Should You Roll Over Your 401(k)?

Deciding what to do with a former employer’s 401(k) plan is an important consideration when changing jobs, approaching retirement, or consolidating financial holdings. A 401(k) rollover involves moving your retirement savings from one qualified plan to another, typically to maintain its tax-advantaged status. This process can seem complex, but understanding the options available allows for an informed decision that supports your long-term financial health.

Available Choices for Your Former 401(k)

After leaving an employer, you have four primary choices for your 401(k) balance. Each option places your funds in a different financial vehicle with distinct characteristics.

You can leave assets within the former employer’s 401(k) plan if permitted. No new contributions can be made, but your balance remains invested according to plan rules. This choice can be simple if you are satisfied with the plan’s investment options and fees.

You might roll funds into a new employer’s qualified retirement plan, such as another 401(k). This is contingent on your new employer’s plan accepting rollovers. This approach allows for the consolidation of retirement savings within your current workplace plan.

A common choice is rolling funds into an Individual Retirement Account (IRA). This can be either a Traditional IRA or a Roth IRA. If rolling pre-tax money into a Traditional IRA, the funds maintain their tax-deferred status, meaning taxes are paid upon withdrawal in retirement. Rolling pre-tax funds into a Roth IRA, however, constitutes a taxable conversion, where you pay taxes on the amount rolled over in the year of the conversion, but qualified withdrawals in retirement are tax-free.

The final option is to cash out the account, receiving the funds directly. This is generally the least advisable choice due to immediate tax implications. The distribution is typically taxed as ordinary income, and if you are under age 59½, a 10% early withdrawal penalty usually applies, unless a specific exception is met.

Factors Influencing Your Choice

Several objective elements warrant careful consideration when evaluating what to do with your former 401(k).

Investment Options

The range and quality of investment options can vary significantly between account types. Employer-sponsored 401(k)s often provide a limited menu of mutual funds or exchange-traded funds chosen by the plan administrator. In contrast, an IRA typically offers a much broader array of investment choices, including individual stocks, bonds, mutual funds, and exchange-traded funds, providing greater flexibility.

Fees and Expenses

Fees and expenses represent another important consideration. 401(k) plans can have administrative fees, record-keeping fees, and investment management fees, which commonly range from 0.5% to 2% annually, with an average around 1%. While some 401(k)s, particularly larger institutional plans, may offer lower-cost investment options, IRAs often have lower or no custodial fees, though some robo-advisors might charge advisory fees typically between 0.20% and 0.36%.

Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) dictate when you must begin withdrawing funds from certain retirement accounts. For traditional 401(k)s and Traditional IRAs, RMDs generally begin at age 73 for those born between 1951 and 1959, and age 75 for those born in 1960 or later, as adjusted by the SECURE Act 2.0. Roth IRAs do not have RMDs for the original owner during their lifetime, providing greater flexibility in leaving assets to beneficiaries.

Creditor Protection

Creditor protection is another distinguishing factor. Funds held in employer-sponsored 401(k) plans generally receive strong federal protection from creditors under the Employee Retirement Income Security Act (ERISA). IRAs, while protected up to $1,512,350 (as of 2025) in federal bankruptcy proceedings, rely on varying state laws for protection outside of bankruptcy. A rollover from an ERISA-protected 401(k) to an IRA may alter the level of creditor protection outside of bankruptcy.

Access to Loan Provisions

Access to loan provisions is typically limited to active 401(k) plans; IRAs do not permit loans. If you have an outstanding loan from a 401(k) when you leave your job, the plan may require full repayment, often within 60 to 90 days. Failure to repay can result in the outstanding balance being treated as a taxable distribution and potentially subject to a 10% early withdrawal penalty if you are under age 59½.

Administrative Burden

Administrative burden and account simplicity also play a role. Consolidating multiple retirement accounts into a single IRA or a new employer’s 401(k) can streamline financial management. This can make it easier to track performance and adjust your investment strategy.

Tax Considerations

Tax considerations are central to the decision-making process. An exception, known as the “Rule of 55,” allows penalty-free withdrawals from a 401(k) if you leave your employer in or after the year you turn 55, provided the withdrawals are from the plan of the employer you just left.

Information Needed for a Rollover

Gathering specific information is a necessary preparatory step before initiating a formal rollover. This ensures a smooth transition of your retirement assets and helps avoid potential complications. Thorough preparation involves collecting details from both your former employer’s plan administrator and the institution that will receive the funds.

From Former 401(k) Administrator

Obtain specific details from your former 401(k) administrator. This includes your account number, the exact balance of your account, and the contact information for the plan administrator. Inquire about their specific distribution forms, procedures, and whether they facilitate direct rollovers or process distributions to the account holder.

From Receiving Institution

Gather necessary information from the receiving institution, whether an IRA custodian or your new employer’s 401(k) plan administrator. This involves obtaining their specific transfer forms, routing instructions for direct rollovers, and details for opening a new account if you do not already have one. Ensure the name on your new account precisely matches the name on your former employer’s plan to prevent delays.

Direct vs. Indirect Rollover

Understand the distinction between a direct and indirect rollover. In a direct rollover, the funds move directly from your old plan to the new institution without passing through your hands. For an indirect rollover, the funds are distributed to you directly, and you are then responsible for depositing them into the new retirement account within 60 days of receipt. If you choose an indirect rollover from a 401(k), the plan administrator is generally required to withhold 20% of the distribution for federal income taxes. To complete the rollover and avoid tax consequences, you must deposit the full original distribution amount, including the 20% that was withheld, into the new account within the 60-day timeframe.

General Identification

General identification details like your Social Security Number, date of birth, and current address are required on all necessary forms. These details are used to verify your identity and ensure accurate processing of your rollover. You can typically obtain official forms directly from your plan administrator or the receiving custodian’s website.

Steps for Completing a Rollover

Once information is gathered and forms prepared, completing a rollover involves distinct actions. These steps ensure your funds are properly transferred and continue to benefit from their tax-deferred status. The specific procedures vary depending on whether you choose a direct or indirect rollover.

Direct Rollover Steps

For a direct rollover, contact your former 401(k) administrator to initiate the distribution. This involves submitting the fully completed distribution forms you prepared earlier, along with any required acceptance letters from the new institution. The former plan administrator then transfers the funds directly to your new IRA custodian or new employer’s 401(k) plan, often via check made payable to the new institution or through a wire transfer. Direct rollovers are generally the most straightforward and typically take between 3 to 14 business days to complete.

Indirect Rollover Steps

If you opt for an indirect rollover, the former 401(k) administrator sends the distribution check directly to you. Upon receiving the check, you have a strict 60-day window to deposit the entire distribution amount, including any taxes withheld, into your new IRA or qualified plan.

Receiving Institution Preparation

Ensure the receiving institution is prepared to accept the funds, regardless of rollover type. This involves submitting the completed new account application or rollover forms to your IRA custodian or new 401(k) administrator. Once the funds are transferred, you should receive confirmation from both the distributing and receiving institutions.

Tax Reporting

After the rollover, you typically receive a Form 1099-R from your former 401(k) plan administrator. This form reports the distribution from your old plan, and for a direct rollover, Box 7 will generally show code “G”. For an indirect rollover, Box 7 might show codes like “1” or “7”. You are required to report this rollover on your tax return, even if no tax is due, and the word “ROLLOVER” will often appear next to the distribution line on your Form 1040.