The four options at a glance
| Option | Best when | Watch out for |
|---|---|---|
| Leave it in the old plan | You retired at 55+ and need withdrawals before 59½, or the plan has excellent low-cost funds | Limited investments, plan rules on withdrawals, scattered accounts |
| Roll to an IRA | You want more choice, consolidation, and flexible withdrawals | Losing the Rule of 55 and NUA; backdoor Roth pro-rata issues |
| Move to a new employer’s plan | You are still working and want to delay RMDs or keep IRA balances clean | The new plan’s fees and fund menu; not all plans accept roll-ins |
| Cash out | Rarely; only small balances or true emergencies | Income tax, 20% withholding, and a 10% penalty if under 59½ without an exception |
Five questions to answer before you move anything
1. Will you need the money before 59½?
If you leave your job in or after the year you turn 55, the Rule of 55 lets you withdraw from that employer’s 401(k) without the 10% penalty. The exception does not follow the money to an IRA. Many early retirees keep enough in the plan to cover spending until 59½ and roll the rest.
2. Do you own your employer’s stock in the plan?
If the shares have grown well above their cost, net unrealized appreciation (NUA) treatment can tax that growth at long-term capital gains rates instead of ordinary income. Rolling the shares to an IRA gives that up permanently, so decide on NUA first.
3. Do you have after-tax money in the plan?
After-tax contributions can usually be sent to a Roth IRA while the pre-tax balance goes to a traditional IRA, in the same distribution. Done correctly, those dollars grow tax-free from then on.
4. Do you make backdoor Roth contributions?
A large pre-tax IRA balance makes backdoor Roth conversions mostly taxable under the pro-rata rule. Money in a 401(k) does not count, which can be a reason to leave it there or move it to a new employer’s plan.
5. Are you still working?
If you are still employed and do not own more than 5% of the company, you can generally delay required minimum distributions from your current employer’s plan until you retire. Rolling an old 401(k) into the current plan can extend that delay to the old money too. IRAs have no such exception.
How to move the money without a tax surprise
Always ask for a direct rollover, paid straight to the new custodian or plan. If the plan pays you instead, it must withhold 20% for federal tax, and you have 60 days to deposit the full amount.
| Indirect rollover of a $500,000 balance | Amount |
|---|---|
| Distribution | $500,000 |
| Withheld for federal tax (20%) | −$100,000 |
| Check you receive | $400,000 |
| To roll over the full amount within 60 days, you must add from other savings | $100,000 |
Hypothetical. If only $400,000 is redeposited, the missing $100,000 is taxable and may face the 10% penalty if you are under 59½ and no exception applies. The withholding is credited when you file.
Two more details: plan-to-IRA rollovers are not limited by the once-a-year rule that applies to IRA-to-IRA rollovers, and an outstanding 401(k) loan that is offset when you leave can generally be rolled over by your tax-filing deadline, including extensions, if you can come up with the cash.
Leaving a job or retiring soon?
Before you sign the rollover paperwork, we’ll check the Rule of 55, NUA, after-tax money, and backdoor Roth issues, and map where each dollar should go.
Schedule a call →Fees, investments, and protection from creditors
Large 401(k) plans sometimes offer institutional share classes that are cheaper than what an individual can buy in an IRA; smaller plans can be more expensive. Compare the all-in cost of your current plan with what you would pay in an IRA, including any advisory fee.
401(k)s covered by ERISA generally have strong federal protection from creditors. IRAs are protected in federal bankruptcy, and money rolled over from an employer plan generally keeps that protection without the dollar cap that applies to contributory IRAs; outside bankruptcy, IRA protection depends on state law.
A note on advice
Anyone who recommends a rollover, including an investment adviser like us, may earn more if your money moves to an account they manage. Ask any adviser to explain in writing why a rollover is in your best interest compared with leaving the money where it is, including the costs of each option.
Pennsylvania residents
Pennsylvania generally does not tax a direct rollover between retirement accounts, or employer plan payments once you have met the plan’s retirement conditions and retired. IRA withdrawals before 59½ can be taxable in Pennsylvania on the amount above your contributions. See our Pennsylvania retirement tax guide.
Frequently asked questions
What are my options for a 401(k) when I retire or leave a job?
You generally have four: leave the money in your former employer’s plan (if the balance is large enough), roll it into an IRA, move it into a new employer’s plan if that plan accepts roll-ins, or cash it out. You can also combine them, for example rolling part to an IRA and leaving part in the plan, if the plan allows partial distributions.
Should I roll my 401(k) into an IRA?
Often, but not always. An IRA usually offers more investment choice and simpler consolidation. Leaving money in the plan can be better if you retired in or after the year you turned 55 and may need withdrawals before 59½, if the plan has very low-cost institutional funds, if you plan backdoor Roth contributions, or if you hold appreciated company stock that could qualify for NUA treatment.
What is the difference between a direct and an indirect rollover?
In a direct rollover, the plan sends the money straight to the IRA or new plan, with no tax withheld. In an indirect rollover, the plan pays you, withholds 20% for federal tax, and you have 60 days to deposit the full amount, including the withheld 20% from other funds, or the shortfall becomes taxable and possibly penalized. A direct rollover avoids that risk.
Is a 401(k) rollover taxable?
A direct rollover from a pre-tax 401(k) to a traditional IRA or another pre-tax plan is not taxable. Rolling pre-tax money to a Roth IRA is a Roth conversion and is taxable as income. Pennsylvania generally does not tax a rollover between retirement accounts.
What happens to after-tax money in my 401(k) when I roll over?
If your 401(k) includes after-tax contributions, you can generally direct the pre-tax money to a traditional IRA and the after-tax contributions to a Roth IRA as part of the same distribution, so those contributions can grow tax-free. Earnings on the after-tax money are pre-tax and go to the traditional IRA unless you choose to convert them.
Does rolling over a 401(k) affect a backdoor Roth IRA?
It can. The pro-rata rule counts all your traditional, SEP, and SIMPLE IRA balances at the end of the year when calculating the tax on a Roth conversion. Rolling a large pre-tax 401(k) into an IRA can make a backdoor Roth contribution mostly taxable. Money left in a 401(k) is not counted.