What Is a 401(k) Rollover? Your Step-by-Step Guide

Unless you plan on working for the same employer for your entire career, there’s a good chance you’ll eventually need to move your 401(k) to a new job. 

This process is called a 401(k) rollover — you move your retirement savings out of an account managed by your employer once you’re no longer employed with them. 

While you aren’t required to roll over your 401(k), there are some reasons why you might consider doing so.

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What Exactly Is a 401(k) Rollover?

According to the Bureau of Labor Statistics, the median employee tenure at a company is just 4.1 years — which means most of us will switch employers multiple times during our careers.

And since your 401(k) is with your employer, you need to decide what to do with it when you do leave a job.

A 401(k) rollover is the process of moving your retirement savings from one account to another. Normally, withdrawing the cash from your 401(k) and depositing it into a new account would trigger a taxable event for the IRS.

Instead, a rollover lets you do this without penalties. There are two ways you can do a rollover: direct or indirect.

How a direct rollover works

A direct rollover is a special process where funds are moved from one account to another. Rather than receiving a check for your funds, your new account manager receives the funds from your account on your behalf. 

For example, if your old employer managed your 401(k) through Charles Schwab but your new employer manages their 401(k) through Fidelity, Charles Schwab would transfer your funds to Fidelity on your behalf.

How an indirect rollover works

An indirect rollover happens when you receive your funds directly from your old employer. When this happens, you’ll receive a paper check in the mail made out to your new account manager. 

You’ll then have 60 days to deposit the funds into your rollover account — if you don’t, it may be considered a distribution and incur taxes and penalties.

READ MORE: What Is a 401(k)? Comparing Roth vs. Traditional Plans

Your 401(k) Rollover Options

While moving your 401(k) from one employer to another is the most common type of rollover, there are other instances where you might need to move your money. 

Roll over to a new employer

If you accept a new job with a new employer, you may be given the option to bring your 401(k) with you. Doing this can make it easier to manage and reduce some of the costs associated with the funds you might be invested in.

While this is quite common, not all employer-sponsored 401(k) plans allow this. Check with your human resources rep to see how your employer handles rollovers and the process you need to follow.

Roll over to an IRA

You might decide that rolling over a 401(k) to your new employer isn’t an option or isn’t the best option for you. 

Instead, you can move your funds to a traditional individual retirement account (IRA). These accounts can be opened at any brokerage firm. Once you move your money to an IRA, you have the freedom to manage it as you please.

One of the benefits of this option is that it allows you to choose which assets you want to invest in. Employer-sponsored IRAs usually limit you to a handful of pre-selected funds, but IRAs allow you to invest in a variety of different securities, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). 

401(k) funds often come with expensive maintenance fees, so the opportunity to move your retirement savings into an account that you manage can help lower your costs.

Before you go with this option, you need to be aware that not all IRAs are the same. Roth IRAs, for example, are a type of IRA account that allows you to generate returns without paying taxes on it. 

Because contributions to 401(k)s are made with pre-tax dollars, you’ll have to pay taxes on your rollover if you move your money into a Roth IRA.

Don’t roll your 401(k) over

Even though you move jobs, you don’t have to move your retirement savings. If you want, you can keep your 401(k) with your old employer.

While keeping your retirement savings with your old employer might seem like an easy option now, it can cost you. Each employer has a different fee structure and offers different funds to invest in. Keeping money in an account that comes with a lot of fees can eat away at your savings over time.

Not to mention, if you plan on bouncing between several employers during your career, maintaining multiple 401(k)s with different employers can be difficult to manage. 

Not all employers allow you to keep your money invested in a retirement program they’re ultimately paying to manage, so make sure you know what is and isn’t permitted before deciding to keep your savings parked wherever it is.

Cash it out

If you want to take a cash distribution from your 401(k) instead of rolling it over to a new employer, this is an option. While this isn’t advisable due to the tax implications, there may be some cases where it’s more practical.

For example, if you leave an employer where you only have a few hundred dollars saved up, you might decide it isn’t enough to justify rolling over into a new account. Alternatively, if you leave an employer to start a business, you might decide you’d rather take the cash now to invest it in your business. 

Whatever you decide to do, just remember distributions are counted as income and taxed according to your current tax bracket. On top of that, you’ll have to pay a 10% penalty too.

How To Roll Over Your 401(k)

Step 1: Figure out what account you are going to roll your funds into

Once you figure out which option works best for you, decide what type of account you need to move your retirement savings into. 

If you transfer your 401(k) to a new job, you might not need to do this. But if you decide to move it into an IRA, you need to find a bank or brokerage firm that offers an IRA and open an account with them.

Step 2: Determine how involved you want to be

Once you have a plan for rolling over your funds, you need to determine how involved you want to be in managing your account. 

