A 401(k) rollover to an IRA moves your old workplace retirement savings into an individual retirement account you control. Done as a direct rollover, it is tax-free and penalty-free. Most people roll over after leaving a job to get more investment choices, lower fees and fewer accounts to track.
Direct vs indirect rollover
| Direct rollover | Indirect rollover | |
|---|---|---|
| How the money moves | Plan sends it straight to your IRA | Plan sends you a check |
| Tax withheld | None | 20% withheld for federal tax |
| Deadline | None | Deposit within 60 days |
| Risk | Very low | Miss the deadline and it becomes taxable |
With an indirect rollover you must put back the full amount, including the 20% that was withheld, out of your own pocket to avoid tax on that part. That is why a direct rollover is almost always the better choice.
How to roll over a 401(k), step by step
- Open the IRA first at a low-cost brokerage. Choose a traditional IRA for pre-tax money and a Roth IRA for Roth 401(k) money.
- Contact your old plan and ask for a direct rollover. Have the IRA account number and the receiving firm’s details ready.
- Check the paperwork: the check, if any, should be made out to the new firm “for the benefit of” you, not to you personally.
- Invest the money once it arrives. Rolled-over money often lands as cash and sits there until you choose investments, such as low-cost index funds.
- Keep the records. You will get a Form 1099-R showing the rollover, and it should not be taxable.
Your four choices with an old 401(k)
- Roll it to an IRA: the most investment choice and control.
- Move it to your new employer’s plan: keeps everything in one place and can be useful for the backdoor Roth strategy.
- Leave it where it is: fine if the plan has low fees and good funds.
- Cash it out: usually the worst option, with income tax plus a 10% penalty if you are under 59½.
Our guide to what happens to your 401(k) when you leave a job covers each in more detail.
When not to roll over
- You left the job at 55 or older: the “rule of 55” lets you take penalty-free withdrawals from that employer’s 401(k), but not from an IRA.
- You use a backdoor Roth IRA: pre-tax IRA balances can make a backdoor Roth partly taxable.
- Your plan has unusually cheap funds or stable-value options you cannot get elsewhere.
- Lawsuit protection matters: 401(k)s have strong federal creditor protection; IRA protection varies by state.
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Frequently asked questions
Is a 401(k) rollover taxable?
No, if you move pre-tax money into a traditional IRA, or Roth money into a Roth IRA. Moving pre-tax money into a Roth IRA is a Roth conversion and is taxable.
How long does a rollover take?
Usually one to three weeks, depending on the plan.
Is there a limit on 401(k) rollovers?
No. The one-rollover-per-year rule applies to indirect IRA-to-IRA rollovers, not to moving money from a 401(k).
This article is general information, not financial or tax advice.
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