How to roll over your 401(k) in 5 easy steps
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If you’ve left your job, there are several options for how to roll over your employer-sponsored 401(k) retirement plan. Making the right decision on where to roll over your account can potentially save you tens of thousands of dollars – or cost you just as much if you make the wrong decision.
Rolling over a 401(k) with high-fee investments into an individual retirement account (IRA) with lower-cost investment options or to your current employer’s 401(k) plan could save you big. According to the Department of Labor, just a 1 percent increase in fees could reduce your retirement account balance by 28 percent.
If a rollover makes sense for you, here’s how to move money from your old 401(k) to a new account.
How to roll over your 401(k)
Follow these five steps to get started on your 401(k) rollover:
- Decide what kind of account you want
- Decide where you want the money to go
- Open your account and find out how to conduct a rollover
- Begin the rollover process
- Act quickly
What is a 401(k) rollover?
A 401(k) rollover is when you direct the transfer of the money in your 401(k) plan to a new 401(k) plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA.
Overview: How to start a 401(k) rollover
1. Decide what kind of account you want
Your first decision is what kind of account you’re rolling over your money to, and that decision depends a lot on the options available to you and whether you want to invest yourself.
When you’re thinking about a rollover, you have two big options: move it to your current 401(k) or move it into an IRA. As you’re trying to decide, ask yourself the following questions:
- Do you want to invest the money yourself or would you rather have someone do it for you? If you want to do it yourself, an IRA may be a good option. But even if you want someone to do it for you, you may want to check out an IRA at a robo-advisor, which can design a portfolio for your needs. But “do-it-for-me” investors may also prefer to make a rollover into your current employer’s 401(k) plan.
- Does your old 401(k) have low-cost investment options with potentially attractive returns, and does your current 401(k) offer similar or better options? If you’re thinking about a rollover to your current 401(k) plan, you’ll want to ensure it’s a better fit than your old plan. If it’s not, then a rollover into an IRA could make a lot of sense, since you’ll be able to invest in anything that trades in the market. Otherwise, maybe it makes sense to keep your old 401(k).
- Does your current 401(k) plan offer access to financial planners to help you invest? If so, it could make sense to roll your old 401(k) into your new 401(k). If you move money to an IRA, you’ll have to manage it completely and pick investments or hire someone to do so.
Before you actually move your money, you’ll need to decide which kind of account makes sense for your situation and needs. Those who need help with investing may be better served with a rollover to their current 401(k) plan, while those who want to invest the money themselves and have the skill to do so, may prefer to opt for an IRA.
2. Decide where you want the money to go
If you’re making a rollover from your old 401(k) account to your current one, you know exactly where your money is going. If you’re rolling it over to an IRA, however, you’ll have to set up an IRA at a bank or brokerage if you haven’t already done so.
Bankrate has reviewed the best places to roll over your 401(k), including brokerage options for those who want to do it themselves and robo-advisor options for those who want a professional to design a portfolio for them.
Bankrate has comprehensive brokerage reviews that can help you compare key areas at each provider. You’ll find information on minimum balance requirements, investment offerings, customer service options and ratings in multiple categories.
If you already have an IRA, you may be able to consolidate your 401(k) into this IRA, or you can create a new IRA for the money.
3. Open your account and find out how to conduct a rollover
After you’ve found a brokerage or robo-advisor that meets your needs, open an IRA account. Once it’s open, you can begin the process for rolling over your 401(k) money into the account.
Each brokerage and robo-advisor has its own rollover 401(k) process, so you’ll need to contact the institution for your new account to see exactly what’s needed. You’ll want to follow their procedures exactly. If you’re rolling over money into your current 401(k), contact your new plan administrator for instructions on what to do.
For example, if the 401(k) company is sending a check, your IRA institution may request that the check be written in a certain way and they might require that the check contains your IRA account number on it.
Again, follow your institution’s instructions carefully to avoid complications.
4. Begin the rollover process
You’ll have to fill out paperwork to conduct your rollover, and it may require some back-and-forth conversations with your providers. You have several options to actually move the money from the old provider to the new one, but your best option is a direct rollover.
In a direct rollover, the funds are sent straight from your 401(k) into your new account without you touching the funds. It’s important that you specify a direct rollover so that you don’t have the check made payable to you. You could trigger a mandatory 20 percent withholding for taxes, and the IRS charges a 10 percent bonus penalty on withdrawals made before age 59 1/2.
