How to roll over your 401(k) in 5 easy steps

If you’ve recently left a job, there are several options for how to roll over your employer-sponsored 401(k) retirement plan. Choosing where to roll over your can potentially save you tens of thousands of dollars — or cost you just as much if you make the wrong decision.

Rolling over a 401(k) with high-fee investments into an individual retirement (IRA) with lower-cost investment options or to your current employer’s 401(k) plan could save you big. According to the Department of Labor, just a 1 percent increase in fees could reduce your retirement balance by 28 percent.

If a rollover makes sense for you, here’s how to move money from your old 401(k) to a new .

1. Decide what kind of you want

First, decide what kind of you’re rolling over your money to. That decision depends a lot on the options available to you and whether you want to do the investing yourself.

You have two big options: move the money to your current 401(k) or move it into an IRA. 

Ask yourself the following questions to help you figure out which way to go:

• Do you want to invest the money yourself, or would you rather have someone do it for you? If you want to do it yourself, an IRA may be a good option. Even if you want someone to do it for you, you may want to check out an IRA at a robo-advisor, which can design a portfolio for your needs. “Do-it-for-me” investors may also prefer to make a rollover into your current employer’s 401(k) plan.
• Does your old 401(k) have low-cost investment options with potentially attractive returns? If you’re thinking about a rollover to your current 401(k) plan, you’ll want to ensure it’s an equivalent or better fit than your old plan. If it’s not, then a rollover into an IRA could make a lot of sense, since you’ll be able to invest in anything that trades in the market. Otherwise, maybe it makes sense to keep your old 401(k).
• Does your current 401(k) plan offer access to financial planners to help you invest? If so, it could make sense to roll your old 401(k) into your new one. If you move money to an IRA, you’ll have to manage it completely and pick investments or hire someone to do so.

Before you actually move your money, decide which kind of makes sense for your needs. Those who need help with investing may be better served with a rollover to their current 401(k) plan, while those who have the skill and desire to invest the money themselves may opt for an IRA.

2. Decide where you want the money to go

If you’re making a rollover from your old 401(k) to your current one, you know exactly where your money is going. If you’re rolling it over to an IRA, however, you’ll have to set up an IRA at a bank or brokerage if you haven’t already done so.

Bankrate has reviewed the best places to roll over your 401(k), including brokerage options for those who want to do it themselves and robo-advisor options for those who want a professional to design a portfolio for them.

Bankrate’s comprehensive brokerage reviews can help you compare key areas at each provider. You’ll find information on minimum balance requirements, investment offerings, customer service options and ratings in multiple categories.

If you already have an IRA, you may be able to consolidate your 401(k) into it. Or you can create a new IRA for the money.

3. Open your and find out how to conduct a rollover

After you’ve chosen a brokerage or robo-advisor, open an IRA . Then you can begin the process for rolling your 401(k) money into it.

Each brokerage and robo-advisor has its own 401(k) rollover process, so the institution for your new to see what’s needed. Follow their procedures exactly. If you’re rolling money into your current 401(k), your new plan for instructions.

For example, if the 401(k) company is sending a check, your IRA institution may request that the check be written in a certain way, and it might require that the check contain your IRA number on it. Again, follow the instructions carefully to avoid complications.

4. Begin the rollover process

You’ll have to fill out paperwork to conduct your rollover, and it may require some conversations with your providers. You have several options to actually move the money, but your best option is a direct rollover.

In a direct rollover, the funds are sent straight from your 401(k) into your new without you touching the money. It’s important that you specify a direct rollover so that you don’t have the check made payable to you, because such a check could trigger a mandatory 20 percent withholding for taxes, and the IRS charges a 10 percent bonus penalty on withdrawals made before age 59 1/2.

However, not all plan providers allow direct transfers, so ask if the option is available.

5. Act quickly to avoid potential tax consequences

If you’re conducting a rollover, you have 60 days from the date you receive your retirement plan distribution to get it deposited into a qualified . Otherwise, it will be a taxable event.

Again, each institution may have its own process for moving the money. Your 401(k) may send a paper check to you or to the institution where you are opening your IRA, or the money may be rolled over digitally via wire transfer.

If you receive a check in the mail, make sure it’s sent along to your new within that 60-day window. 

What to do if you have a 401(k) in your former employer’s plan

If you have a 401(k) at a previous employer, consider whether a rollover makes sense for you based on your unique circumstances. Your options are:

Keep your 401(k) with your previous employer

In this instance, you won’t change a thing. Just actively monitor your investments in the plan for performance and remain aware of any significant changes that occur.

