401(k) Rollover to an IRA

You can roll your 401(k) funds over to an IRA when you leave a job using either a direct or indirect rollover. By rolling over to an IRA instead of another 401(k), you’ll have more control over your investments and fees.

Written by Erin Gobler / July 21, 2022

Quick Bites

  • A 401(k) is a workplace retirement plan that allows employees to save and invest for retirement in a tax-advantaged way.
  • An IRA is a retirement plan that’s offered by brokerage firms and managed by individuals rather than being offered through an employer.
  • When you leave a job—and sometimes when you’re still at a job—you can roll your 401(k) funds over into an IRA using a direct or indirect rollover.

A 401(k) plan is an excellent way to save for retirement in a tax-advantaged way. But you may find yourself wondering what happens to that money when you leave your job.

When you leave a job, you’ll have several options regarding what to do with the money in your 401(k). Some of the choices include leaving the money where it is, moving it into the 401(k) plan with your new employer or cashing it out. However, one of the most popular options is to roll your 401(k) funds into an IRA. We’ll explain more in this article.

Inside this article

  1. How does a 401(k) work?
  2. How does an IRA work?
  3. How to rollover your 401(k)
  4. When to rollover your 401(k)
  5. Who should roll over a 401(k)
  6. FAQ

How does a 401(k) work?

A 401(k) is an employer-sponsored retirement plan offered by many for-profit companies in the U.S. Using this type of plan, workers can defer a percentage of their paychecks into the plan. Those funds are then invested, often in diversified mutual funds.

There are two types of 401(k) plans: traditional and Roth. With a traditional 401(k), workers can contribute pre-tax dollars, which then grow tax-deferred in the account and are subject to income taxes during retirement. With a Roth IRA, workers invest with after-tax money, but then enjoy tax-free growth and tax-free distributions.[1]

In addition to the employee’s contributions, an employer may also contribute to its workers’ accounts. These contributions are often made as matching contributions up to a certain percentage of an employee’s salary.

“Typically, there is a time requirement set by the company before a worker fully owns the contributions made by the employer, which is known as a vesting schedule,” says Antonio Tovar, a Certified Financial Planner and wealth manager at Stone Wealth Management. “However, contributions made through the employee’s check deferral will always be owned by the employee immediately.”

How does an IRA work?

An individual retirement account (IRA) is another type of retirement plan that allows workers to save for retirement. Unlike 401(k) plans, IRAs aren’t offered or managed by employers. Instead, they are individual accounts that anyone can open with a brokerage firm.[2]

Just like with 401(k) plans, individuals can make either traditional or Roth contributions to their accounts. However, there are more restrictions on who can use these accounts.

Anyone can contribute to a traditional IRA, but high-income earners may not be eligible to deduct their contributions if they also have access to a workplace retirement plan.[3] Similarly, someone may not be allowed to contribute to a Roth IRA if their income exceeds certain limits.[4]

Once money has been contributed to an IRA, it can be invested in nearly anything. Brokerage firms generally offer a much larger selection of investments in IRAs than you’re likely to find in a 401(k) plan.

How to rollover your 401(k) to an IRA

As we mentioned, one of the options available when you leave your job is to roll the balance over to an IRA plan. There are two different ways you can do this:

  • Direct rollover: The simplest way to roll your 401(k) balance to an IRA is to have your 401(k) administrator make a payment directly to your IRA plan. To initiate this type of rollover, simply ask your 401(k) administrator to send a check to your IRA plan. Your IRA administrator can provide instructions on where to send the check.

  • Indirect rollover: If a direct rollover isn’t an option, you can use an indirect rollover where your 401(k) plan administrator sends a check made out to you with the balance of your account. You then have 60 days to deposit that amount into your IRA to avoid being subject to income taxes.[5]

When to rollover your 401(k) to an IRA

In most cases, you’ll do a 401(k) rollover to an IRA when you leave a job. In fact, many employers don’t allow you to roll over your funds while you’re still with the company.

The good news is that when you leave a job, the timing is flexible as to when you roll the funds over. Many employers allow you to leave money in the plan indefinitely after you leave, meaning you won’t have to initiate the rollover right away. Of course, this isn't always the case. Some employers can’t manage accounts for old employees, and in that case, you’ll have to move your funds.

While rollovers are most common when you leave a job, some employers also allow you to roll over funds while you’re still with the company. Ultimately, it comes down to your employer's rules.

“Each 401(k) plan can be different, so it is important to contact your plan administrator for additional questions and details,” Tovar says.

Who should roll over their 401(k) to an IRA

In most cases, you should roll over your 401(k) balance when you leave a job. The most common options are to roll your balance over to a new 401(k) plan or an IRA. By choosing an IRA, you’ll have more control over your investments and your fees.

“Depending on the investment choices they have within their 401(k), it might be possible to save on internal investment expenses and have more direction and control over their options,” Tovar says.

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401(k) plans usually have a limited menu of investment options that are primarily made of mutual funds. These plans also often have expensive fees that cut into your returns. IRAs, on the other hand, have a much wider variety of investment choices. And because you have more investment choices, you have more control over your fees.

That being said, an IRA isn’t right for everyone. For those who don’t want to choose their own investments, the limited menu and administrative services that come with a 401(k) plan might be preferable.

“​​People should take into consideration the benefits and drawbacks of rolling over a 401(k) into an IRA,” Tovar says. “The burden of making the investment decisions would then fall onto the individual and with the funds intended for retirement living, the funds require appropriate decision making and care.”


What are the tax consequences of rolling a 401(k) into an IRA?

If you roll your traditional 401(k) contributions into a traditional IRA, there won’t be any tax consequences. But if you roll your traditional contributions into a Roth IRA, you’ll have to pay income taxes on the amount you roll over.

Can I roll over my 401(k) to an IRA without leaving my job?

In most cases, you can only roll over your 401(k) funds to an IRA once you leave a job or the employer discontinues the plan. However, some employer plans may allow for 401(k) rollovers while you’re still working there.

Is it better to roll over my 401(k) to a new employer or to an IRA?

Whether it’s better to roll your 401(k) into a new 401(k) plan or an IRA depends on the investment options available and the fees the 401(k) plan charges.

Article Sources
  1. “401(k) Plan Overview.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-401k-plan-overview.
  2. “Individual Retirement Arrangements (IRAs).” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022.
  3. “IRA Deduction Limits.” IRS https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022.
  4. “Amount of Roth IRA Contributions That You Can Make for 2022.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022.
  5. “Rollovers of Retirement Plan and IRA Distributions.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

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