If you have a 401(k) from a former employer, a rollover can be a way to help you gain greater control over your funds and keep your retirement savings better organized. But it’s important to understand how to do it without triggering unexpected taxes, penalties or headaches.
Read more: Is a Roth or traditional IRA right for you?
What is a 401(k) rollover?
A 401(k) rollover is the process of moving the money from your employee-sponsored plan into another retirement account.
What is a rollover IRA?
Unlike a traditional or Roth Individual Retirement Account (IRA), a rollover IRA is designed to hold funds exclusively from an employee-sponsored plan.
A 401(k) rollover is the process of moving the money from your employee-sponsored plan into another retirement account.
Your choices for an old 401(k)
If you have an old 401(k), you can do a few things with it:
Leave the money in the plan with your old employer, if allowed
Roll over the assets to your new employer’s plan, if allowed
Roll over to an IRA
Cash out the account value (there may be significant penalties and taxes for early withdrawals)
Why roll over your 401(k) to an IRA?
A rollover can be beneficial for a few reasons:
Multiple 401(k)s can be difficult to keep track of
Fewer accounts could mean more flexibility to adjust and diversify
Your old 401(k) could cost you extra through higher fees
You could have a wider range of investment choices through other retirement account types
Steps to roll over your 401(k) to an IRA
Get started with these three steps.
1. Choose what type of account you want to roll your old fund into
You generally have two choices:
A new 401(k): Rolling over would enable you to see all of your retirement money in one place.
An IRA: If you’re looking to manage your own account without being subject to employer-imposed rules or blackout periods, this could be the right choice for you.
2. Request a rollover from your old 401(k) provider and get all the necessary forms together
You’ll likely see one of two methods:
Direct: Your money is transferred directly from your old account to your new account. Keep in mind, a check may still be sent to you, but it will be made out to your new financial institution. All you’ll have to do is mail it to your new provider.
Indirect: The old provider sends you the funds, and you must send to your new provider within 60 days to avoid penalties. This method is generally not recommended unless you have an urgent, short-term need for the money.
3. Call your new IRA provider and determine how you can start depositing funds into your new account
Make sure you’ve got the right steps nailed down and confirm that your old fund has rolled over into the new account properly.
Pros and cons of rolling over your 401(k) to an IRA
Before you make a decision, consider how these pros and cons might affect your long-term money goals.
Pros | Cons |
|---|---|
Potentially easier to manage | Potential for more fees |
Avoid additional taxes | Potentially less protection from creditors |
More investment opportunities | Delayed access to funds |
401(k) rollover FAQs
How long do you have to roll over a 401(k)?
Many employers will roll your 401(k) over for you, but if that’s not the case, they may disburse your account. In this scenario, you will have 60 days to move the money to your new account.
Do I have to pay taxes when rolling over a 401(k)?
As long as you move the funds to an eligible retirement account within the time period described above, you will not have to pay any additional taxes.
How much can I roll over from a 401(k) to an IRA?
You can move any amount from a 401(k) to an IRA.
Can I have a Roth IRA and a 401(k) at the same time?
Yes, you can have both accounts as long as you meet the eligibility requirements.
What are the pros and cons of cashing out a 401(k) instead of rolling over the funds?
The main benefit of cashing out a 401(k) is that you will avoid a 10% early withdrawal penalty. But if you aren’t yet 59 ½, you will be required to pay income tax on the money you withdraw, as well as a 10% penalty tax, with some exceptions.
Determine the best retirement savings approach for you
A 401(k) rollover doesn’t have to be the difficult task you might imagine it to be. Follow these three steps for a smooth rollover experience.
