You've changed jobs. Or retired. Or your old employer was acquired. Whatever the reason, you have an old 401(k) sitting at a previous employer's plan, and you're trying to figure out what to do with it.
For most people, rolling it into an IRA is the right move. But "most" isn't "all," and the mechanics of the rollover can go wrong in ways that cost real money. This guide covers the decision and the execution.
The Four Options
When you leave a job, your 401(k) money has four possible homes:
- Leave it in the old employer's plan. Available as long as your balance is over $7,000 (per 2024 SECURE 2.0 rules; balances under $7,000 can be force-cashed-out by the plan).
- Roll it into your new employer's plan. Available if the new plan accepts rollovers (most do).
- Roll it into a Traditional IRA at a brokerage of your choice. No tax consequences if done correctly.
- Convert it to a Roth IRA. Triggers income tax on the converted amount in the year of conversion.
There's a fifth option — cashing it out — but unless you're under serious financial duress, don't. The 10% early withdrawal penalty (if you're under 59½) plus federal and state income tax on the full balance typically means you'll lose 35–45% of the money. Don't cash out.
When Rolling to an IRA Is Better Than Leaving It
The IRA option is usually the strongest because:
- Investment selection. A typical 401(k) has 15–25 fund choices. An IRA at any major brokerage gives you access to thousands of mutual funds and ETFs.
- Lower expenses. 401(k) plans often have administrative fees baked into fund expense ratios. An IRA invested in low-cost index ETFs can run at 0.03%–0.10% all-in. Some 401(k)s do match this; many don't.
- Consolidation. Pulling old 401(k)s into one IRA means one statement, one beneficiary form, one set of investments to manage.
- Roth conversion flexibility. You can convert any portion of a Traditional IRA to a Roth IRA at any time. This is much harder to do from inside a 401(k) plan.
- RMD aggregation. Required Minimum Distributions from multiple Traditional IRAs can be taken from any one of them. RMDs from multiple 401(k)s must each be taken separately.
When Leaving It in the Old 401(k) Is Better
These are the underrated cases for staying put:
You're 55 or older and might want penalty-free withdrawals before 59½
The "Rule of 55" lets you take penalty-free withdrawals from your most recent employer's 401(k) if you separated from service in the year you turned 55 or later. Roll the money to an IRA and you lose that flexibility — the IRA's penalty-free age is 59½ (with limited exceptions).
Your 401(k) has access to institutional share classes
Some employer plans give you access to fund share classes with much lower expense ratios than what's available retail. If your 401(k) holds an institutional share class of a Vanguard or Fidelity fund at 0.02% expense, the same fund's retail share class might be 0.10%. Multiplied across decades, the difference matters.
You have appreciated employer stock with NUA potential
If a meaningful portion of your 401(k) is in your employer's stock that has appreciated significantly, the Net Unrealized Appreciation (NUA) strategy can be powerful. Briefly: you transfer the company stock to a taxable brokerage account, paying ordinary income tax only on the original cost basis. The appreciation is taxed at long-term capital gains rates when you eventually sell. Roll the stock into an IRA and you forfeit this — all distributions become ordinary income. Talk to a CFP or CPA before doing anything if NUA might apply.
You face creditor litigation
401(k) plans have unlimited federal creditor protection under ERISA. Traditional IRAs have lower protection that varies by state (and by whether the creditor case is bankruptcy or non-bankruptcy). If you're a physician, business owner, or anyone exposed to professional liability, this matters.
Direct vs. Indirect Rollover (Get This Right)
There are two ways to move 401(k) money to an IRA. They look similar. They are not.
Direct rollover (do this one)
Your old plan sends a check directly to your new IRA custodian, typically made payable to "[Brokerage] FBO [Your Name]." You may receive the check in the mail, but you forward it to the new custodian — you don't deposit it. There is no tax withholding, no IRS reporting beyond a simple Form 1099-R coded as a non-taxable rollover.
This is the only way to do it. Always.
Indirect rollover (don't do this)
The plan distributes the money to you personally. They are required by law to withhold 20% for federal taxes. You then have 60 days to deposit the full original amount (including the 20% they withheld) into a new IRA. You get the 20% back when you file your taxes the following year — but in the meantime, you have to come up with that 20% out of pocket.
Example: You request to move $200,000 from your 401(k) via indirect rollover. The plan sends you a check for $160,000 (after 20% withholding). To complete the rollover, you have 60 days to deposit $200,000 into an IRA — meaning you have to find $40,000 from somewhere else to make up the withheld amount. If you can't, the missing $40,000 is treated as a distribution, taxable at your ordinary income rate, plus a 10% penalty if you're under 59½.
