amounts to avoid a huge tax bill all at once. 

Conversion Process

Here are the steps you need to take to convert your 401(k) to a Roth IRA: 

1. Contact your 401(k) provider. Ask about fees, taxes and rollover options. Ask if your 401(k) allows a direct rollover to your Roth IRA.
2. Open a Roth IRA. Choose a low-cost IRA provider like Vanguard or Fidelity to open your Roth IRA and select investment options.
3. Request a rollover. Ask for a direct rollover.
4. Pay taxes. You will be required to pay taxes on the conversion. The converted amount will be added to your taxable income.
5. Invest the funds. Choose investments that align with your financial growth. 

When To Consider a Roth IRA and When To Hold Off

You should consider a Roth IRA if the following applies: 

• Higher taxes in retirement. If you expect to pay higher taxes in retirement, it’s a good idea to pay taxes now rather than later.
• You can afford taxes currently. If you can afford the taxes on the Roth IRA now, you can prevent depleting your savings later. 
• During a market downturn. Lower asset values mean you can convert more at a lower tax cost.

You should hold off on a Roth IRA if these are your current circumstances:

• Cannot afford taxes. If you cannot pay the taxes on the Roth IRA conversion, you should hold off on rolling over your 401(k). 
• Rollover pushes you into a higher tax bracket. Consider spreading conversions over several years to avoid paying a higher tax bill. 
• Lower bracket in retirement. Consider a delay in a rollover if retirement will mean a lower tax bracket. 

How To Avoid Common 401(k) Rollover Mistakes

Deciding to roll over your IRA is a good financial move, but you need to pay attention to some common mistakes that may result in paying more money out of your pocket. You have the choice of leaving your 401(k) with your employer, converting your 401(k) to a traditional or Roth IRA, or cashing out your 401(k). Here are some of the most common scenarios: 

Forgetting to Factor in Taxes

If you decide to cash out your 401(k), you will pay a tax on the cashed-out amount. If you spent several years at your job building your income and contributing to your 401(k), you could owe a substantial amount in taxes. In addition, if you cash out your 401(k) before turning 59 ½, you will pay a 10% penalty. 

Similarly, if you decide to roll over your 401(k) into a Roth IRA, you’ll pay taxes on the converted amount. The good news is you won’t pay taxes when you withdraw from your Roth IRA during retirement. You can avoid taxes if you leave your 401(k) with your old employer or decide to roll over the funds to a traditional IRA. It may be a good idea to talk to a financial planner to forecast your tax liability with all of your assets before deciding on the outcome of your IRA. 

Underestimating Fees

Don’t make the mistake of assuming a 401(k) rollover is free. Some employers have an exit fee when you roll over your 401(k). The amount of the fee depends on the employer.

If you decide to roll over your 401(k) to an IRA, make certain you choose an IRA provider that doesn’t charge an annual maintenance fee. Charles Schwab, Vanguard and Fidelity have zero-fee IRAs available. 

Deciding to convert your 401(k) to a Roth IRA you will be required to pay income taxes on the converted amount. 

If your new 401(k) or IRA invests in mutual funds, you may be responsible for trading fees. To avoid this scenario, look for an IRA provider with commission-free trading. 

Consulting with a financial planner about your strategy also results in an ongoing advisory fee.

Delaying the Rollover

If you leave your 401(k) with your old employer, you may lose track of your retirement savings. Leaving your 401(k) may result in higher fees, and the investment options may be more restricted. 

Timing Your 401(k) Rollover

When is the right time for your 401(k) rollover? The best time depends on your situation.

After Changing Jobs

Typically for most people, it’s best to roll over when you switch jobs. You can either roll over to your new employer’s 401(k) plan or to an IRA. 

Before Retirement

Moving your 401(k) plan to an IRA between five to 10 years before retiring allows you to have control over your investments. 

Market Downturns 

You want to roll over your 401(k) during a market downturn because it allows you to maximize growth. 

401(k) Rollover Fees and Costs

Rolling over your 401(k) is a strategic move, but before you decide to do so, you will need to pay fees for the rollover. Here are some fees:

• Administrative fees: Managing your 401(k) has some fees associated with it. 
• Transaction fees: Each transaction, like changing your investment selections or taking a loan from your 401(k), can result in fees. 
• Investment fees: These include expense ratios of mutual funds or other investment vehicles within the plan.

You can try to minimize some of these fees by consulting with a financial advisor and getting advice on what is your most cost-effective option. One choice may be to rollover your 401(k) to an IRA because there are potentially fewer fees with this selection. When you roll over your 401(k), you also need to check whether the new account aligns with your financial goals. 

When you compare rollover options, you need to examine the switch by looking at the whole picture. This includes looking at the investment options, fee structure, services offered and account protection from creditors. 

Final Thoughts: Is a 401(k) Rollover Right for You?

Whether a 401(k) rollover is right for you depends on your tax situation, investment preferences and retirement goals. Rolling over your 401(k) offers several advantages. You can simplify your financial management and have better control of your investments and withdrawals. If you roll over your 401(k) to an IRA, you have lower fees and more investment choices. In cases where you roll over your 401(k) to a Roth IRA, you pay taxes upfront, but you can make withdrawals in retirement without facing any tax consequences. 

You have four options when deciding whether to roll over your 401(k).

1. Cash out your 401(k). You could cash out your 401(k) but you will face penalties and lose future growth.
2. Leave the 401(k) with your former employer. You could leave your 401(k) with your old employer, especially if you’re paying low fees and have a higher rate of return.
3. Move your 401(k) to your current employer. This allows you to have continued tax benefits and allows for easier management.
4. Rollover your 401(k) to an IRA. This allows for more investment choices and lower fees. 

Ultimately, deciding whether to roll over your 401(k) may mean talking to a financial planner to decide what is the best option for you. You have several choices but need to consider how rolling over your 401(k) impacts your overall financial strategy. 

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