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How to do a 401(k) rollover and what to consider
By one estimate, there are nearly 30 million forgotten 401(k)s in the U.S., worth roughly $1.65 trillion. The numbers come from Capitalize, a company that helps retirement savers find and consolidate their retirement accounts.
A primary strategy in retirement account consolidation is the 401(k) rollover. Read on to learn how rollovers work, when you would need one, and what to consider before you proceed.
Learn more: What is a 401(k)? A guide to the rules and how it works.
What is a 401(k) rollover?
A 401(k) rollover is the transfer of funds from a current or former employer’s 401(k) to another account. The other account is usually an IRA or a 401(k) with a new employer.
Some 401(k) plans allow you to transfer funds while you still work for that employer. However, it is more common to do a 401(k) rollover after a job change, voluntarily or otherwise. The rollover may be required if your 401(k) balance is less than $7,000.
There are two types of 401(k) rollovers:
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Direct 401(k) rollovers transfer the balance from one account to another. You do not take possession of the funds. Direct rollovers have no tax consequences.
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Indirect 401(k) rollovers happen when the 401(k) funds are sent to you directly. The amount will usually be your vested balance, less 20% tax withholding. You must send the funds to a qualified retirement account within 60 days to avoid taxes and penalties for an early withdrawal.
Learn more: How much should I contribute to my 401(k)?
How to rollover 401(k) funds directly
Follow these steps to complete a direct 401(k) rollover:
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Decide where to send the funds. If you have a 401(k) with your new employer, you can send the funds there. You can also move the money into an IRA.
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Open a new account if needed.
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Contact your old 401(k) administrator and ask about the rollover process. At a minimum, you will provide your old and new account numbers. You may also need a Letter of Acceptance from the administrator of the new account.
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Complete any paperwork you are provided. Usually, the funds can be sent directly to the new account. If the funds must be distributed via check, request the check be made payable to the company that holds your new account, for your benefit. If your new account is with Vanguard and your name is Bob Smith, for example, the payee would be Vanguard, FBO Bob Smith. This way, the transfer still qualifies as a direct rollover.
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Send the check to the new account for deposit, if necessary. Make sure your new account number is written on the check. If the payee is the account administrator as recommended, you do not need to endorse the check.
How to rollover 401(k) funds indirectly
You will do an indirect rollover if you receive the funds as a check payable to you. Here are the steps:
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Decide where to send the funds.
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Open a new account, if necessary.
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Endorse the check and include your new account number.
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Deposit the check to the new account within 60 days. Note that 401(k) withdrawals are subject to tax withholding of 20%. Consider adding funds so your deposit equals the full balance of your old 401(k). This keeps your retirement wealth intact and minimizes tax consequences. Depending on your tax situation, you may get the withheld amount back at tax time.
401(k) rollover considerations
If your balance is high enough, a rollover after you change jobs is optional. Below are six factors to consider when deciding whether a rollover makes sense for you.
1. Convenience
After you leave the employer, you can no longer contribute to the old 401(k). Your money will stay invested and continue growing, but you will need another retirement account to hold future contributions. Consolidating to one account will be more convenient to manage going forward. It also reduces the chances you will lose track of the old account.
2. Account fees
If your old 401(k) has lower fees than your new account, it can make sense to leave the funds where they are. The opposite is also true. Avoiding high fees in the old account is a good reason to move your money elsewhere.
3. Investment options
401(k)s can have limited investment options relative to IRAs. A rollover may allow for greater diversification and a more complex investing strategy.
4. Vesting
If you have unvested matching contributions, you will forfeit them and their associated earnings in a rollover. You may be able to fulfill the vesting requirements later if you return to work with that employer within five years. This is only an option, however, if you forgo a rollover and leave the funds where they are.
5. Creditor protections
Federal law generally prohibits creditors from reaching into your 401(k) account to collect on debts you owe. IRAs do not have the same federal protections.
Melissa Murphy Pavone, founder of the financial planning firm Mindful Financial Partners, explains, "If you roll over funds into an IRA, those funds might be subject to state-specific creditor protection laws, which can vary widely."
6. Required minimum distributions (RMD)
RMDs are mandatory, taxable withdrawals from retirement accounts. Many retirement savers must take RMDs starting at age 73.
Melody Evans, a wealth management advisor for TIAA, says you can postpone RMDs from your current employer's 401(k) if you are still working after the age of 73. For this reason, Evans recommends rolling other retirement funds into your current 401(k) if you expect to work into your mid-70s.
Learn more: Retirement planning: A step-by-step guide
Account types
Your 401(k) balance may include pre-tax and after-tax contributions. This distinction is important when you are planning a rollover. To avoid tax implications, you must roll pre-tax funds into pre-tax accounts and after-tax contributions should go into after-tax accounts. Specifically:
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Pre-tax, or traditional 401(k), funds can roll into another traditional 401(k) or a traditional IRA.
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After-tax, or Roth 401(k), funds can roll into another Roth 401(k) or a Roth IRA.
If you roll over traditional 401(k) funds into a Roth account, the amount of the transfer will be taxable. You will also increase your taxable income for the year.
Learn more: These are the traditional IRA and Roth IRA limits in 2025
401(k) rollover mistakes
A blundered rollover can raise your tax liability for the year and reduce your retirement savings potential. Three mistakes to avoid are below.
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Missing the deadline. If you receive a 401(k) funds distribution payable to you, you have 60 days to deposit the funds into a new account. Miss the deadline and you will be subject to early withdrawal taxes and penalties.
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Sending pretax funds to a Roth account. If you roll your traditional 401(k) funds into a Roth account, the entire amount of the transfer will be taxable.
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Taking an all-or-nothing approach. It may be appropriate to divvy up your 401(k) funds in different ways. Marc Fowler, director of retirement education at 401(k) provider Human Interest, explains, "If your plan administrator allows it, you could roll over a portion of the 401(k) into an IRA and the remaining portion to a new 401(k)." Fowler continues, "Or cash out a small portion and roll over the rest to a new retirement account." There will be tax consequences to a partial cash-out, but this may be acceptable depending on your financial situation.
Maximizing your 401(k) wealth
There are benefits to rolling over your 401(k) funds after a job change. You will streamline your retirement savings and avoid early withdrawal taxes and penalties. Even better, your old account will not become a forgotten 401(k) statistic. And that means you can retire with every dollar coming to you.