Also find out if you’ll be responsible for any plan istrative fees. Often, employers cover some or all of these costs for existing employees. But once you become an ex-employee, the costs may become your responsibility.

The stay-put approach is best if you really like the provider and investment options.

Roll over your 401(k) to an IRA

This option helps you take more active control of your retirement investments and avoid triggering a taxable event. If you have an existing IRA, you may be able to consolidate all of your retirement s in one place. And an IRA gives you many investment options, including low-cost mutual funds and ETFs.

Plenty of mutual fund companies and brokerages offer no-load mutual funds and commission-free ETFs, says Greg McBride, CFA, Bankrate chief financial analyst.

“You also want to just make sure that you’re satisfying any minimums so that you don’t get dinged for an maintenance fee for having a low balance,” McBride says. “Index funds will have the lowest expense ratios. So there’s a way that you can really cut out a lot of the unnecessary fees.”

Check with your IRA institution first to ensure that it will accept the kind of rollover you want to make.

Roll over your old 401(k) to your new employer’s 401(k)

If your new employer’s 401(k) plan accepts rollovers, this may be a good choice if the investment options are better or lower-cost than your previous employer’s 401(k). Consulting with a financial planner can help you make the decision that’s best suited to your current and future needs.

The pros and cons of rolling over your 401(k)

Pros	Cons
You can consolidate your 401(k) s	You like your current 401(k)
You’ll have more investment choices in an IRA	A 401(k) may offer benefits that an IRA doesn’t have
You’ll have the choice to bring the anywhere you’d like	You can’t take a loan from an IRA as you can with a 401(k)

Advantages of rolling over your 401(k)

You can consolidate your 401(k) s

Especially if you change jobs often, you might find yourself with several 401(k) s. The more s you have, the harder it can be to manage them. Having your retirement funds all in one place can make it easier.

You’ll have more investment choices in an IRA

With your 401(k), you are restricted to the investment and options that are offered in that plan. An IRA gives you more assets to invest in, including individual stocks, bonds or other vehicles that may not be available in your 401(k).

Another plus: the ability to continue to add money to your retirement . You can’t add to the 401(k) if you leave it at your previous employer. But if you roll this money over into an IRA, the contribution window remains open up to the annual maximum. You’ll have to follow the IRA contribution guidelines.

You’ll have the choice to bring the anywhere you’d like

With an IRA, you can take your money with you to any broker or advisor, such as if you already work with a financial advisor or financial planner. Or maybe you already have a brokerage where some of your money is being managed, and you want all your funds there.

Disadvantages of rolling over your 401(k)

You like your current 401(k)

If the funds in your old 401(k) don’t charge high fees, or if the plan offers access to lower-fee mutual fund share classes that aren’t available elsewhere, you might want to take advantage of this and remain with that plan. Compare the plan’s fund fees to the costs of having your money in an IRA.

In many cases, the best advice is, “If it isn’t broken, don’t fix it.” If you like the investment options, it might make sense to stay in your previous employer’s 401(k) plan.

A 401(k) may offer benefits that an IRA doesn’t have

If you keep your retirement in a 401(k), you may be able to access this money at age 55 without incurring a 10 percent additional early-withdrawal tax, as you would with an IRA.

With a 401(k), you can avoid this penalty if distributions are made to you after you leave your employer and the separation occurred in or after the year you turned age 55.

This loophole does not work in an IRA, where you would generally incur a 10 percent penalty if you withdraw money before age 59 1/2.

You can’t take a loan from an IRA as you can with a 401(k)

Many 401(k) plans allow you to take a loan, whereas loans are not allowed in an IRA. Rolling over your old 401(k) into your new 401(k) preserves the ability to borrow money.

While taking loans from your retirement funds is not advised, it may be good to have this option in an extreme emergency or short-term cash crunch. Many plans require you to make repayments of both principal and interest, and if you leave your job for any reason, the balance must be repaid in full by a set deadline. Otherwise, you’ll owe taxes and early-withdrawal penalties on the outstanding balance.

Other factors to consider

Net unrealized appreciation (NUA) and company stock in a 401(k)

If you have company stock in a 401(k), it could save you significant money on taxes to transfer those shares into a taxable brokerage to take advantage of net unrealized appreciation, or NUA. NUA is the difference between what you paid for company stock in a 401(k) and its current value.

