What Are My Options for Rolling Over a 401(k)?

When you leave your job, you have four options for rolling over your 401(k) account. The option you choose should depend on your financial situation and retirement goals.

Understanding your options and potential results impacts the tax advantages you receive. The following information can help.

These are your four options for rolling over your 401(k) account.

1. Cash Out Your 401(k) Account

Cashing out your 401(k) account is NOT recommended. The distributions typically are subject to taxes and a 10% early withdrawal penalty if you’re under age 59 ½.

2. Leave Your 401(k) Account with Your Previous Employer

Consider leaving your 401(k) account with your previous employer if there are quality investment options, the costs are low, and you’re satisfied with the services received. Keep in mind that you likely cannot contribute to your account or consolidate other accounts with your 401(k) after leaving your job. However, if you turn 55 or older the year you leave the company, you might be able to take distributions without penalty, potentially providing tax advantages.

3. Move Your 401(k) Account to Your New Employer

Determine whether your new employer’s 401(k) plan allows rollovers from an account with a previous employer’s plan. Then, evaluate whether you are comfortable with the new plan’s investment options, fees, services, and distribution options: 

Rolling over your 401(k) account can help consolidate your retirement accounts and maintain lower plan fees. If you plan to work past age 73, you likely won’t have to take required minimum distributions (RMDs) from your new employer’s plan.

4. Roll Over Your 401(k) Account to an IRA

An Individual Retirement Account (IRA) typically offers a wider selection of investment options and services than a 401(k) account. You can consolidate your investment accounts with one provider for easier monitoring and asset management. However, an IRA typically has higher fees and expenses than a 401(k) account, and you generally can't take penalty-free withdrawals from an IRA until age 59½.

How Does a 401(k) Rollover Work?

The following details outline a 401(k) rollover:

401(k) Rollover to an IRA

If you decide to roll over your 401(k) account into an IRA, start by determining which type of IRA you want:

• A traditional 401(k) can be rolled over to a traditional IRA or Roth IRA.

• A Roth 401(k) can be rolled over only to a Roth IRA.

Rolling over your 401(k) into a Roth IRA is considered a Roth conversion and is subject to taxes. If you want to convert your assets, consider rolling over your 401(k) to a traditional IRA, then completing a Roth conversion.

401(k) Direct or Indirect Rollover 

Determine whether you want an indirect or direct rollover of your 401(k) account to an IRA:

An indirect rollover can be risky:

• Your previous employer’s 401(k) plan issues a check payable directly to you.

• You roll over the money to an IRA within 60 days.

• The taxable portion of the distribution is subject to a mandatory 20% federal tax withholding.

• Any amount, including the 20% withholding, not rolled into an IRA within 60 days, generally is taxable and potentially subject to an early withdrawal penalty.

A direct rollover is preferred:

• Your previous employer’s 401(k) plan issues a check or securities payable directly to an IRA custodian for your benefit.

• A direct rollover typically is a non-taxable distribution.

• No taxes are withheld from the amount rolled over.

• If you have a required minimum distribution (RMD), you must take it before requesting the rollover.

*This information is for educational purposes only.

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