How to roll over a 401(k) to an IRA

A 401(k) to IRA rollover is a fairly straightforward process but can take up to a couple of weeks to complete. Before you start the rollover process, review the different tax implications and pros and cons of moving from one retirement account type to another.

4 steps to roll over a 401(k) to an IRA

To roll over your 401(k) to an IRA, you must choose an IRA account type and provider and initiate the rollover process with your old 401(k) provider. Here’s what each step entails.

1. Choose a rollover IRA account type

When choosing an IRA type, note any potential tax implications. For instance, if you roll over your traditional 401(k) to a Roth IRA, you’ll have to pay income taxes the year you roll over the money. This is because a Roth IRA is a post-tax account in which you pay taxes on the money before you contribute versus when you begin taking withdrawals in retirement. The benefit is that when you withdraw the money in retirement, you won’t have to pay taxes on the qualified distributions

However, if you have a Roth 401(k) and roll your funds to a Roth IRA, you may not have to worry about paying any additional tax unless you have pre-tax employer contributions you’re rolling over.

Moving funds from a traditional 401(k) to a traditional IRA is not considered a taxable event if you complete the rollover within 60 days, according to IRS rules.

2. Compare and select an IRA provider

Not all IRA providers are designed alike — things like fees, investment options and other features and amenities differ from one bank or broker to the next. Whereas one broker may let you invest in a wide variety of assets, another may limit you to stocks and exchange-traded funds (ETFs).

Also, consider your investing approach as you compare providers. If you prefer to be hands-off, consider an IRA provider that offers automated investing using a robo-advisor.

3. Contact your old 401(k) provider and request a rollover

The actual transfer of 401(k) funds can take up to a couple of weeks, depending on the provider. Usually, you can select a direct rollover option, where funds are transferred from your old employer’s 401(k) provider to your new IRA provider. An indirect rollover is when you receive a check for your distribution and have to deposit the money with your IRA provider.

The advantage of a direct rollover is that it’s simpler and avoids potential tax implications. If you choose an indirect rollover and fail to deposit the money within 60 days, the money is subject to taxes and an early withdrawal penalty if you’re younger than 59.5 years old. Some 401(k) plan administrators automatically issue a check if your balance is below $1,000. This money incurs a 20% income tax withholding, and you’ll need to deposit the funds into an IRA within 60 days to avoid any early withdrawal penalties.

4. Deposit the money

If you choose a direct rollover option, your 401(k) plan administrator automatically deposits your money with your new IRA provider. If you choose an indirect rollover, deposit the money within 60 days to avoid taxes and penalties.

5. Invest your funds

Depositing or transferring funds into your IRA doesn’t mean these funds are invested. Unless you choose an IRA that offers managed portfolios, you’ll need to choose your own investments. If you’re unsure how to start investing, consider your time horizon, risk tolerance and investing goals when deciding which investments are right for you.

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Advantages and disadvantages of rolling over a 401(k) to an IRA

Rolling over a 401(k) to an IRA has different advantages and disadvantages.

Advantages

• More investment variety. IRAs account providers usually offer stocks, bonds, ETFs, mutual funds and more, while 401(k)s typically include mostly mutual funds.
• No employer restriction. Contribute to your IRA regardless of employment status.
• Education exception. The IRS lets you withdraw early from an IRA for qualified higher education expenses but does not allow the same for a 401(k).⁽¹⁾

Disadvantages

• No loan options. Unlike 401(k)s, you cannot take a loan out with IRAs.⁽²⁾
• Limited creditor protection. While 401(k)s are protected from creditors as a result of the ERISA law, IRA laws and the level of protection differ state by state.
• Smaller contribution limits. Contribute up to $23,000 to your 401(k) in 2024 but only $7,000 to your IRA.

Is it a good idea to rollover 401(k) to IRA?

At the end of the day, transferring funds from your 401(k) to an IRA can be helpful if you wish to have more investment choices and potentially lower fees. If you find that your 401(k)’s creditor protections, loan options and investment choices align more with your goals, you may want to hold off.

It’s worth noting that your rollover does not affect your total IRA contribution amounts. For example, the IRA contribution limit is $7,000 and another $1,000 if you’re age 50 and older. If you roll over a $5,000 401(k) balance to your IRA, it won’t count toward your contribution limit.

Bottom line

A 401(k) rollover to an IRA is a straightforward process. But because of potential tax implications, it’s a good idea to roll your 401(k) over to an IRA of the same type. Review the best IRAs and best Roth IRAs to see which IRA provider is right for you.

Frequently asked questions