401k Rollover: How to Move Your Old Retirement Account

When you leave a job, you have several options for your old 401(k). Making the wrong choice can cost you thousands in taxes and penalties.

Your Options When Leaving a Job

Option 1: Direct Rollover to IRA (Best for most people) Transfer directly to a traditional IRA at a brokerage. No taxes, no penalties, full control over investments.

Option 2: Roll into new employer’s 401(k) If new employer allows it. Keeps everything in one place, retains 401(k)-specific benefits (like protection from creditors).

Option 3: Leave it with old employer Only viable if the 401(k) has excellent investment options and low fees. You lose the ability to manage it as easily.

Option 4: Cash out (Never do this) 20% automatic withholding + 10% early withdrawal penalty + ordinary income tax = you lose 30-40% immediately. On $30,000, you’d net $18,000-21,000.

The Direct Rollover Process (Recommended)

Open a rollover IRA at your chosen brokerage (Fidelity, Vanguard, or Schwab are excellent choices)
Contact your old 401(k) provider and request a “direct rollover” to [brokerage name] IRA
Provide the new account information—your brokerage will give you the exact details needed
The check should be made payable to the new custodian (not to you—this is critical)
Invest the rolled-over funds once they arrive (typically 3-7 business days)

The Indirect Rollover Trap

If you take possession of the money (check made out to you):

Old employer withholds 20% for taxes
You have 60 days to deposit the full original amount into an IRA
You must come up with the withheld 20% from other sources
If you miss the 60-day window: full taxes + 10% penalty apply

Always request a DIRECT rollover—custodian to custodian.

Roll to IRA vs New 401(k)

Advantages of IRA:

Wider investment selection (all ETFs and mutual funds, not limited menu)
Lower fees typically (choose index funds)
More flexible withdrawal options (Roth conversion, etc.)

Advantages of 401(k):

Better creditor protection in most states
Slightly better protection from bankruptcy creditors
Can borrow against it (not recommended but available)
Delay RMDs if still working after 73

For most people with investment flexibility as priority: IRA wins.

Roth Conversion Opportunity

If you’re rolling a traditional 401(k) and your current year income is unusually low, consider converting some or all to a Roth IRA. You’ll pay taxes now at your current (lower) rate, but all future growth is tax-free.

This is especially valuable if you’ve left a job mid-year and have limited income for that calendar year.

FAQ

How long do I have to roll over? You must complete a rollover within 60 days of receiving the distribution. Direct rollovers have no time limit since you never take possession.

Are there contribution limits for rollovers? No—rollovers don’t count toward annual contribution limits. You can roll over $500,000 without affecting your ability to contribute the normal annual maximum.

What if my 401(k) balance is under $5,000? Your employer may force-distribute the account. Open an IRA immediately if you leave a job so you’re ready to accept the rollover.

Use our Retirement Calculator to see how your rolled-over balance compounds toward your retirement goal.