How to Roll Over Your 401(k) to an IRA

There are many reasons why you may have decided to make a 401(k)-to-IRA rollover. You may have left your job for a position at a new company, you may have been laid off or you may have decided to take your career in a new direction. Regardless, if you’ve been contributing diligently to your employer-sponsored retirement plan for a number of years, you could have a decent stash of cash in your account. If you want help managing your retirement accounts after your rollover, consider working with a financial advisor.

Should You Roll Over Your 401(k)?

To start, it’s worth knowing that you don’t have to make a 401(k)-to-IRA rollover, even if you do leave your job. You have the option of leaving the money you’ve invested in the plan at your old company. You can’t keep contributing to it, but it will stay invested and if your investments go up, you’ll continue to see your account grow. This is called an orphan account.

Do you like the way your money is invested currently? If so, you may want to consider keeping your money in the existing plan. If you currently aren’t working but anticipate taking a new job soon, you could leave your money at your old plan temporarily and put it into your new company’s plan once you have access to it.

For those who don’t think they’ll end up in another 401(k) plan but still want to save more for retirement, it might make sense to do a 401(k)-to-IRA rollover. Remember, even though you still have your account at your old company’s 401(k), you won’t have the ability to make more contributions.

How to Pick an IRA to Roll Over To

The most important question you need to ask is whether you want to start a traditional IRA or a Roth IRA. Traditional IRAs work much like traditional 401(k) plans. You contribute money before you pay taxes. The 2023 maximum contribution limit for traditional and Roth IRAs is $6,500 ($7,500 for age 50 and older). This will increase to $7,000 (and $8,000) for 2024.

With a traditional IRA, the money you contribute is deducted from your taxable income for the year. When you retire, the money is taxable as you withdraw it. A Roth IRA, however, works differently. You contribute money post-taxes. The money is then not taxable when you withdraw it in retirement. If you think you might want to keep contributing to your new IRA after the rollover is complete, it’s important to decide which type of IRA you want.

It’s also important to consider the tax implications. If you have a traditional 401(k) plan, that means you didn’t pay taxes on the money when you contributed it to your account. If you want to move that money into a Roth IRA, you’ll have to pay taxes on it. You can roll over from a traditional 401(k) into a traditional IRA tax-free. The same goes for a Roth 401(k)-to-Roth IRA rollover. You can’t roll a Roth 401(k) into a traditional IRA.

Beyond the type of IRA you want to open, you’ll need to choose a financial institution to invest with. Some basic investigation into the types of investment options available at various institutions should shed some light on which IRAs you should open. Beyond that, consider factors like which online interface you find easiest to use and what experiences you might have already had with particular financial institutions.

How to Start a 401(k) to IRA Rollover

Doing a 401(k) rollover to IRA doesn’t have to be difficult. Once you’ve figured out exactly which IRA you want to use, set one up with that company. You can do this online, just like you’d start any other financial account.

Next, get in touch with the financial company managing your 401(k). Ask if they have any special rollover requirements, and assuming you’ve met all of them, have a check for your assets mailed to the company you opened an IRA with. That company will then deposit it in your account. You’ve officially completed your rollover!

Tax Consequences of a 401(k)-to-IRA Rollover

As mentioned above, you generally won’t have to pay any taxes on your 401(k)-to-IRA rollover. The only time you’ll have to deal with taxes is if you have a traditional IRA and want to roll over to a Roth IRA.

One other tax consideration: You can choose to do a direct or indirect rollover. For a direct rollover, your old plan sends the money directly into your new IRA. In an indirect rollover, your old plan sends you a check with the cash and withholds 20% of your funds. These withheld funds are a taxable distribution unless you make up the difference out of pocket.

You’ll likely have to pay a 10% fine for the early withdrawal. This rule only applies if the check is sent directly to you, though. It doesn’t matter if your old plan sends you a check to forward to your new IRA.

Bottom Line

Whether you are changing jobs or transferring control of your assets to another financial advisor or institution, a 401(k) to IRA rollover can be incredibly helpful. There are some planning questions to be mindful of, though. However, with some strong planning, this retirement account move can pay huge dividends in the long run.

Tips for Retirement Investing

Consider finding a financial advisor to steer you in the right direction in terms of savings and investments. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When you’re starting to plan for retirement, you should consider the tax laws of the state you live in. Some have retirement tax laws that are very friendly for retirees, but others don’t. Knowing what the laws apply to your state, or to a state you hope to move to, is key to getting ahead on retirement planning.