When you do a direct rollover and transfer your 401(k) to a new job, you don’t need to take as active a role in managing your portfolio as you do with an IRA.

But if you convert your 401(k) to an IRA, you can be as active or passive as you want. If you’d rather be hands-off, you can pay a professional advisor to manage your account for you. Or you can roll your 401(k) to a robo-advisor that uses sophisticated algorithms to manage your account automatically.

As you’re deciding, also consider fees. Having a professional account manager may not provide the highest reward — and the fees can eat away at the growth potential of your portfolio. 

There are several low-cost investments you can make — including in low-fee ETFs — that can help you maximize the return on your savings for the lowest cost possible.

READ MORE: Active vs. Passive Investing: Which Is Best?

Step 3: Set up your new account

Once you know what type of account you want and how you want to manage it, you’ll need to actually open the account. You can typically do this online or by calling a customer representative and working with them directly.

There isn’t a uniform process for rolling over 401(k)s. It doesn’t matter whether you open an account at a bank or a brokerage firm, each financial institution will have its own process for handling 401(k) rollovers. 

Make sure you understand what that process is so you ensure you are sending your money to the correct account.

Step 4: Move your money

After you open your account you’ll need to move your money into it. 

In some cases, the funds will automatically transfer from one account to another. In other cases, you might have an indirect rollover where you receive a check in the mail written on your behalf — you will then need to mail it to the financial institution managing your new account.

Whatever the process is, make sure you move your money promptly. You have 60 days to complete the rollover, otherwise you’ll trigger a taxable event. If this happens, you’ll lose some of your money to taxes and penalties.

Simplify the rollover process with Capitalize

Capitalize is a free tool that simplifies the rollover process. It’s a step-by-step guide that walks you through the entire process. The platform connects with several brokerages, allowing you to select from a menu of options rather than hunting around looking for your account info.

One of the benefits of working with a platform like Capitalize is that they’ll work with you to help you understand your options. They’ll help you figure out whether an IRA through a robo-advisor is better for you and which brokerage best suits your needs.

Plus, if you receive equity as part of your compensation package, you may have questions about whether the stock is fully vested in your 401(k). Capitalize can help clarify things if this applies to you.

Capitalize gets paid through referrals. The platform doesn’t charge anything to you but they may earn a commission from a brokerage company they partner with.

Pros and Cons of Rolling Over Your 401(k)

Many people automatically roll over their 401(k) when they start a new job, but that isn’t always the best path. 

Pros

• IRAs give you more options for asset allocation, diversification, and the option to select funds with lower fees.
• Rolling over your 401(k) to an IRA gives you ownership of your account, no matter how many times you change jobs in the future. 
• Rolling over avoids costly taxes and penalties. 

Cons

• You are responsible for making investments in an IRA, including making sure any funds you deposit are allocated properly.
• You won’t get an employer match or automatic deductions if you move funds from a 401(k) to an IRA.

FAQs

How long does a 401(k) rollover take?

Depending on what rollover method you choose, a 401(k) rollover can take a few days or a few weeks. The important thing to remember is that you only have 60 days from the date you receive the funds if you’re doing an indirect rollover. If you take longer than that, you’ll have to pay penalties and owe taxes.

Does rolling a 401(k) into an IRA count as a contribution?

No, rolling a 401(k) into an IRA is not counted as a contribution. This means you are still eligible to take advantage of the full contribution limit for your IRA. For 2024, individuals under age 50 can contribute $7,000 while individuals over 50 can contribute $8,000.

Can I have an IRA and a 401(k) at the same time? 

Yes, you can have an IRA and a 401(k) at the same time. There are contribution limits for both and, depending on your income, you may not be able to take advantage of tax deductions if you contribute to both. 

Can I roll over my 401(k) while I’m still with my company?

Yes, you can roll over your 401(k) while you’re still with your company. You might consider doing this if you’d like to have more control over your investment decisions.

TL;DR

A 401(k) rollover is when you move your funds from one 401(k) account to another, without the penalties and taxes that would normally come from withdrawing the funds yourself. You can roll over your 401(k) to another employer’s 401(k) plan, or to an IRA that you manage yourself.

A rollover can be direct (meaning it’s done automatically) or indirect (meaning you’ll receive a check that you then have to deposit into the new account within 60 days).

No matter how you choose to roll over your 401(k), be sure to check with your HR rep and your financial institution, to make sure you’re following all the right rules and won’t get dinged for penalties.

For more tips on managing your investments and retirement savings, check out these episodes of the Erika Taught Me podcast:

• How To Invest for Beginners (Step by Step)
• Money & Investing Pitfalls To Avoid
• Investing Advice from the Most Powerful Woman on Wall Street

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