However, not all plan providers allow direct transfers, so make sure to ask if the option is available.
5. Act quickly to avoid potential tax consequences
If you’re conducting a rollover, you have 60 days from the date you receive your retirement plan distribution to get it deposited into a qualified account. Otherwise, it will be a taxable event.
Again, each institution may have its own process for moving the money. Your 401(k) administrator may send a paper check to you or to the institution where you are opening your IRA, or the money may be rolled over digitally via wire transfer.
If you receive a check in the mail, you’ll need to make sure it’s sent along to your new account. Act quickly.
What to do if you have an existing 401(k) at your previous employer
If you have a 401(k) at a previous employer, you’ll want to consider whether a rollover makes sense for you. You may want to consult with a tax professional to help you make a decision that is best for your unique circumstances.
As you’re thinking about what to do with your old 401(k), here are some options to consider:
Keep your 401(k) with your previous employer
In this instance, you won’t change a thing. Just make sure that you actively monitor your investments in the plan for performance and remain aware of any significant changes that occur.
If you really like your current investment options and are paying low fees on the investments, this might be the right choice for you.
Roll over your 401(k) to an IRA
This option makes sense if you want to roll over your 401(k) and you want to avoid a taxable event. If you have an existing IRA, you may be able to consolidate all of your retirement accounts in one place. And an IRA gives you many investment options, including low-cost mutual funds and ETFs.
There are plenty of mutual fund companies and brokerages that offer no-load mutual funds and commission-free ETFs, says Greg McBride, CFA, Bankrate chief financial analyst.
“You also want to just make sure that you’re satisfying any account minimums so that you don’t get dinged for an account maintenance fee for having a low balance,” McBride says. “Index funds will have the lowest expense ratios. So there’s a way that you can really cut out a lot of the unnecessary fees.”
Check with your IRA institution first to ensure that it will accept the kind of rollover that you would like to make.
“The letter of the law says it is OK [to roll a 401(k) into a Roth IRA]. But in practice, your 401(k) plan may not allow it,” says Michael Landsberg, CPA/PFS, principal at wealth management firm Homrich Berg.
Roll over your old 401(k) to your new employer’s 401(k)
If your new employer’s 401(k) plan accepts rollovers, this may be a good option if the investment options are better or lower-cost than your previous employer’s 401(k). You’ll have to investigate to see which plan is better and meets your needs.
The pros and cons of rolling over your 401(k)
Advantages of rolling over your 401(k)
1. You can consolidate your 401(k) accounts
Especially if you change jobs often, you might find yourself with many 401(k) accounts scattered around. The more accounts you have, the harder it may be to actively make decisions. By having your retirement funds all in one place, you may be able to manage them more carefully.
2. You’ll have more investment choices in an IRA
With your 401(k), you are restricted to the investment and account options that are offered in that plan. An IRA can give you a more diverse option of assets to invest in. In an IRA you may be able to invest in individual stocks, bonds or other vehicles that may not be available in your 401(k).
You can’t add to the 401(k) at your previous employer. But if you roll this money over into a traditional IRA, you can add to that traditional IRA over time, up to the annual maximum. You’ll have to follow the IRA contribution guidelines.
3. You’ll have the choice to bring the account anywhere you’d like
With an IRA, you can take your money with you to any advisor, if you already have a financial advisor or financial planner that you work with, for example. Or maybe you already have a brokerage where some of your money is being managed, and you want all your funds there.
Disadvantages of rolling over your 401(k)
1. You like your current 401(k)
If the funds in your old 401(k) don’t charge high fees, you might want to take advantage of this and remain with that plan. Compare the plan’s fund fees to the costs of having your money in an IRA.
In many cases the best advice is “If it isn’t broken, don’t fix it.” If you like the investment options you currently have, it might make sense to stay in your previous employer’s 401(k) plan.
2. A 401(k) may offer benefits that an IRA doesn’t have
If you keep your retirement account in a 401(k), you may be able to access this money at age 55 without incurring a 10 percent additional early withdrawal tax, as you would with an IRA.
With a 401(k), you can avoid this penalty if distributions are made to you after you leave your employer and the separation occurred in or after the year you turned age 55.
This loophole does not work in an IRA, where you would generally incur a 10 percent penalty if you withdraw money before age 59 1/2.
3. You can’t take a loan from an IRA, as you can with a 401(k)
Many 401(k) plans allow you to take a loan. While loans from your retirement funds are not advised, it may be good to have this option in an extreme emergency or short-term crunch.