For example, if you paid $20,000 for company stock and it’s now worth $100,000, the NUA is $80,000.

The benefit of the NUA approach is that it helps you avoid paying ordinary income tax on these distributions of your own company’s stock from your retirement . That can be up to 37 percent, which is the highest tax bracket, says Michael Landsberg, A/CFP/PFS, principal at wealth management firm Homrich Berg.

Instead, you’ll enjoy capital gains tax treatment, which is only 20 percent even at the highest tax bracket. High earners, however, will be subject to a bonus 3.8 percent net investment income tax. And an NUA may be subject to a 10 percent early-withdrawal tax if you move funds prior to age 59 1/2.

Landsberg says NUA makes the most sense when the difference in tax rates is higher.

“Net unrealized appreciation is a very powerful tool, if used correctly,” Landsberg says. “So you can get creative and potentially have a pretty nice windfall if you use the NUA rules correctly.”

Beware 401(k) balance minimums

If your balance is less than $7,000 and you’ve left the company, your former employer may require you to move it. In this case, consider rolling it over to your new employer’s plan or to an IRA.

If your previous 401(k) has a balance of less than $1,000, your employer has the option to either cash out your or move your IRA money into an IRA at a provider it chooses.

Regardless of what you decide to do with your old 401(k), don’t forget to keep tabs on it either on your own or with help from a financial pro who understands your entire financial picture.

401(k) rollover FAQs

• How long do I have to roll over a 401(k)?

  If a distribution is made directly to you from your retirement plan, you have 60 days from “the date you receive” a retirement plan distribution to roll it over into another plan or an IRA, according to the IRS.

  But if you have more than $7,000 in a 401(k) at your previous employer — and you’re not rolling it over to your new employer’s plan or to an IRA — there generally isn’t a time limit on making this decision.

• Is it better to roll a 401(k) into an IRA?

  If you like your former employer’s 401(k) plan — the investment options and the expense ratios on the investments — then it won’t necessarily be better to roll it over into an IRA. But you may find that if you roll your 401(k) into an IRA, you may have more investment options. Compare expense ratios and factor in istrative fees within the plan to see which option is best for you.

  Kaleb Paddock, a CFP and founder at Ten Talents Financial Planning in Parker, Colorado, says a typical 401(k) plan only has approximately 20 to 40 mutual funds available. But an IRA could give you access to thousands of exchange-traded funds and mutual funds as well as individual stocks.

  “Another reason might be, if you want to invest in socially responsible funds or funds that invest according to a certain set of values, those funds may not be available in your prior employer’s 401(k),” Paddock says.

  “But by rolling it over to … one of these large custodians, you’ll likely be able to access funds that may be socially responsible or fit your values in some fashion — and give you more options that way,” he says.

  Plus, rolling over your 401(k) to an IRA may result in you earning a brokerage bonus, depending on the rules and restrictions that the brokerage has in place.

• Do I have to pay taxes when rolling over a 401(k)?

  Whether you owe taxes on a rollover depends on whether you’re changing types (traditional vs. Roth). Generally, if you move a traditional 401(k) to a Roth IRA, you could create a tax liability. Here are a few scenarios:

  • If you’re rolling over money from a traditional 401(k) to another traditional 401(k) or traditional IRA, you won’t create a tax liability.
  • If you’re rolling over a Roth 401(k) to another Roth 401(k) or Roth IRA, you won’t create a tax liability.

  However, if you’re rolling a traditional 401(k) into a Roth IRA, you could (and likely will) create a tax liability.It’s also important to know that if you have a Roth 401(k) that has any employer matching funds in it, until recently, those matching funds were required to be made on a pre-tax basis and categorized as a traditional 401(k) contribution. So if you transfer a Roth 401(k) that has matching funds treated that way into an IRA, you’ll need to create two IRA s – a traditional IRA and a Roth IRA – to avoid any tax issues during the rollover.The SECURE Act 2.0 now allows employers to make matching contributions in Roth plans, but it may take some time to implement this change. Of course, you’ll still need to abide by the 60-day rule on rollovers. That is, you have 60 days from “the date you receive” a retirement plan distribution to roll it over into another plan, according to the IRS. Taxes generally aren’t withheld from the transfer amount, and this may be processed with a check made payable to your new qualified plan or IRA .

— Kim Husband contributed to an update of this article.