Important Things to Remember While Rolling Over a 401(k) Plan

A 401(k) rollover means transferring funds from your 401(k) to another retirement account. People often do this when they change jobs, retire, or want a different investment option. You can roll over your savings from one 401(k) to another or move them from a 401(k) to an Individual Retirement Account (IRA), depending on your financial goals.

However, there are several 401(k) rollover rules to keep in mind before you move your money. A mistake, a missed step, or a delay could result in unexpected taxes or penalties. This 401(k) rollover guide explains everything you need to know. You may also want to speak with a financial advisor to understand the rules and complete the rollover correctly.

How to roll over a 401(k)?

Here are the steps for a 401(k) rollover:

If you opt for a direct rollover, you need to do the following:

• Inform both your old 401(k) and new 401(k) or IRA plan administrators about the rollover.
• Your old plan provider will initiate the rollover, sending a check to your new plan administrator.

Alternatively, you can also follow the steps below and indirectly roll over the money:

• Inform both your old 401(k) and new 401(k) or IRA plan administrators about the rollover.
• Your old plan provider will initiate the rollover by issuing you a check. They will withhold 20% of your account balance to cover your taxes. This is a precaution in case you miss the 60-day deadline (more on this later in the article).
• The money you receive will be deposited in your bank account. You can then send a check to the new plan administrator for the account you want to roll the funds into. However, keep in mind that the check you write must be for the full account balance, including the 20% that was withheld. For now, you’ll need to come up with this money yourself. As long as you deposit the check within the 60-day window, the 20% withheld will be sent to you.

Irrespective of the options you choose, you have the following options if you want to roll over your 401(k) funds:

1. Opt for a rollover from your existing 401(k) into a new employer’s plan

If your new employer offers a 401(k) plan, you may be able to roll over your old 401(k) into it. This lets your retirement savings keep growing tax-advantaged while keeping all your retirement funds in one place. This can make managing your investments easier. Fewer accounts also help you keep track of your retirement savings. Imagine managing more than one 401(k). You would have to track them all, spend time reviewing their portfolios, and pay multiple fees. With a single 401(k), investing can surely be more convenient and time-saving. 401(k) plans can also include employer stock.

Even though a 401(k) to 401(k) rollover has many advantages, before you initiate the transfer, check whether your new employer’s plan accepts rollovers from previous employer-sponsored retirement accounts. Not all employers allow this, and even if they do, 401(k) rollover rules can vary by plan. If your new employer does not accept rollovers, you may have to leave your old 401(k) where it is or consider rolling it over into an IRA instead.

If your new employer accepts rollovers, you must take the time to review the new plan, either by yourself or with the help of a financial advisor. Review the range of investment options available, the plan’s fees, and employer vesting rules.

2. Opt for a 401(k) rollover to an IRA

A 401(k) rollover to an IRA involves transferring the funds from your 401(k) into an IRA. If you choose this option, your pre-tax retirement savings can keep growing tax-deferred. Another advantage of an IRA is the wider range of investment choices it offers compared to an employer-sponsored 401(k) plan. You can open an IRA with the financial institution of your choice, such as a bank, broker, or credit union. You may also have more control over your investments without needing your employer’s involvement.

Before opening an IRA, compare providers carefully. Fees and expenses can vary between financial institutions, and in some cases, investment costs may be higher than those in your employer’s 401(k) plan. IRAs also have lower annual contribution limits than 401(k) plans. For example, in 2026, you can contribute up to $7,500 to an IRA, or $8,600 if you are age 50 or older. In comparison, the 2026 contribution limit for a 401(k) is $24,500, or $32,500 if you are age 50 or older. Between ages 60 and 63, you can contribute an additional $11,250. So, if you wish to contribute more, a 401(k) to 401(k) rollover may be the better choice. Another factor to consider is that federal law provides better creditor protection for assets held in 401(k) plans than for IRAs.

A 401(k) rollover to an IRA can be a good option if you want more control over your retirement savings. However, consider the downsides before deciding. If you are unsure which option is best for your situation, consider speaking with a financial advisor.

Below are some 401(k) rollover rules that you need to follow no matter what option you choose:

1. There is a 60-day window to complete the 401(k) rollover

If you move your retirement savings to another retirement account, you have a fixed 60-day period to complete the transfer. If you fail to do so, you will have to face some penalties. If you transfer a partial amount or make no transfer at all within the 60-day period, the Internal Revenue Service (IRS) would likely consider it a withdrawal and treat it as a taxable withdrawal. In most such cases, you may have to pay a 10% early withdrawal penalty.

This is why a direct rollover is usually considered a better option. The money goes straight from your old retirement account to your new one. The old plan administrator does not withhold taxes, and the chances of a delay are greatly reduced. If you choose to receive the money first, your employer must withhold part of it for taxes. Even if you plan to deposit the money into a new retirement account within 60 days, you will still need to replace the withheld amount from your own pocket. This can be hard, depending on your total account balance and liquidity constraints.

2. Employers have vesting periods for 401(k)s

You may not be able to roll over your entire 401(k) balance if your employer’s contributions have not fully vested. 401(k) contributions made by employees are 100% vested. However, the employer’s contributions may be fully vested after a few years. The exact vesting schedule varies by plan.

Before starting a 401(k) rollover, check your plan’s vesting rules. Any employer contributions that have not vested may be forfeited when you leave your job. This is money that is simply lost.

