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

Option 1: Roll into an IRA (usually best).

Every time you change jobs, you face a decision about your old 401(k). Here are your options, ranked from generally best to worst:

Option 1: Roll into an IRA (usually best). Transfer your 401(k) balance into an Individual Retirement Account at a brokerage like Fidelity, Schwab, or Vanguard. You gain access to thousands of investment options instead of the limited menu in most 401(k) plans, and fees are typically lower. This is a direct rollover — no taxes owed.

Option 2: Roll into your new employer's 401(k). If your new job has a good 401(k) plan with low-cost index funds, this keeps everything consolidated. Some plans do not accept rollovers, so check with your new HR department.

Option 3: Leave it with your old employer. This is fine temporarily, but you cannot contribute to it anymore, you may lose access to certain plan features, and managing multiple accounts gets complicated over time.

Option 4: Cash it out (avoid this). You will owe federal and state income taxes on the entire balance, plus a 10% early withdrawal penalty if you are under 59½. On a $50,000 balance, you could lose $15,000-$20,000.

Step 1

A direct rollover is the safest and simplest method. The money moves directly from your old plan to your new account without you ever touching it, so there are no taxes or penalties.

Step 1: Open an IRA at your chosen brokerage if you do not already have one. Choose a traditional IRA for a traditional 401(k) rollover (no tax impact) or a Roth IRA if you want to convert (you will owe taxes).

Step 2: Contact your new brokerage and tell them you want to initiate a direct rollover from your old 401(k). They will provide paperwork or an online process, and often handle the communication with your old plan.

Step 3: Contact your old 401(k) plan administrator (the number is on your statement) and request a direct rollover. They will ask for your new account details. Make sure the check is made payable to your new brokerage, not to you personally.

Step 4: Once the money arrives in your new account (usually 1-3 weeks), invest it according to your retirement strategy. Do not leave it sitting in cash — the default holding is often a money market fund that may not match your long-term goals.

Direct rollover (trustee-to-trustee)

Understanding the difference can save you thousands in unnecessary taxes.

Direct rollover (trustee-to-trustee): Money goes directly from your old plan to your new account. No taxes withheld, no time limit, no risk. This is what you want.

Indirect rollover (60-day rollover): Your old plan sends you a check. They are required to withhold 20% for federal taxes. You then have 60 days to deposit the full original amount (including the withheld 20% from your own pocket) into your new account. If you miss the deadline or cannot make up the withheld amount, the shortfall is treated as a taxable distribution plus potential penalties.

Example: You have $50,000 in your old 401(k). With an indirect rollover, you receive a check for $40,000 (after 20% withholding). To complete the rollover, you must deposit $50,000 into your IRA within 60 days — meaning you need $10,000 from your own funds to make up the difference. You get the withheld $10,000 back when you file taxes, but only if you completed the full rollover.

Bottom line: Always request a direct rollover to avoid this complexity.

Traditional 401(k) to Traditional IRA

A traditional 401(k) can be rolled into either a traditional IRA or a Roth IRA, but the tax implications are very different.

Traditional 401(k) to Traditional IRA: No taxes owed. Your money continues to grow tax-deferred, and you pay income tax when you withdraw in retirement. This is the simplest option.

Traditional 401(k) to Roth IRA (Roth conversion): You owe income tax on the entire converted amount in the year of conversion. However, all future growth and qualified withdrawals are tax-free. This can be advantageous if you expect to be in a higher tax bracket in retirement, or if you are in a temporarily low-income year.

When a Roth conversion makes sense: You are early in your career with a lower income, you are between jobs with reduced income for the year, you expect tax rates to increase in the future, or you want to reduce future required minimum distributions.

When to stick with traditional: You are in a high tax bracket now, you do not have cash outside the account to pay the conversion tax, or you expect to be in a lower bracket in retirement.

Benefits of consolidation

If you have changed jobs several times, you may have 401(k) accounts scattered across multiple former employers. Consolidating them into a single IRA simplifies your financial life and often reduces fees.

Benefits of consolidation: One login to check your retirement savings, easier to maintain your target asset allocation, fewer accounts to track for tax purposes, and often lower total fees than multiple 401(k) plans.

How to consolidate: Open one IRA and roll each old 401(k) into it. You can do multiple rollovers into the same IRA — there is no limit on direct rollovers. Start with the smallest accounts first to get comfortable with the process.

Do not forget about old accounts. Americans have left behind an estimated $1.65 trillion in forgotten 401(k) accounts. If you have lost track of an old account, contact your former employer's HR department or search the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com.

Mistake 1: Cashing out small balances.

Mistake 1: Cashing out small balances. Even a $10,000 401(k) left to grow for 25 years at 8% annual returns becomes $68,000. Cashing out costs you decades of compounding.

Mistake 2: Missing the 60-day deadline on indirect rollovers. If you receive a check and do not deposit it into a qualifying account within 60 days, the entire amount becomes taxable income plus a 10% penalty if under 59½.

Mistake 3: Forgetting to invest after rolling over. Money that arrives in your new IRA often sits in a default money market fund. Log in after the transfer completes and invest according to your retirement plan.

Mistake 4: Rolling over employer stock without considering NUA. If your 401(k) holds highly appreciated company stock, the Net Unrealized Appreciation (NUA) strategy may save you significant taxes. Consult a tax professional before rolling over employer stock.

Mistake 5: Not considering the Roth conversion in a low-income year. Job transitions sometimes create low-income years that are ideal for Roth conversions. Run the tax numbers before defaulting to a traditional-to-traditional rollover.