How To Roll Over Your 401(k): A Simple, Step-by-Step Guide

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Switching jobs, retiring or looking for a new retirement strategy? Rolling over your 401(k) can be a smart way to keep your savings on track. This guide will walk you through the process, helping you avoid common mistakes and make informed decisions.

What Is a 401(k) Rollover?

A 401(k) rollover transfers assets from your employer-sponsored 401(k) to a different retirement account. Unlike simply cashing out your 401(k), rolling it over lets you continue to enjoy the tax benefits of a retirement account. Depending on your age, you also might avoid a 10% early withdrawal penalty.

Several circumstances might prompt you to consider rolling over your 401(k), but two of the most common are job changes and impending retirement.

Retirees sometimes roll over their 401(k)s as a tax strategy, or to expand their investment options or gain more control over their distributions.

If you’re changing employers, you might not have to roll over your 401(k) — plans often allow employees to leave it with the employer. But rolling it over will make tracking and managing your savings easier by consolidating your assets into a single account.

You have three options for rolling over your 401(k):

• Roll it into your new employer’s 401(k)
• Roll it into a traditional IRA
• Roll it into a Roth IRA

Good To Know

Many employer-sponsored plans allow two types of 401(k) contributions: traditional and Roth. However, few employees opt for Roth 401(k)s vs. traditional 401(k)s.

Step-by-Step Guide: How To Roll Over Your 401(k)

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

Step 1: Contact Your 401(k) Provider

Confirm your 401(k) balance, rollover options and any fees. Ask if a direct rollover is available — you’ll avoid mandatory tax withholding and potential penalties for holding the money too long before depositing it.

Step 2: Decide Where To Roll Over Your 401(k)

If you decide to roll over your 401(k) rather than leave it with your old employer, you can roll it into these account types:

• Your new employer’s 401(k), if the plan allows it — not all do
• Traditional IRA
• Roth IRA — usually allowed only if you leave your employer or are of retirement age

Consider these factors as you weigh your options:

• Fees: IRAs typically have lower fees than 401(k); fees for inactive employees’ 401(k) accounts are usually higher than fees for active employees’ 401(s).
• Investment options: You’ll likely have more investments to choose from with an IRA.
• Tax consequences: You pay income tax on traditional 401(k) funds. You roll over into a Roth IRA, but withdraw the money tax-free in retirement, subject to a five-year holding period.

Step 3: Open a New Account, If Needed

If you’re going to roll over a 401(k) from a previous employer into one sponsored by your current employer, contact the plan administrator or your human resources representative to create an account if you don’t already have one.

An IRA is an individual account you open yourself through your choice of brokerages. Discount brokerages such as Vanguard, Fidelity and Schwab offer them.

If you’re eligible for a rollover into a Roth IRA, consider the effects of the mandatory withholding and five-year holding period before opting for one.

Step 4: Submit the Rollover Request

The exact steps for submitting a rollover request depends on your plan providers’ rules and the type of rollover you’re doing. These tips will help to ensure a smooth transition.

• Request a direct rollover if it’s available.
• Confirm that your new account is open and ready to receive the funds before you submit the rollover request.
• If the rollover is indirect, deposit the funds as soon as you receive them.

401(k) Rollover Steps At a Glance

1. Contact your 401(k) provider.
2. Decide where to roll over your 401(k).
3. Open a new account, if needed.
4. Submit the rollover request.

Types of 401(k) Rollovers: Which One Is Right for You?

There are two main types of rollovers:

• 401(k) to a traditional IRA or Roth IRA
• 401(k) to a new employer’s 401(k).

Here’s a look at rollovers to a traditional or Roth IRA vs. a 401(k) and the pros and cons of each. 

Rolling Over to a Traditional or Roth IRA

A rollover to an IRA might be the right choice if you want to pick your own investments and/or won’t contribute to a new employer’s 401(k).

Consider a traditional IRA if you want to defer taxes on the transferred funds. If you’d rather pay tax now and withdraw the money tax-free later, and you won’t need the money for at least five years, a Roth IRA is a viable alternative.

Pros

• No tax on conversion to traditional IRA
• Future tax-free withdrawals from Roth
• Many investment options
• Low fees

Cons

• No matching contributions from employer
• Lower annual contribution limits
• Upfront taxes and five-year waiting period for Roth conversion

Rolling Over to a New Employer’s 401(k)

Rolling over your old 401(k) to your new employer’s plan might be your best option if you’ll contribute to the new plan via payroll deferrals. Maxing out your employer’s matching 401(k) contributions, which are free money, before contributing to other retirement accounts helps your savings grow faster.

Pros

• No tax consequences for rolling over
• Avoids high fees charged to inactive employees

Cons

• Small selection of funds to invest in
• Higher fees compared to IRAs

Common 401(k) Rollover Mistakes and How To Avoid Them

These common mistakes can result in unnecessary out-of-pocket costs.

Forgetting To Factor in Taxes

If you 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. But the tax hit in the year you convert could be substantial, so it’s a good idea to consult with a tax professional first.

Underestimating Fees

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.

Delaying the Rollover

If you leave your 401(k) with your old employer, you may lose track of your retirement savings, or pay higher fees than you need to. Also, you won’t be allowed to make additional contributions to the account.

Tax Implications of a 401(k) Rollover

Certain rollovers have tax consequences you should be aware of.

If you have to do an indirect rollover, your current 401(k) plan administrator must withhold 20% of the funds for federal income tax. You can also be taxed if you don’t deposit the money into another retirement account within 60 days. In that case, the IRS will treat the liquidation of your 401(k) as a cash out, which is taxable income. If you’re younger than 59.5 — 55 if you no longer work for the plan sponsor — you’ll also have to pay a 10% early-withdrawal penalty if you miss the deadline.

A rollover into a Roth IRA also has tax implications. Roth IRA contributions come from after-tax money, so you’ll have to pay the tax when you convert the funds. If the 401(k) allows multiple rollovers, you can break up the tax payments by rolling over part of the 401(k) each year for several years. Alternatively, you can roll over the 401(k) to a traditional IRA and convert to a Roth later.

Here’s a look at the tax consequences for traditional and Roth IRAs.

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. On the one hand, a rollover simplifies your financial management and gives you more control over your investments.

If you roll over your 401(k) to an IRA, you have lower fees and more investment choices. If 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. 

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.

Rudri Patel contributed to the reporting for this article.

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