Changing jobs is one of the most common triggers for a 401(k) rollover. Here’s exactly how to do it, what to watch out for, and which option is best for your situation.
Quick answer: Always choose direct rollover (tax-free). Roll to IRA for most investment options, or new 401k to consolidate. Never cash out—you’ll lose 30%+ to taxes and penalties.
Your 401(k) Rollover Options
| Option | What It Means | Pros | Cons |
|---|---|---|---|
| Roll over to IRA | Transfer to a traditional or Roth IRA at a brokerage | Widest investment options, lower fees | Pro-rata rule for backdoor Roth |
| Roll over to new employer 401(k) | Transfer to your new job’s retirement plan | Keep everything in one place | Limited to new plan’s investments |
| Leave it in old 401(k) | Do nothing—money stays put | No action needed | Old plan fees, limited access, easy to forget |
| Cash out | Take the money as cash | Immediate access | Taxes + 10% penalty if under 59½ |
The Math on Cashing Out (Don’t Do This)
$50,000 401(k) Balance, Age 35, 22% Tax Bracket
| Option | Tax | Penalty | Net Amount | Lost Retirement Value at 65* |
|---|---|---|---|---|
| Roll over (no tax) | $0 | $0 | $50,000 | $0 |
| Cash out | $11,000 | $5,000 | $34,000 | $283,000 |
*Assuming 7% annual return for 30 years. That $50,000 would grow to $380,000.
Cashing out costs you $283,000 in lost retirement savings.
How to Do a Direct Rollover (Step by Step)
Rolling to an IRA
| Step | Action | Timeline |
|---|---|---|
| 1 | Open a traditional IRA at your brokerage (Fidelity, Vanguard, Schwab) | 15 minutes online |
| 2 | Call your old 401(k) plan administrator | Have plan number and SSN ready |
| 3 | Request a “direct rollover” to your new IRA | Specify the account number |
| 4 | Choose to send via check (made to brokerage FBO you) or wire transfer | Wire is faster |
| 5 | Verify funds arrive in your IRA | 3-10 business days |
| 6 | Invest the money (it may arrive as cash) | Same day you receive it |
Rolling to a New Employer 401(k)
| Step | Action | Timeline |
|---|---|---|
| 1 | Confirm your new employer’s plan accepts rollovers | Ask HR or plan administrator |
| 2 | Get new plan’s rollover instructions and account number | From new plan administrator |
| 3 | Contact old 401(k) administrator, request direct rollover to new plan | Provide new plan details |
| 4 | Complete any required paperwork for both plans | Varies |
| 5 | Verify funds arrive in new plan | 1-3 weeks |
Direct vs. Indirect Rollover
| Feature | Direct Rollover | Indirect Rollover |
|---|---|---|
| How it works | Money goes directly from old plan to new plan/IRA | Check is sent to you; you deposit it within 60 days |
| Tax withholding | None | 20% mandatory withholding |
| Deadline | None | 60 days to deposit |
| Risk | Very low | High—miss the 60 days and it’s a taxable distribution |
| Recommended? | Always | Almost never |
The Indirect Rollover Trap
If you receive a $50,000 distribution check from an indirect rollover:
| What Happens | Amount |
|---|---|
| You receive | $40,000 (after 20% withholding) |
| To avoid taxes, you must deposit | $50,000 (the full original amount) |
| Out-of-pocket to make up the difference | $10,000 |
| If you only deposit $40,000 | $10,000 is treated as a taxable distribution |
| Tax on $10,000 (22% bracket) | $2,200 |
| Early withdrawal penalty (if under 59½) | $1,000 |
| Total cost of the indirect rollover mistake | $3,200 |
Always choose a direct rollover.
Traditional 401(k) to Roth IRA Conversion
You can roll a traditional 401(k) directly into a Roth IRA, but you’ll owe income tax on the entire amount:
| 401(k) Balance | Tax Bracket | Tax Owed | Net Benefit Over Time* |
|---|---|---|---|
| $25,000 | 22% | $5,500 | Tax-free growth forever |
| $50,000 | 22% | $11,000 | Tax-free growth forever |
| $100,000 | 24% | $24,000 | Tax-free growth forever |
| $200,000 | 32% | $64,000 | Tax-free growth forever |
*Roth conversions make the most sense when you’re in a lower tax bracket now than you expect in retirement.
When a Roth Conversion Makes Sense
| Situation | Convert to Roth? |
|---|---|
| Between jobs (lower income year) | Yes—lower tax bracket |
| Early career (low income) | Yes—pay less tax now |
| Expect higher taxes in retirement | Yes—lock in today’s rate |
| Large 401(k) balance and high bracket now | Maybe—consider partial conversion |
| Near retirement with high income | Usually no—high tax cost now |
| Need the money within 5 years | No—5-year rule on conversions |
IRA vs. New 401(k): Which Is Better?
| Factor | Roll to IRA | Roll to New 401(k) |
|---|---|---|
| Investment options | Thousands of funds, ETFs, stocks | Limited to plan menu |
| Fees | Typically 0.03-0.20% | 0.05-1.0%+ |
| Backdoor Roth compatibility | NO—triggers pro-rata rule | YES—keeps IRA clean |
| Creditor protection | Varies by state | Federal protection (ERISA) |
| Loan option | No | Maybe (if plan allows) |
| Required minimum distributions | Starting at 73 | Starting at 73 (can delay if still working) |
| Simplicity | One account you fully control | Managed through employer |
The Backdoor Roth Rule
If you plan to use the backdoor Roth IRA strategy, do NOT roll your 401(k) into a traditional IRA. Roll it to your new employer’s 401(k) instead. Having pre-tax IRA money triggers the pro-rata rule, which makes backdoor Roth conversions partially taxable.
Special Situations
Employer Stock in Your 401(k) (Net Unrealized Appreciation)
If your 401(k) holds employer stock, consider Net Unrealized Appreciation (NUA):
| Feature | NUA Strategy | Regular Rollover |
|---|---|---|
| How it works | Transfer employer stock to taxable account; pay income tax only on cost basis | Roll everything to IRA; all growth taxed as ordinary income |
| Tax on growth | Long-term capital gains (15-20%) | Ordinary income (up to 37%) |
| Best when | Large appreciation in employer stock | Stock hasn’t appreciated much |
Roth 401(k) Rollover
| From | To | Tax Implications |
|---|---|---|
| Roth 401(k) | Roth IRA | No tax (Roth to Roth) |
| Roth 401(k) | Traditional IRA | Not allowed |
| Roth 401(k) | New Roth 401(k) | No tax (if plan accepts) |
Multiple Old 401(k)s
| Number of Old Plans | Best Approach |
|---|---|
| 1 old 401(k) | Single rollover to IRA or new plan |
| 2-3 old 401(k)s | Consolidate all into one IRA |
| 4+ old 401(k)s | Definitely consolidate—too many to track |
Common Rollover Mistakes
| Mistake | Consequence | How to Avoid |
|---|---|---|
| Choosing indirect rollover | 20% withheld, 60-day deadline | Always request direct rollover |
| Missing the 60-day deadline | Full amount taxed + 10% penalty | Use direct rollover |
| Forgetting to invest the cash | Money sits in cash, missing market gains | Invest immediately after rollover |
| Rolling to Roth without tax planning | Unexpected large tax bill in April | Calculate tax impact first |
| Keeping it in old plan forever | Forgotten accounts, higher fees | Consolidate when you change jobs |
| Cashing out instead of rolling over | Taxes + penalties + lost growth | Roll over, period |