401(k) Rollover: A Beginner’s Guide

401(k) accounts are portable. That’s good news if you change jobs or want to improve your retirement savings potential by switching to another provider with better investment choices or lower fees. You just have to abide by all the rules and regulations of a 401(k) rollover, which can be complicated. Keep reading to learn what a 401(k) rollover is, how to perform a 401(k) rollover and how to determine what the right option is for your situation.

What is a 401(k) rollover?

A 401(k) rollover is when you take funds from your current 401(k) and move them to another approved retirement account, such as a different 401(k), a traditional IRA or a Roth IRA. Rollovers of the entire balance are most common, although you may roll over a partial amount. Rollovers do not count as contributions, so they are not subject to annual contribution limits.

How do you roll over a 401(k)?

First, contact your current 401(k) provider to determine whether your account is eligible to roll over since some accounts do not have this option.

Decide where to rollover your 401(k)

There are three rollover options for your 401(k). Consider each option carefully to ensure you pick the right one for your unique investment situation.

IRAs

In a 401(k) rollover to IRA, you transfer your current 401(k) to a traditional IRA account. An IRA is an individual retirement account with no connection to an employer, so they are popular with self-employed individuals. You can have an IRA and an employee-sponsored 401(k) to increase retirement savings.

IRAs have different benefits that may make them more appealing than your current 401(k), including:

More flexibility in investment options, including stocks, bonds and mutual funds

The ability to withdraw money early for qualified purchases like a first-time home loan or expenses related to higher education for you or your children

Potentially lower maintenance or management fees than a 401(k)

However, by rolling over to an IRA, you will lose out on a few 401(k) benefits, including:

The ability to take out a loan against your balance

Higher annual contribution limits

Earlier access to your funds at 55 if you’ve retired

Additional protection from creditors (only a bankruptcy filing protects an IRA)

If you opt to roll over your 401(k) to an IRA, you will not have to pay any fees or trigger any tax liabilities if you complete the transfer within the mandated 60 days.

If you decide to open an IRA, you’ll need to work with a qualified financial institution, like an investment firm, a brokerage or a bank, to set up the account before you move on to the next step of the rollover process.

Roth IRAs

You can also opt to roll over your existing 401(k) account into a Roth IRA, but not all 401(k) accounts offer this option. Your company’s benefits manager or your 401(k) administrator can tell you if rolling over to a Roth IRA is an option for you.

Rolling your 401(k) to a Roth IRA has a potentially significant tax liability. 401(k) contributions utilize pre-tax income, and you pay taxes on disbursements. However, Roth IRA contributions use after-tax income, so you won't have to pay taxes on your disbursements in retirement.

This means you'll be required to pay taxes on the rollover amount when you file your taxes for the year that the rollover took place. This can be a massive tax bill if you have a large 401(k) balance. You'll need to come up with the money to pay the taxes from a source other than your retirement account since any funds you take out would also incur additional penalties for early withdrawals.

If your 401(k) is a Roth 401(k), however, you’ve already made after-tax contributions and won’t have to pay taxes when you roll over your Roth 401(k) to a Roth IRA.

Despite the tax implications, rolling your 401(k) to a Roth IRA may be worth it if:

You are looking for more investment options

You expect you’ll be in a higher tax bracket in retirement

You want to avoid the required minimum distributions (RMDs) that kick in on 401(k)s at age 73

Be aware that you will lose access to the same 401(k) benefits you lose when you roll your funds into a traditional IRA.

401(k)s

Your third option is to roll over your 401(k) into another 401(k) account. This is the easiest rollover since you won't have to pay any taxes or fees. This option is available when you switch employers and your new one offers a 401(k) plan as one of its benefits.

You'll need to work with your new company’s HR department to set up your new account before taking the next step. Some employers require you to enroll during specific time frames, such as within 30 days of hiring or during annual enrollment periods.

Consult with your plan administrator to ask for a direct rollover

Once you’ve set up your new retirement account, talk to your current account administrator and request a direct rollover.

A direct rollover occurs when your current 401(k) provider sends your account balance to your new account provider. Many providers will perform an electronic transfer or send a check directly to your new provider. Sometimes, your current provider will send you a check made out to your new provider, and you'll send the check to your new provider.

Not all providers offer this option, also called a trustee-to-trustee or in-kind transfer, but it is the easiest way to roll over your 401(k). It prevents your current provider from needing to withhold any potential tax liability and ensures your money is deposited in your new account within 60 days.

Begin the rollover process

To begin the rollover process, reach out to your new administrator for some basic information:

Their address
Your account number
How to make out the check

With this information, fill out the paperwork with your original provider letting them know where to send your money. Once you file this paperwork, it may take a few weeks for the total amount of your 401(k) to be deposited in your new account.

Follow plan rules: act within the 60-day time limit

After you file the paperwork, it's imperative that you follow your plan's guidelines. If your deposit occurs after the 60-day time frame lapses, you'll have to pay an early withdrawal penalty (usually 10%) and taxes on the total amount.

