How to Roll Over Your 401(k)

Quick Answer

Instead of leaving funds behind when you move jobs or retire, consider rolling your old 401(k) into an IRA, Roth IRA or your new employer’s 401(k) plan. A 401(k) rollover isn’t taxable but it is reportable on your tax return, so be sure to follow IRS guidelines.

Young woman in blue cardigan walking another young woman over how to roll over 401k.

When you move jobs, it may be a good idea to take your 401(k) funds with you. Some employers won't allow you to keep a 401(k) open after you leave. And even when they do, you can easily lose track of your money or lose touch with your old plan administrator.

A 401(k) rollover transfers funds from a 401(k) with a former employer into a new IRA or a 401(k) with your new employer. Except for a conversion from a traditional 401(k) to a Roth IRA, a 401(k) rollover generally isn't taxable, but it is reportable on your tax return. Here's how to roll a 401(k) into a new account while staying on the right side of IRS rules.

What Is a 401(k) Rollover?

A 401(k) rollover lets you move cash or investments from one eligible retirement plan to another without penalty. You can roll funds from a 401(k) or 403(b) plan into a traditional IRA, Roth IRA or qualified 401(k) with your new employer. Each of these options has its pros, cons and limitations.

Traditional IRA: You can move your 401(k) funds into a traditional IRA without paying additional taxes or penalties (details on how to do this within IRS guidelines below). If you contributed to your 401(k) with pretax dollars, meaning your contributions were deducted from your gross income, you can roll your funds into a traditional IRA. There they will continue to grow tax-deferred until you withdraw the money in retirement. If you have a designated Roth 401(k) account, you can't roll it into a traditional IRA.

Roth IRA: You can roll your funds from a Roth 401(k) into a Roth IRA, or from a traditional 401(k) to a Roth IRA. With a Roth, your money grows tax-free and is also tax-free when you withdraw it in retirement. However, converting funds from a traditional 401(k) to a Roth IRA will generate a tax bill now: The amount of your conversion counts as regular income on your current-year tax return.

401(k) with your new employer: Some employers allow their employees to roll funds from an old 401(k) into their new 401(k) accounts. This allows you to keep all of your retirement funds in one place rather than managing multiple accounts or leaving funds behind with an old employer.

Why Should I Roll My 401(k) Over?

In some cases, your former employer may allow you to keep your 401(k) open even after you move on. But this usually isn't ideal. Having multiple retirement accounts in multiple places makes your funds difficult to track and manage. Streamlining your accounts gives you a clear view into your retirement savings and makes it easier to adjust your portfolio as you age.

Can I Cash Out My 401(k) Instead?

If you withdraw funds from your 401(k) without rolling them into another retirement account, your withdrawal will be treated as an early distribution. Unless you're age 59½ or older or you qualify for an early withdrawal (say, to use funds to purchase a new home), you'll have to pay a 10% early withdrawal penalty and regular income tax on the amount you cash out.

How Quickly Do I Have to Roll Funds Over?

Once you initiate a 401(k) rollover, the rollover must be completed within 60 days of the funds being released. If you've already withdrawn funds and have missed this deadline, the IRS may provide a waiver that allows you to complete a rollover and avoid taxes and penalties.

How to Roll Your 401(k) Over Into an IRA

You can transfer funds from an old 401(k) into the IRA of your choice. Here are the basic steps to follow:

  1. Choose a traditional or Roth IRA. Learn the pros and cons of traditional vs. Roth IRAs and choose the option that fits your overall retirement plan.
  2. Open an account. You'll find options for opening an IRA at any number of investment companies, or from your bank or credit union.
  3. Roll over your funds. You have two choices for moving funds from a 401(k) to an IRA:
    • Do a direct rollover: Transfer money by having your plan administrator make the payment directly to your new IRA. No money will be withheld from your transfer for taxes.
    • Do a 60-day indirect rollover: Have funds paid directly to you and deposit them into an IRA within 60 days to avoid taxes and an early withdrawal penalty. The IRS requires your plan administrator to withhold 20% of your withdrawal for taxes, so you will only receive 80% of your account balance. To deposit the full account value into your new IRA by the 60-day deadline—and avoid penalties and taxes—you'll need to make up the 20% withholding from other funds.
  4. Follow up with your plan administrator. Make sure your transfer is complete and that your transferred funds have been invested properly by checking in with your plan administrator. Retain records of your rollover for your tax return.

How to Roll Your 401(k) Over to a New Employer

Follow a similar process to roll your old 401(k) into a new one with your current employer:

  1. Find out if your new employer's plan accepts 401(k) rollovers. If they don't, you can still roll your old 401(k) into an IRA.
  2. Notify your new plan administrator that you're planning to move money. Ask for instructions for making the transfer.
  3. Ask your old plan administrator to move your 401(k) funds to your new 401(k).
  4. Make sure your transfer is complete. Retain a record of the transfer for your taxes.

The Bottom Line

Rolling a 401(k) into a new IRA, Roth IRA or retirement account with your current employer can help you keep your retirement finances simple. You'll have an easier time keeping track of your money, measuring and managing your portfolio's performance, and coordinating withdrawals when you're ready to retire.