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401(k) Rollover Guide: What to Do with Your Old Retirement Account

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401(k) Rollover Guide: What to Do with Your Old Retirement Account

Leaving a job often brings a stack of decisions—none as important as what to do with your 401(k). Do you leave it where it is, roll it into your new employer’s plan, move it to an IRA, or cash it out? Each choice affects your taxes, fees, investment options, and long-term retirement security.

This guide breaks down the options, shows realistic numbers, and gives step-by-step instructions to make the rollover (or non-rollover) decision simple and confident. Whether you have $10,000 or $250,000 in an account, you’ll learn what matters and why.

Why your choice matters

A 401(k) is more than a number on a statement. Small differences compound over decades. Consider this simple example:

  • If you have $75,000 and your investments earn an average of 6% per year, in 20 years that amount could grow to about $240,000.
  • But fees and poor investment choices that trim returns even 1% a year reduce that 20-year total by tens of thousands of dollars.

“Your decision on where to keep retirement savings can determine how much you keep in retirement,” says Sarah Lee, Certified Financial Planner. “Rollovers affect fees, investment options, and your access to financial advice. It’s not just paperwork—it’s long-term planning.”

Your options at a glance

When you leave an employer, you typically have four main options:

  • Leave the money in your old employer’s 401(k)
  • Roll it into your new employer’s 401(k) plan
  • Roll it into an Individual Retirement Account (IRA)
  • Cash it out (not usually recommended)

Each option has pros and cons. The best choice depends on the account balance, investment choices, fees, and your personal needs for flexibility, creditor protection, or Roth conversions.

Detailed comparison: fees, flexibility, and taxes

Note: Fees and policies differ widely between plans and providers. Always check your plan’s fee disclosure (Form 5500 and Participant Fee Disclosure) and the new plan’s summary plan description.

How rollovers work — the two main methods

There are two common ways to move money from a 401(k) to another retirement account:

  • Direct rollover (trustee-to-trustee): Your old plan sends the money directly to the new plan or IRA. This avoids tax withholding and is the cleanest method.
  • Indirect rollover: The plan distributes the funds to you, and you have 60 days to deposit them into a qualified retirement account. The plan must withhold 20% for federal income tax. You must replace that withheld amount from other funds when completing the rollover, or the withheld amount becomes taxable (and possibly penalized).

Pro tip: Always choose a direct rollover if possible to avoid the 20% withholding headache and the 60-day clock.

Step-by-step: How to roll over your 401(k) to an IRA

  • 1) Pick an IRA provider. Consider low-cost brokers like Vanguard, Fidelity, Schwab, or a robo-advisor if you prefer managed portfolios. Look at expense ratios and transaction fees.
  • 2) Open the IRA. You’ll usually choose a Traditional IRA if the 401(k) was pre-tax. If you want to convert to a Roth IRA, you’ll handle taxes at conversion time.
  • 3) Contact your old plan administrator. Ask for a “direct rollover” to the IRA and provide the IRA account information and any forms required.
  • 4) Confirm the transfer. Expect 1–3 weeks depending on paperwork and whether the old plan holds mutual funds that must be sold first.
  • 5) Rebuild your portfolio. Once the IRA receives funds, place investments consistent with your risk tolerance and time horizon.

Example: If you have $45,000 in a 401(k) at Company A and open a Traditional IRA at a broker with a 0.05% typical annual fee, rolling over could save you 0.3–0.5% annually versus a high-fee old plan that charges 0.7%–1.0%.

Roth conversions: when to convert and how much you’ll pay

Converting a Traditional 401(k) or IRA to a Roth IRA means you pay income tax now so future withdrawals are tax-free (if rules are met).

  • If you convert $50,000 to a Roth this year and your marginal tax rate is 24%, expect roughly $12,000 in taxes due (federal only) — unless you offset with deductions or tax credits.
  • People in a low-income year often convert part or all of their balance to Roth to take advantage of a lower tax rate.

“Roth conversions can be a powerful tool but work best when done with a plan. Convert too much in one year and you could push yourself into a higher tax bracket,” advises Michael Tran, retirement strategist.

If you plan to convert, pay the tax from outside the retirement account. Using IRA funds to pay conversion taxes reduces the benefit and can introduce penalties if you’re under 59½.