During the transfer process, pay attention to the amount your original provider sends to your new provider. They may mistakenly withhold tax liabilities when they shouldn't. You want to ensure they transfer the total amount of your 401(k).

Why should you roll over your 401(k)?

While you can leave your investments in your current 401(k) when you leave an employer, there are many reasons why you should rollover your 401(k) instead:

Monitoring your retirement assets and goals with one consolidated account is easier. Experts recommend that you check your 401(k) twice a year, which can be time-consuming if you have multiple accounts. Or you may forget about an old account over time — studies show more than $1.35 trillion is sitting in abandoned 401(k) accounts.

You are currently paying maintenance fees for multiple 401(k) accounts. If each 401(k) charges you fees, consolidating them into one account eliminates paying multiple fees, which can add up quickly.

You are unhappy with your current 401(k) range of investment options. Check your next 401(K) statement changes. Your statement will show you the current rate of return on your investment. 401(k) administrators also provide tools that help you estimate how much your 401(k) will be worth when you retire and how long you can expect to live comfortably on disbursements from it. This estimate will vary depending on how long you anticipate you'll still be working. If the projected growth of your 401(k) seems too low, you may want to look at other investment options that have the potential to earn you more.

The fees for your 401(k) are too high. Even fees that seem inconsequential now can add up to a significant sum over time. Retirement accounts grow using compounded growth of earnings, which means the earnings you make from the investment are reinvested into the account. So those fees are costing you the earnings you could have made if those fees weren't removed from your investment.

In some cases, you do not have a choice and must roll over your 401(k). Perhaps you don't meet the minimum balance requirements for your previous employer's 401(k) program, or your previous company will no longer maintain the account.

Can you retain retirement savings from a previous employer?

When you leave an employer, you retain ownership of all of the money in your 401(k). It is your legal right to do any of the following:

Leave the money in the current 401(k) until you are ready to withdraw it (as long as that meets the rules established by your previous employer)

Roll over the amount to your new employer’s 401(k) option

Roll over the amount to a traditional IRA or a Roth IRA

Cash out your account

However, cashing out your account comes with serious financial penalties — you’ll often be required to pay a penalty (usually 10%) and taxes. Cashing out may not be a good idea for another reason; retirement accounts typically grow quickly over time and the amount you withdraw now will be worth a significant amount in the future.

Can you roll over a 401(k) to a new qualified employer?

Yes, you can roll over a 401(k) to a new qualified employer 401(k) plan. The rollover amounts do not count as contributions. So you can continue to make contributions up to the allowable amount for the tax year.

401(k) rollover FAQs

How do you report a rollover from IRA to a 401(k) plan?

If you roll over an IRA to a 401(k), you'll need to inform the IRS. Your IRA administrator will send you a Form 1099-R in January, the year after the rollover occurred. On this form, indicate the taxable amount as $0 and check the box for rollover.

Is the ability to roll over a 401(k) based on age?

No, the ability to roll over a 401(k) is not based on age. You can roll over a 401(k) at any time.

What is an indirect rollover?

Some 401(k) providers do not offer direct rollovers, so you'll be required to take an indirect rollover. In this type of rollover, you serve as the middleman between the two providers.

1. Your current provider will send you a check made out to you for the amount you are rolling over, minus 20%, which it will withhold for tax purposes.

2. You will deposit this check into your bank account.

3. Once the check clears, you will write a new check out to your new provider for the full amount you plan to roll over.

4. Your new provider will deposit the check in your retirement account. This must occur within 60 days of when you initiated the rollover, or the amount will be subject to taxes and fees.

5. Once you file your federal tax return the year after the rollover occurred, the previous provider will send you a check for the amount they withheld.

How often can you roll over a 401(k)?

No matter how many 401(k) accounts you have, the IRS limits you to one rollover from one account to another in a 12-month period. As long as rollovers occur outside of that 12-month period, you can roll over an account as often as you like.

When can you initiate a 401(k) rollover to a new 401(k)?

You can only open a 401(k) account at a new employer during certain enrollment periods, usually during the first 30 days of employment or the end of every year. Some businesses also require you to be employed for a year before receiving a 401(k) benefit. Once you open a new 401(k) account, and if your previous provider's terms allow it, you can initiate a 401(k) rollover at any time.

Find what's best for your investment options and retirement plan

Navigating the rollover process can be complicated. The best choice of what to do with your money isn’t the same for everyone. That’s especially true if you have any unique considerations, such as whether your previous employer included company stock options in your 401(k). Speaking with a financial advisor before you make any rollover decision is a critical step for most people. He or she can help you make the right investment decisions for your unique situation. Paying a professional financial advisor who knows you and the ins and outs of tax law can more than pay for itself down the road.

401(k) Rollover: A Beginner's Guide