The 60-day clock is strict. Miss it by a day and the entire balance is treated as a distribution. The IRS does grant hardship waivers occasionally, but the process is brutal and outcomes are unpredictable.
Always do a direct rollover. If anyone at the old plan suggests otherwise, push back.
Traditional IRA vs. Roth IRA
A Traditional 401(k) rolls into a Traditional IRA without any tax consequences. The money continues to grow tax-deferred; you'll pay income tax when you eventually withdraw.
You can also choose to convert all or part of the rollover into a Roth IRA. This means paying income tax on the converted amount in the current tax year. The benefit: tax-free growth from then on, no RMDs, and tax-free distributions in retirement.
When a Roth conversion makes sense at rollover time:
- You're between jobs and have unusually low income this year
- You're in retirement and not yet taking Social Security or RMDs
- You expect to be in a higher tax bracket later (perhaps because of large RMDs, Social Security, or a planned income event)
- You can pay the conversion tax from non-IRA money (this is critical — paying the tax from the IRA itself effectively reduces your future tax-free pool)
When a Roth conversion is a mistake:
- You're in your peak earning years and a high tax bracket
- You'd have to use IRA money to pay the conversion tax
- You expect to be in a much lower bracket in retirement (e.g., you're moving from California to Texas at retirement)
You don't have to convert all-or-nothing. Partial conversions done over multiple years let you fill up specific tax brackets without jumping into a higher one. This is called "bracket management" and is one of the most valuable services a CFP provides during the transition years.
The Step-by-Step Process
Assuming you've decided to roll over and stick with Traditional (no Roth conversion):
1. Open the receiving IRA
Pick a brokerage — Vanguard, Fidelity, Schwab, and a few others are the standard low-cost options. Open a Rollover IRA (a separate account type from a Contributory IRA, mostly for record-keeping reasons).
2. Get the rollover packet from your old plan
Call the 401(k) plan administrator (the number is on your statement). Tell them you want to do a direct rollover to a Traditional IRA. They'll send you forms.
3. Complete the forms
You'll need:
- Receiving custodian name and address
- Receiving account number
- Make the check payable to: "[New Brokerage] FBO [Your Name], [Account Number]"
4. Submit the forms
Mail or upload back to the 401(k) administrator.
5. Wait
Most rollovers complete in 7–14 business days. Some plans are slower, especially if the rollover requires spousal consent.
6. Verify the money landed
Check your new IRA. Confirm the deposit shows up coded as a "rollover contribution," not a regular contribution. (Regular IRA contributions are limited to $7,000/year in 2024; rollovers are not subject to that limit, but they have to be coded correctly.)
7. Invest the money
The rollover lands in cash. You have to manually buy investments. Don't leave it in cash for months — the whole point was to be invested.
8. Wait for the 1099-R
In January after the rollover, you'll get a 1099-R from the old 401(k) plan. The distribution code should be G (direct rollover). Verify this. If it's coded differently, contact the plan administrator immediately to fix it.
9. Report on your tax return
The rollover gets reported on Form 1040, lines 5a and 5b. Line 5a shows the gross amount distributed; line 5b shows $0 (assuming it was a proper rollover). Most tax software handles this correctly if the 1099-R is coded G.
Common Mistakes
- Cashing out the old 401(k). Already covered. Don't.
- Indirect rollover when direct was available. Already covered. Always direct.
- Missing the 60-day window. Only relevant if you ended up doing an indirect rollover. The clock starts the day you receive the funds.
- Rolling pre-tax and after-tax money into the same Traditional IRA. If your 401(k) had after-tax contributions, those should go into a Roth IRA, not Traditional. Mixing them creates basis-tracking problems for years.
- Forgetting to update beneficiaries. Your old 401(k) beneficiary doesn't follow the money to the new IRA. Set the new IRA's beneficiary the day you open it.
The Bottom Line
Rolling an old 401(k) into a Traditional IRA is usually the right move, especially if your old plan's investment choices are limited or expensive. Always do it as a direct rollover (trustee-to-trustee). Consider a Roth conversion only if you have a low-income year and money outside the IRA to pay the conversion tax.
If you have NUA potential, are 55+ planning to use the Rule of 55, or have unusually good institutional fund pricing in your old plan, the calculation changes. Talk to a CFP. Our directory lists fiduciary advisors who specialize in retirement transitions across every state — verify any advisor on FINRA BrokerCheck before you commit.