What Are the Rules for Rolling Over a 401(k)?

Jennifer Wills
Feb 11
3 min read

You have three options for your 401(k) account when you leave a job:

Leave your account in your former employer’s plan
Roll your account into your new employer’s plan
Roll your account into an Individual Retirement Account (IRA)

Understanding your 401(k) account fees and investment options helps you decide whether to keep it where it is or roll it over. The following information can guide you.

What Is a 401(k) Rollover?

A 401(k) rollover involves transferring funds from one 401(k) plan to another retirement account, such as a new employer's 401(k) plan or an Individual Retirement Account (IRA). The rollover process lets you maintain the tax-deferred status of your retirement savings.

What Are the Types of 401(k) Rollovers?

You can roll over funds from an old 401(k) plan into a new 401(k) or IRA in one of two ways:

Direct rollover: The funds are transferred from your old 401(k) plan to a new 401(k) plan or IRA without any immediate tax implications.
Indirect rollover: The funds are distributed to you, then you deposit them into a new 401(k) plan or IRA within 60 days to avoid taxes and potential penalties. The taxable portion is subject to a 20% mandatory tax withholding. You must add funds from other sources equal to the amount withheld to defer tax on the taxable portion.

Who is Eligible for a 401(k) Rollover?

A distributable event, such as termination of employment, allows you to roll over a 401(k) account:

Distributable events can vary by 401(k) plan and are detailed in the plan’s Summary Plan Description.
Only eligible rollover distributions can be rolled over.

The following do not meet the definition of distributable events:

Withdrawals, electing out of automatic enrollment
Hardship distributions
A distribution that is one of a series of substantially equal payments
Loans treated as a distribution

Why Are 401(k) Rollover Decisions Important?

You want to invest your savings in a 401(k) plan or IRA with the following three features to maximize your retirement over time:

1. Minimal fees: Because the cumulative effect of 401(k) fees can dramatically erode your savings over time, you want the amount as low as possible.

2. Index fund returns or better: The most common investments offered by 401(k) plans are active funds and index funds:

Active funds aim to outperform their market benchmark, such as the S&P 500.
Index funds try to match their market benchmark.
Despite their investment objectives, index funds tend to outperform comparable funds with a similar benchmark over time, net of fees. 
Your retirement savings should earn no less than an index fund.

3. Professional advice: Maintaining a proper asset allocation when saving for retirement is important. Investing too conservatively when young and losing out on growth, or too aggressively when older and sustaining unrecoverable losses, could cause you to miss out on gains.

A 401(k) plan or IRA with these features could add tens of thousands of dollars of compound interest to your future savings compared to a 401(k) plan or IRA with excessive fees and underperforming active funds. As a result, a 401(k) rollover could be in your best interest.

What Are the 401(k) Rollover Rules for Roth Contributions?

Roth contributions are subject to stricter rollover rules than traditional IRA contributions. A Roth account can be rolled into a Roth IRA or 401(k) plan that permits Roth rollovers.

How Do You Choose Between Your 401(k) and IRA Options?

Your best rollover option depends on the investments and features you want and the cost of your 401(k) account and IRA options:

Leave Your Savings in the Old 401(k) Plan

Choose this option under the following circumstances:

You like the plan’s investment options.
The plan has low fees.
You want to move the savings to a new employer’s plan later.

If you have a small balance and the 401(k) plan includes a force-out provision, you might be unable to keep your account with your previous employer. If so, your former employer can involuntarily roll your savings to an IRA on your behalf.

Roll Over Your Savings to a New 401(k) Plan

If your new employer’s 401(k) plan permits rollovers, consider moving your savings to their plan under the following circumstances:

The new plan has better investment options.
The new plan has lower fees.
You want to consolidate your retirement savings into one plan.

Roll Over Your Savings to an IRA