Special rules & common pitfalls

  • 20% withholding on indirect rollovers: If you receive the distribution and don’t complete the rollover within 60 days, the 20% withheld becomes taxable and possibly penalized.
  • Age 55 rule: If you leave a job in the year you turn 55 or older, you may be able to take penalty-free distributions from your 401(k) (not from an IRA) — useful for early retirees.
  • Loans: Outstanding 401(k) loans often must be repaid or become a taxable distribution when you leave an employer.
  • Required Minimum Distributions (RMDs): Traditional IRAs require RMDs starting at age 73 (for many savers). However, if you remain employed and the 401(k) is with your current employer, you may be able to delay RMDs from that plan.

When cashing out might make sense (and when it definitely doesn’t)

Cashing out your 401(k) means you withdraw the balance as cash. This often triggers taxes and penalties, so it’s typically a last resort.

Consider cashing out only if:

  • You’re facing immediate financial hardship and have no alternatives.
  • The balance is very small (some say under $1,000) and the plan forces cash-out; but even then, rolling to an IRA is usually better.

Why avoid cashing out:

  • You’ll owe income tax on the distribution.
  • If you’re under 59½, you’ll likely face a 10% early withdrawal penalty.
  • You lose the benefit of tax-deferred growth.

Example: Cashing out $20,000 at age 35 in the 22% tax bracket might result in roughly $4,400 in federal income tax plus a $2,000 penalty — leaving about $13,600 instead of preserving the whole amount invested for retirement.

Real-world scenarios

  • Scenario A — Young professional with $12,000: Jess, 29, left a job and has $12,000 in a 401(k). She rolls it into a Roth IRA over three years (converting $4,000 a year) because she’s in a low tax bracket now and expects to be in a higher bracket later. She pays minimal tax and gains tax-free growth.
  • Scenario B — Mid-career with $200,000: Raj, 46, has $200,000 and excellent investment options in his new employer’s 401(k) with fees of 0.25%. He consolidates into the new plan for simplicity and because it offers low-cost institutional funds and loan access.
  • Scenario C — Older worker nearing retirement: Maria, 63, leaves her job and keeps the 401(k) where it is because the plan has strong managed-account advice and allows penalty-free withdrawals under age-55 rules aren’t relevant. She values continuity and the plan’s RMD flexibility.

Checklist: What to do now

  • Find your old account balance and request the latest fee disclosure.
  • Compare the old plan’s fees and investment menu to your new plan and an IRA.
  • Decide whether you want more investment choices (IRA) or lower-cost institutional funds (some 401(k) plans).
  • Choose direct rollover whenever possible and open the receiving account first.
  • Consider partial Roth conversions in low-income years — consult a tax professional.
  • Keep clear records of the rollover paperwork and confirmation statements.

Common questions answered

Q: How long do I have to complete a rollover?
A: If you receive the distribution, you have 60 days to redeposit it into a qualified retirement account to avoid taxes and penalties. Direct rollovers have no time limit because the funds go directly between trustees.

Q: Will I lose creditor protection if I move to an IRA?
A: Employer-sponsored plans like 401(k)s have strong federal creditor protection. IRAs have some protection, but it varies by state and situation. If creditor protection is critical, check legal advice.

Q: Are there fees to roll over?
A: Direct rollovers usually have no tax or penalty fees. Some plans charge administrative or processing fees; your new provider may charge account setup fees, but many brokers offer free rollovers.

Expert tips to get it right

“Treat a rollover like moving houses: plan what’s coming with you, what you’ll leave behind, and hire reputable help if needed,” says financial planner David Morales. “A little patience during the transfer saves headaches later.”

  • Ask for a “direct rollover” in writing. Keep emails and confirmation numbers.
  • Check whether your old 401(k) holds employer stock—net unrealized appreciation (NUA) rules can change the tax treatment.
  • If you use a broker IRA, avoid frequent trading that increases costs. Use low-cost ETFs or index funds where possible.
  • When in doubt, consult a fee-only financial advisor or tax professional—especially for large balances or complicated situations (like inheritance or employer stock).

Final thoughts

Rolling over a 401(k) is rarely a single “best” answer for everyone. The right move depends on your balance, timeline, investment preferences, tax situation, and future plans. Start by comparing fees and investment options, favor direct rollovers, and consider Roth conversions strategically. With careful choices, your rollover can improve your retirement outcomes and simplify your financial life.

Need a quick action plan? Do this today:

  • Locate your most recent 401(k) statement.
  • Open the receiving account (new 401(k) or IRA) if you plan to roll over.
  • Request a direct rollover and track the transfer.
  • Review and rebalance your investments once funds arrive.

If you’d like, I can help you compare your specific plan fees and run simple projections based on your balance and target retirement age. Share your plan details (fees, balance, and new plan options) and I’ll walk through the numbers with you.

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