3. 401(k) rollovers are normally indirect for account balances below $1,000

People who haven’t been saving for long or who are changing jobs for the first time are likely to have lower account balances. In cases where the account balance is less than $1,000, employers can cash out your money, withhold 20% for taxes, and pay you the remaining amount. In this case, you would have to complete an indirect rollover to avoid taxes and penalties. Make sure you do this within the 60-day window.

There are possible tax consequences for 401(k) rollovers

When you do a rollover, you may be taxed as follows:

• Traditional 401(k) to Roth IRA: Converting a traditional 401(k) to a Roth IRA is a taxable event. The entire converted amount is treated as ordinary income and taxed in the year of conversion.
• Traditional 401(k) to Roth 401(k): Moving funds from a traditional 401(k) to a Roth 401(k) is also considered a Roth conversion. The full converted amount is taxed as ordinary income in the year of the transfer.
• Roth 401(k) to Traditional IRA: You cannot roll over a Roth 401(k) directly into a traditional IRA.

How to choose between an IRA and 401(k) rollover?

The choice between an IRA and a 401(k) comes down to your preferences. In order to decide, you must know and understand the differences between these two accounts and the benefits and features they offer. Let’s discuss a few of them:

1. 401(k)s may offer more flexible withdrawals

In some cases, you can withdraw from a 401(k) at the age of 55 instead of 59.5. However, for IRAs, qualified withdrawals begin at age 59.5.

If you retire early at the age of 55, you may be able to withdraw money from your 401(k) without paying the 10% early withdrawal penalty. You still have to pay ordinary income tax on your withdrawals if you have a Traditional 401(k), but the penalty is waived. This exception does not apply to IRAs. In most cases, you must wait until age 59½ to withdraw money from an IRA without incurring the 10% early withdrawal penalty, unless you qualify for another IRS exception.

2. 401(k)s may offer federal protection against creditors

Creditors can come after your IRA funds in the event of bankruptcy. However, your 401(k)s funds have federal protection. Sticking to a 401(k), whether keeping an old one or moving to a new one, can be beneficial in such circumstances.

3. 401(k)s offer loans

You can apply for a 401(k) loan if you are in need of funds. The loan is granted against your balance. You can take a loan of up to $50,000 or 50% of your vested account balance, whichever is less. However, you must repay the loan within five years. Plus, it accrues interest. Still, this is a convenient option in urgent situations. An IRA does not offer this facility.

4. Roth IRAs may offer tax benefits

If you move your money to a Roth IRA, you can enjoy tax benefits on qualified withdrawals. Roth IRAs offer tax-free income in retirement, which can help your savings last longer. You would have to pay tax on the year of the conversion, but after that you can enjoy tax-free income for life.

5. IRAs may offer more investment choices

IRAs may offer more investment options than a 401(k). Moreover, with an IRA, you can shop around. You can browse different plan providers and compare fees and investment options. With a 401(k), you are pretty much stuck with what the employer offers.

Alternatives to a 401(k) rollover

You do not have to necessarily opt for a 401(k) rollover. You can also choose from the following:

1. Leave your 401(k) with your previous employer

You can choose to leave your 401(k) with your previous employer if the plan allows it. Nothing happens to your savings after you quit. They remain in the account and potentially grow over time. But you cannot make new contributions or receive employer matching contributions. Meanwhile, you can contribute to your new employer’s 401(k) or open a new IRA if that is what you want.

Keep in mind that if you choose this option, you would have to manage multiple accounts. Having said that, if your new employer offers limited investment choices and you do not want to open an IRA, it might just make more sense to stay invested in the old 401(k) account.

2. Cash out your entire 401(k)

You can withdraw your entire 401(k) balance as a lump sum. However, the amount you withdraw is subject to income tax. If you are under 59½, you may also have to pay a 10% early withdrawal penalty.

3. Cash out part of your 401(k)

You can cash out only a portion of your 401(k) and roll over the remaining balance into your new employer’s retirement plan or an IRA. This can be suitable if you need lump-sum money. But again, the amount you withdraw will be subject to taxes and, if applicable, an early withdrawal penalty.

Follow the 401(k) rollover guide to the T

There are quite a few choices at your disposal when it comes to a 401(k) rollover. However, follow the 401(k) rollover rules no matter what you decide. The IRS enforces these rules strictly. An error could lead to unexpected taxes or penalties, both of which can lower your balance and impact your long-term retirement goals. Consider consulting a financial advisor to help you avoid mistakes. Our financial advisor directory can help find an advisor near you.

Frequently Asked Questions (FAQs) about 401(k) rollover rules

1. Do I have to pay tax on a 401(k) rollover?

It depends on the type of rollover. A direct 401(k) rollover where you follow the applicable rules is not taxable. But if you receive the money yourself and do not deposit it into another eligible retirement account within 60 days, you would be taxed.

Converting a traditional 401(k) to a Roth IRA or Roth 401(k) is also a taxable event because the converted amount is treated as ordinary income.

2. Do I need to hire a financial advisor to make a rollover?

No, you don’t need to hire a financial advisor to do a rollover. However, it can be helpful. A financial advisor can help you choose the right rollover option and understand the prevailing 401(k) rollover rules.

For more information on retirement planning strategies tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm that manages private client accounts for individuals and families across America. As an SEC-registered investment advisor (RIA) firm, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services tailored to each client’s unique needs, providing institutional-caliber money management based on a solid, proven research approach. Each client also receives comprehensive financial planning to help them move toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been featured in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as an investment industry leader with a track record of creating value for his firm’s clients.