401(k) Rollover: How to Move Your Plan After a Job Change

When you leave a job, your 401(k) does not have to stay behind, and it should not be cashed out without careful thought. A 401(k) rollover lets you move your retirement savings to an IRA or a new employer's plan while keeping its tax-deferred status. Done correctly, a rollover is tax free. Done incorrectly, it can trigger taxes, penalties and lost growth. This guide explains your options, the mechanics of direct and indirect rollovers and the rules that trip people up.

Your Four Options After Leaving a Job

1. Leave the Money in Your Old Plan

Many plans let you keep your account if the balance is above a certain amount. This can make sense if the plan has low-cost investments or features you value. Plans may automatically distribute or roll over small balances; under SECURE 2.0, plans can force out balances up to $7,000, often by rolling them into an IRA in your name.

2. Roll Over to Your New Employer's Plan

If your new employer's plan accepts rollovers, consolidating can simplify your finances and keep everything in one place. Employer plans may offer institutional-class funds and strong creditor protection.

3. Roll Over to an IRA

An IRA rollover typically gives you the widest investment choices and full control over provider and fees. It is a popular choice for people who want to consolidate several old plans.

4. Cash Out

Cashing out is usually the most expensive option. The distribution is taxable as ordinary income, and if you are under 59½ you generally owe a 10 percent additional tax unless an exception applies. You also lose future tax-deferred growth.

Direct vs Indirect Rollovers

Direct Rollover

In a direct rollover, your old plan sends the money straight to the new plan or IRA, or issues a check payable to the new custodian for your benefit. No taxes are withheld, and there is no deadline risk. For most people, this is the safest method.

Indirect Rollover

In an indirect rollover, the plan pays the distribution to you, and you must deposit it into an IRA or eligible plan within 60 days to avoid taxes. The plan is required to withhold 20 percent for federal income taxes from an eligible rollover distribution paid to you. To roll over the full amount, you must make up that 20 percent from other funds within the 60 days. Any amount not rolled over is treated as a taxable distribution and may be subject to the 10 percent additional tax. The withheld amount is credited when you file your tax return.

The IRS can waive the 60-day requirement in limited circumstances, and there is a self-certification procedure for certain qualifying reasons, but relying on it is risky.

The One-Rollover-Per-Year Rule

You can make only one indirect IRA-to-IRA rollover in any 12-month period. This rule does not apply to direct trustee-to-trustee transfers between IRAs, to rollovers from a 401(k) to an IRA, or to conversions to a Roth IRA. Using direct transfers avoids this issue entirely.

Roth and Pre-Tax Money

Pre-tax 401(k) money should go to a traditional IRA or another pre-tax plan to remain tax deferred. Roth 401(k) money can be rolled to a Roth IRA or a Roth account in a new employer plan. Rolling pre-tax money into a Roth IRA is a conversion and is taxable.

If your old plan included after-tax contributions, special rules may let you send the after-tax portion to a Roth IRA and the pre-tax portion to a traditional IRA. Ask the plan administrator for a breakdown.

Things You Might Lose by Rolling to an IRA

Rule of 55

If you leave your job in or after the year you turn 55, you can generally take penalty-free withdrawals from that employer's 401(k). This exception does not apply to IRAs. If you may need the money before 59½, consider leaving some or all of it in the plan.

Company Stock

If your 401(k) holds appreciated employer stock, you may benefit from net unrealized appreciation treatment, which can lower taxes on that stock. Rolling it into an IRA forfeits the strategy, so get advice before moving it.

Loan Access and Creditor Protection

Some employer plans allow loans, which IRAs do not. Employer plans covered by ERISA also generally have strong federal creditor protection, while IRA protection depends partly on state law and federal bankruptcy rules.

Backdoor Roth Plans

If you use the backdoor Roth strategy, holding pre-tax IRA balances triggers the pro-rata rule. Rolling old 401(k) money into your new employer plan instead of an IRA can keep the backdoor strategy clean.

Step-by-Step: How to Do a Direct Rollover

1. Open the receiving IRA or confirm your new plan accepts rollovers.
2. Contact your old plan administrator and request a direct rollover.
3. Provide the receiving institution's details, including the account number and how checks should be made payable.
4. If a check is mailed to you, forward it promptly to the new custodian.
5. Confirm the deposit is coded as a rollover and invest the money according to your plan.
6. Keep the Form 1099-R from the old plan and Form 5498 from the IRA for your records.

Coordinating the Rollover With Your Broader Plan

A rollover is a good time to review your asset allocation and withdrawal plans. If you are close to retirement, our guide to the 4 percent rule explains how to think about sustainable withdrawals. Keeping an emergency fund in a high-yield savings account means you will not be tempted to cash out retirement savings during a job transition.

The Bottom Line

A 401(k) rollover lets you keep retirement savings growing tax deferred after leaving a job. Use a direct rollover whenever possible to avoid the 20 percent withholding and 60-day deadline. Compare the old plan, the new plan and an IRA based on fees, investments, flexibility and features such as the Rule of 55, and avoid cashing out unless there is no other option.