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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. Many people roll their 401(k) into an individual retirement account, or IRA. But you may also be able to roll your balance into another 401(k).
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. We'll outline that process below.
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Rolling over your 401(k): The options
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 has 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. Because your 401(k) contributions were made pre-tax, and a Roth IRA is an after-tax account, there are tax consequences to this. You’ll owe taxes on the rolled-over amount in the year of the rollover. But it can have benefits in the future, 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.
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2. Roll your old 401(k) over to a new employer
To keep your money in one place, you may want to transfer assets from your old 401(k) to your new employer’s 401(k) plan, assuming your new plan allows this. Doing this will make it easier to see how your assets are performing because they will all be in one place.
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.
3. Keep your 401(k) with a former employer
If your ex-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 your former employer could decide to move your old 401(k) account to another provider. If your balance is between $1,000 and $5,000, 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.
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 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).)
For example, say your total 401(k) account balance was $20,000 and your former employer sends you a check for $16,000 (that’s the full account minus 20%). Assuming you’re not planning to go the Roth route, you'd need to come up with $4,000 so that you can deposit the full $20,000 into your IRA.
At tax time, the IRS will see you rolled over the entire retirement account and will refund you the amount that was withheld in taxes.
Pros and cons of a 401(k) rollover into an IRA
Many people benefit from turning a 401(k) into a rollover IRA after leaving a job, often in the form of lower fees, a larger investment selection or both. But it's important to know the pros and cons before making this decision — after all, we're talking about your retirement savings here.
Why you might roll a 401(k) into an IRA
An IRA offers several benefits over a 401(k), especially once you've left your job, which means you can no longer contribute to the account and you're no longer earning an employer match.
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.
Maybe 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 best IRA accounts
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Track your retirement savings balances in one place by linking your accounts.
Why you might not want to roll a 401(k) to an IRA
There are a few scenarios that might make rolling over the wrong choice for you.
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.
Loss of access to loans: Many 401(k) providers do allow participants to take loans from the plan. You can't take a loan from an IRA.
Required minimum distributions: 401(k)s and traditional IRAs require distributions beginning at age 73. But a 401(k) has a loophole: It allows you to push off those distributions until you actually retire, even if you do so after 73.
401(k)s offer potential for earlier access: If you leave your job, you may be able to tap your 401(k) as early as age 55. With an IRA, in most cases you can't begin taking qualified distributions until age 59½.
Taxes on company stock: Company stock should generally be rolled over to a taxable brokerage account, not an IRA. If your 401(k) plan holds company stock, we recommend consulting a tax professional.
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Frequently asked questions
Is a rollover IRA the same as a 401(k)?
No. Generally, you set up a rollover IRA so that you can move money from a 401(k) into that IRA. (If you were to simply withdraw the money from your 401(k), rather than roll it over, you'd owe income tax and probably an early withdrawal penalty.) A rollover IRA lets you move money out of a 401(k) without sacrificing the benefit of delaying your tax bill until retirement.
Is there a limit on the amount of money I can roll over to an IRA?
No. But again, you'll need to abide by your annual contribution limits for future contributions to your IRA.
Does my rollover count as a contribution?
No. It is considered separately from your annual contribution limit. So you can contribute additional money to your rollover IRA in the year you open it, up to your allowable contribution limit.
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 chose 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 your number of IRAs low, as this will make it easier to keep track of your funds and assess things like asset allocation.