However, if you roll over your funds into an IRA, you will not have the option of a 401(k) loan. You might consider rolling over your old 401(k) into your new 401(k), and preserve the ability to borrow money.
Other items to consider
Net unrealized appreciation (NUA) and company stock in a 401(k)
If you have company stock in a 401(k), it could save you significant money on taxes to transfer those shares into a taxable brokerage account to take advantage of net unrealized appreciation, or NUA. NUA is the difference between what you paid for company stock in a 401(k) and its value now.
For example, if you paid $20,000 for company stock and it’s now worth $100,000, the NUA is $80,000.
The benefit of the NUA approach is that it helps you avoid paying ordinary income tax on these distributions of your own company’s stock from your retirement account. That can be up to 37 percent, which is now the highest tax bracket, says Landsberg.
Instead, you’ll enjoy capital gains tax treatment, which even at the highest tax bracket is only 20 percent. High earners, however, will be subject to a bonus 3.8 percent net investment income tax. And an NUA may be subject to a 10 percent early withdrawal tax if you move funds prior to age 59 1/2.
Landsberg says NUA makes the most sense when the difference in tax rates is higher.
“Net unrealized appreciation is a very powerful tool, if used correctly,” Landsberg says. “So you can get creative and potentially have a pretty nice windfall if you use the NUA rules correctly.”
Beware 401(k) balance minimums
If your account balance is less than $5,000 and you’ve left the company, your former employer may require you to move it. In this case, consider rolling it over to your new employer’s plan or to an IRA.
If your previous 401(k) has a balance of less than $1,000, your employer has the option to cash out your accounts, according to FINRA.
Always keep track of your hard-earned 401(k) money and make sure that it is invested or maintained in an account that makes sense for you.
401(k) rollover FAQs
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If a distribution is made directly to you from your retirement plan, you have 60 days from “the date you receive” a retirement plan distribution to roll it over into another plan or an IRA, according to the IRS.
But if you have more than $5,000 in a 401(k) at your previous employer – and you’re not rolling it over to your new employer’s plan or to an IRA – there generally isn’t a time limit on making this decision. -
If you like your former employer’s 401(k) plan – the investment options and the expense ratios on the investments – then it won’t necessarily be better to roll it over into an IRA. But you may find that if you roll your 401(k) into an IRA, you may have more investment options. Compare expense ratios and fees to see which option is best for you.
Kaleb Paddock, a certified financial planner at Ten Talents Financial Planning in Parker, Colorado, says a typical 401(k) plan only has approximately 20 to 40 mutual funds available. But an IRA could give you access to thousands of exchange-traded funds and mutual funds as well as individual stocks.
“Another reason might be, if you want to invest in socially responsible funds or funds that invest according to a certain set of values, those funds may not be available in your 401(k) or your prior employer 401(k),” Paddock says.
“But by rolling it over to … one of these large custodians, you’ll likely be able to access funds that may be socially responsible or fit your values in some fashion — and give you more options that way,” he says.
Plus, rolling over your 401(k) to an IRA may result in you earning a brokerage account bonus, depending on the rules and restrictions that the brokerage has in place.
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Whether you owe taxes on a rollover depends on whether you’re changing account types (traditional vs. Roth). Generally, if you move a traditional 401(k) account to a Roth IRA, you could create a tax liability. Here are a few scenarios:
- If you’re rolling over money from a traditional 401(k) to another traditional 401(k) or traditional IRA, you won’t create a tax liability.
- If you’re rolling over a Roth 401(k) to another Roth 401(k) or Roth IRA, you won’t create a tax liability.
- However, if you’re rolling a traditional 401(k) into a Roth IRA, you could (and likely will) create a tax liability.
It’s also important to know that if you have a Roth 401(k) that has any employer matching funds in it, those matching funds are categorized as a traditional 401(k) contribution. So if you transfer a Roth 401(k) with matching funds into an IRA, you’ll need to create two IRA accounts – a traditional IRA and a Roth IRA – to avoid any tax issues during the rollover. The SECURE Act 2.0 now allows employers to make matching contributions in Roth plans, but it may take some time to implement this change.
Of course, you’ll still need to abide by the 60-day rule on rollovers. That is, you have 60 days from “the date you receive” a retirement plan distribution to roll it over into another plan, according to the IRS. Taxes generally aren’t withheld from the transfer amount, and this may be processed with a check made payable to your new qualified plan or IRA account.
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