How to Roll Over Your 401(k) to an IRA

There are many reasons why you decide to roll over a 401(k) into an IRA. To name a few, you may have left your job for a position at a new company, you may have been laid off or you may have decided to take your career in a new direction. Regardless of the reason, if you’ve been contributing diligently to your employer-sponsored retirement plan for a number of years, you could have a decent stash of cash in your account that might be worth rolling over to an IRA.

If you need help managing your retirement accounts, consider working with a financial advisor.

Should You Roll Over Your 401(k)?

To start, it’s worth knowing that you don’t have to make a 401(k)-to-IRA rollover, even if you do leave your job. You have the option of leaving the money you’ve invested in the plan at your old company, which is called an orphan account. While you can’t keep contributing to an orphan account, your funds will stay invested, and if your investments go up, you’ll continue to see your account grow. If you like the way your money is currently invested, you may consider keeping your money in the existing plan. Or, if you currently aren’t working but anticipate taking a new job soon, you could leave your money at your old plan temporarily and put it into your new company’s plan once you have access to it.

But for those who don’t think they’ll end up in another 401(k) plan but still want to save more for retirement, it might make sense to do a 401(k)-to-IRA rollover. Remember, even though you still have your account at your old company’s 401(k), you won’t have the ability to make more contributions.

How to Pick an IRA to Roll Over To

The most important question to ask when choosing an IRA is whether you want a traditional IRA or Roth IRA.

Traditional IRAs work much like traditional 401(k) plans, where you contribute money before you pay taxes. Then when you retire, the money is taxable as you withdraw it. A Roth IRA, however, works differently in that you contribute money post-taxes. The money is then not taxable when you withdraw it in retirement.

It’s important to factor in these tax implications for a rollover. If you have a traditional 401(k) plan, that means you didn’t pay taxes on the money when you contributed it to your account. So if you want to move that money into a Roth IRA, you’ll have to pay taxes on it.

Meanwhile, you can roll over from a traditional 401(k) into a traditional IRA tax-free. The same goes for a Roth 401(k)-to-Roth IRA rollover. Note that you can’t roll a Roth 401(k) into a traditional IRA.

Beyond the type of IRA you want to open, you’ll also need to choose a financial institution to open your IRA with. Some basic investigation into the types of investment options available at various institutions should offer some insight. Also consider factors like which online interface you find easiest to use and what experiences you might have already had with particular financial institutions.

How to Start a 401(k)-to-IRA Rollover

Once you’ve figured out exactly which IRA you want to use, the next step is to open an IRA with that company. You can do this online, just like you’d start any other financial account.

Next, get in touch with the financial company managing your 401(k). Ask if they have any special rollover requirements. Assuming you’ve met all of them, have a check for your assets mailed to the company you opened an IRA with. That company will then deposit the funds into your IRA. You’ve officially completed your rollover!

Tax Consequences of a 401(k)-to-IRA Rollover

Three dice spelling out "IRA" over a $100 bill.

As mentioned above, you generally won’t have to pay any taxes on a 401(k)-to-IRA rollover. The only time you’d have to deal with taxes is if you have a traditional 401(k) and want to roll it over to a Roth IRA.

One other tax consideration: You can choose to do a direct or indirect rollover. For a direct rollover, your old plan sends the money directly to your new IRA. In an indirect rollover, your old plan sends you a check with the cash and withholds 20% of your funds for tax purposes.. You must deposit the full amount of your 401(k) balance into your IRA within 60 days, or else you’ll face taxes and potentially a 10% early withdrawal penalty.

Investment Strategy After the Rollover

Once a 401(k) rollover into an IRA is complete, the account holder must decide how to invest the assets going forward. The rollover itself is an administrative step and does not change how the money is allocated. This means any prior investment selections from the employer plan may no longer apply, leaving the IRA either uninvested or invested differently, depending on how the transfer was handled.

IRAs typically offer a wider range of investment choices than employer-sponsored plans do. These options may include individual securities, exchange-traded funds (ETFs), bonds and a broader selection of mutual funds. This expanded menu of IRA investment options can change how risk and return are distributed across the portfolio compared to the original 401(k) lineup.

A rollover can also affect overall portfolio structure, particularly when multiple workplace plans are consolidated into a single IRA. Combining accounts may shift asset allocation unintentionally, especially if the old plans had different investment mixes. Reviewing holdings after consolidation is important for clarifying exposure across asset classes and account types.

Investment decisions made after the rollover will influence future withdrawals and taxes. Asset selection affects how income is generated, how volatility is managed and how RMDs are funded later on. In turn, these choices shape how the IRA supports income needs throughout retirement and how long assets may last.

Bottom Line

A woman looking at the balance of her retirement account.

Whether you are changing jobs or transferring control of your assets to another financial advisor or institution, a 401(k)-to IRA-rollover can be incredibly helpful. There are some planning questions to be mindful of, though, prior to following the steps for how to rollover over your 401(k) to an IRA. Once the rollover is completed, it is vital to review your account and investments, ensuring your retirement savings stays on track.

Tips for Retirement Investing

Consider finding a financial advisor to steer you in the right direction in terms of savings and investments. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When you’re starting to plan for retirement, you should consider the tax laws of the state you live in. Some have retirement tax laws that are very friendly for retirees, but others don’t. Knowing what the laws apply to your state, or to a state you hope to move to, is key to getting ahead on retirement planning.