If you recently changed jobs or retired, you might be wondering what to do with your old 401(k). Rolling over your 401(k) into an IRA or a new employer’s plan can be a smart way to keep your retirement savings growing, maintain tax advantages, and simplify account management. In this guide, we’ll walk through how to roll over a 401(k), your rollover options, and what to consider before making a move.

Read more: Rollover IRA vs. Traditional IRA

Direct vs. indirect rollovers

The primary difference between a direct and an indirect rollover comes down to who holds the funds during the transfer process and the potential for tax withholding.

With a direct rollover, your current plan provider directly transfers or makes your 401(k) balance payable to your new 401(k) plan or IRA, and no taxes are withheld. With an indirect rollover, you can choose to have your current plan provider send a check payable to you for your balance, and you’ll then deposit it into your IRA or new 401(k) plan. However, this method would require that taxes be withheld. Additionally, you only have 60 days to deposit the full amount into your IRA or new 401(k) plan before it’s considered taxable and possibly an early withdrawal.¹

Keep your money in your former employer’s 401(k) plan

If permitted, you can choose to leave your 401(k) savings in your former employer's plan. With this option, you don’t have to make an immediate decision about where or how to roll over your 401(k). Generally, your account stays subject to your previous employer's plan rules, including investment choices, costs, and withdrawal options.

Benefits:

• Any earnings on your investments remain tax-deferred 

• You could take penalty-free withdrawals if you turn 55 (or older) during the calendar year you lose or leave your job. You must still pay taxes on withdrawals²

• You can still choose to roll over the money to an IRA or to a 401(k) offered by a new employer in the future, provided the new employer's plan accepts rollovers

• Your former employer’s 401(k) plan may have perks like lower fees, a wider range of services and features, or greater investment choices compared to a new employer’s 401(k) plan

Disadvantages:

• Once you leave a company, you can no longer contribute to the 401(k) and managing savings in multiple 401(k) plans can be complicated
• The fee structure could change if you’re no longer a current employee
• Your range of investment choices and your ability to transfer assets among funds may be limited
• A new employer's 401(k) may offer better benefits, lower fees, or a wider range of investment options

Roll over the money into an IRA

If you’re changing jobs or retiring, rolling over your 401(k) savings into either a traditional or Roth IRA can offer greater flexibility and the ability to continue building your nest egg.

Benefits:

• Both traditional and Roth IRAs are tax-advantaged retirement accounts — money in traditional IRAs can continue to grow tax-deferred, while earnings from after tax-contributions to a Roth IRA grow tax-free
• You can use a rollover to consolidate multiple retirement accounts into a single traditional or Roth IRA to simplify account management
• The financial institution where you hold your IRA may offer additional incentives and guidance
• With a Roth IRA, you don’t have to take required minimum distributions (RMDs)

Disadvantages:

• Unlike with a 401(k), you can’t take out a loan against your savings with either type of IRA
• Federal law offers greater protections for money saved in a 401(k) compared to an IRA. With an IRA, your assets are generally protected from creditors in bankruptcy proceedings, up to a certain limit. However, state law may provide additional protection for IRAs³
• You may be subject to annual fees or higher investment fees, depending on the IRA provider you choose for your 401(k) rollover
• Once you reach age 73, you may be required to take RMDs if you have a traditional IRA, regardless of whether you are still working⁴
• If you roll over money from a traditional 401(k) to a Roth IRA you will be required to pay taxes on the converted amount. This is because traditional 401(k)s are funded with pre-tax dollars, which is not permitted for Roth IRAs.

Roll over the money into your new employer's 401(k) plan

If you're starting a new job, moving your 401(k) savings to your new employer's plan is another option to consider. Doing so allows you to simplify the management of your retirement savings by keeping all your 401(k) investments in one account.

Benefits:

• Any potential earnings will be tax-deferred
• You may be able to borrow against the new 401(k) account via a 401(k) loan if the plan allows
• Assets in a 401(k) are typically protected from claims by creditors, including lawsuits and bankruptcy, through the Employee Retirement Income Security Act (ERISA)⁵
• Your new employer’s 401(k) plan may have lower associated fees and offer services and features that are not available in your former employer's 401(k) or an IRA

Disadvantages:

• You may have fewer investment options or they may not be as varied in the new 401(k) plan
• Fees could be higher than your former employer’s 401(k) plan

How to roll over a 401(k) step-by-step

1. Determine your rollover approach: Decide whether you’ll roll over your 401(k) savings to your new employer’s 401(k), a traditional IRA, or a Roth IRA.
2. Initiate the rollover: Contact both your current plan administrator and the new plan administrator or financial services provider to gather specific details on how to roll over your 401(k). Submit the necessary forms for the rollover request.
3. Wait for the rollover request to be processed: Your current 401(k) plan administrator will process the distribution, which may take anywhere from a few days to a couple of weeks.
4. Track or aid in transferring the funds: Once the distribution is processed, the funds will be transferred to your new 401(k) plan or IRA. For direct rollovers, a check is typically made payable to the new plan or financial services institution. If a rollover check is made payable directly to you, you must deposit the money into your IRA within 60 days of receiving the check to avoid income taxes and a possible early withdrawal penalty.
5. Investing the funds: After the funds are received by the new plan or IRA, you'll need to choose your fund allocation in the new account. If you’re unsure how to select your investments, it may be beneficial to work with a financial professional.

Read more: How to find old 401(k) accounts

Pitfalls to avoid when rolling over a 401(k)

1. Missing the 60-day rule deadline: You have 60 days from the date you receive the distribution to complete the rollover. If the rollover is not complete and the funds are not deposited into the new account in 60 days, you may be subject to penalties and taxes.
2. Taking an indirect rollover instead of a direct rollover: Generally, financial professionals recommend a direct rollover over an indirect rollover when transferring funds from a retirement account, such as a 401(k) to an IRA. Direct rollovers are typically more straightforward and reduce the risk of triggering taxes and penalties associated with indirect rollovers.
3. Not understanding the tax implications: As with any financial decision you make, it’s important to understand all the potential tax implications before acting. Consider speaking with a tax professional if you are unsure about the potential impact of moving your money to one kind of account versus another.
4. Forgetting to invest your rollover money: Once your funds are transferred from your previous employer’s 401(k) plan to your new plan or account, you must invest your funds. If you roll over your money into a new 401(k) plan, there may be a default investment option automatically selected. If you roll over your money into an IRA, the funds will remain as cash until you select your investments — likely reducing the potential for growth.
5. Not taking required RMDs before the rollover: When an RMD is due, it must be distributed before any rollover takes place. Generally, retirement account owners must start taking their RMD the year they reach age 73 — or age 75 for those born in 1960 and after.⁶

The bottom line

Deciding how to roll over a 401(k) can simplify retirement planning, but it’s important to consider fees, investment choices, and tax implications before making a move. Consulting with a financial advisor can help you choose the best rollover option for your long-term goals.