401k Rollover Options: How to Transfer Your 401k Fund

When you leave a job where you have contributed to a 401(k) plan, you have three options for the money: Cash out your 401(k), keep it in your current plan, or move it to another qualified retirement account. A qualified retirement account can be your new employer’s 401(k) plan, a Traditional IRA, or a Roth IRA. The action of moving money out of your current 401(k) plan to a new qualified account is called a rollover.

Who is Eligible for a Rollover

You are eligible for a rollover when you leave your job, voluntarily or involuntarily. Some plans also offer what is called an “In Service 401(k) Distribution,” which allows you to rollover your 401(k) fund even while you are still working.

Your Options

Before going through with a rollover, you should consider your options carefully.

1. Cash Out Your 401(k): A BAD idea

Don’t do it. This is the worst thing you could do with your 401(k). When you cash out your 401(k), you are taxed on the withdrawal and potentially penalized.

Any amount withdrawn is subjected to federal, and possibly state and local, taxes. The increased income could also push you into a higher tax bracket. Also, you may be subject to a 10% early withdrawal penalty if you are younger than 59 1/2. Assuming an effective combined federal and state tax rate of 35%, a $100,000 cash out could cost you $45,000 in taxes and penalties, leaving you with only $55,000.

2. Keep Money in Your Current Plan

Typically, you only want to do this if your current plan offers great investments at low costs. Check with the current plan administrator to see if this is an available option for your plan. If it is, ask if there are extra fees for keeping your money in the current plan, and if you can roll the plan over down the road if you change your mind. If everything checks out, work with your current

3. Rollover to Your New 401(k) Plan

If you have access to your new employer’s plan right away, and it offers great low-cost investments, then this might be a good option for you. To rollover into your new plan, work with the new plan administrator to coordinate the process.

4. Rollover to an IRA (usually the best option)

Compared to the options above, a rollover to an IRA is usually the best option. You can usually lower your investment expenses and gain access to a much wider variety of investment options. You can even switch among the many different brokerage firms to take advantage of different investment options, tools, features, prices, fees, and other benefits.

Personally, I use TradeKing and TD Ameritrade; and both of them have representative that helped me rollover my 401(k) into my IRA account.

Also, you also have the option of converting your 401(k) to a Roth IRA, which allows your retirement savings to grow tax-free.

Tax Implications

We already discussed what happens if you cash out your 401(k) — not good!

When you keep your 401(k) in your current plan, roll it over to your new employer’s plan, or rollover to a Traditional IRA, there are no tax liability as long as you do it right; make sure you use a trustee-to-trustee transfer  (also called a direct transfer, see below).

A rollover from a Traditional 401(k) to a Roth IRA does trigger a taxable event, however. It will increase your taxable income, and potentially bump up your tax marginal rate into the next tax bracket.

  • If you anticipate high taxable income this year, it might be worthwhile to hold off on the rollover to a Roth IRA. You can either keep your money in your current employer’s plan (if you are allowed a rollover at a later date), or rollover to a traditional IRA, and then convert it to a Roth IRA later.
  • Rollover into a Roth IRA does not increase your Modified AGI, so your ability to contribute to an IRA should not be impacted by the rollover. (See clause 1b under Modified AGI on the IRS.gov web site)

How to Rollover Your 401(k) to an IRA

Now that you’ve decided on the 401(k) rollover to IRA option, here is what you need to do:

  1. Open an Individual Retirement Account (IRA) with any financial institution that offers an IRA. A good choice is one of the many discount brokers — my personal favorites are TradeKing and TD Ameritrade. In general, you want to pick the investment company that offers the type of investments you want, and that are accessible at low trade commissions and fees.
  2. Inform your employer that you want to rollover to an IRA. Make sure your employer makes the check payable to the investment company that you choose. This is called a trustee-to-trustee transfer, and it helps you avoid the automatic 20% tax withholding (see below).
  3. Invest Your Money. Once the transfer is complete, your money will sit in some sort of interest bearing investment account, such as a money market account, with a very low yield. You will have to invest your money according to your asset allocation plan. The exact investment options you have depend on your broker. In general, you want to invest in a well-diversified portfolio of low cost and passively managed mutual funds (try index funds) and ETFs.

Trustee-to-Trustee Transfer (Direct Transfer)

Trustee-to-Trustee transfer is an instruction to your plan administrator to send money directly to your new 401(k) plan, or to your IRA custodian. In the event that you fail to specify this action and an indirect transfer occur, i.e., the check is made out to you instead, several things happen:

  • You current plan will automatically withhold 20% of the fund. Assuming it’s a $100,000 transfer, you will receive an $80,000 check.
  • You will have to come up with the additional $20,000 and deposit the full $100,000 into the new 401(k) plan or IRA account within 60 days. If you only deposit $80,000, the remaining $20,000 will be treated as a withdrawal (and subjected to taxes and penalties as explained in Cash Out option above). If you fail to deposit any of the money within 60 days, the entire amount is considered withdrawn.

Bottom Line

If you are facing this decision, consider performing a 401(k) rollover to IRA to take advantage of the opportunity to lower your costs and gain greater flexibility. Remember to research the investment company well before you open an IRA with them, and do your due diligence when selecting your investments. If you are uncertain, it’s usually a good idea to consult a professional to help guide you through this process and answer your questions.

About the Author

By , on Dec 18, 2016
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (188 Comments)

  1. Danny says:

    Got layed off have to put my 401k somewhere looking for advice around 23000.00

  2. MarsBars says:

    My wife was let go after 20 yrs.(due to medical) on 9-25-2012. Her employer did not release her 401k, profit sharing and safe harbor until after 12-31-2013. We rolled this over to an annuity. Shouldn’t the funds have been available on 12-31-12?
    He is with Vanguard group and showing a loss of 16% for 2013 year.

  3. AARP Guy says:

    Kudos to you for your replies 2 years after original write up of this story.
    I am not happy with my current IRA Brokerage account. It is too trade restrictive.
    I have around 400k I would like to do an in service transfer to another provider.
    Can I do this now? Can I do this at 55?

    • Pinyo says:

      @AARP Guy – You can transfer your IRA to another brokerage account. That’s not a problem. Talk to your new brokerage firm and they should be able to assist you. In service transfer is only necessary if you’re transferring 401(k).

  4. Russ Kidd says:

    Hi, Pinyo,

    I plan to roll most of my 401(k) with my current employer to a traditional IRA, which is permitted by our 401(k) trustee (John Hancock) for anyone over 62 (I’m 69). I would like to distribute the money to several mutual fund companies.

    In IRS Publication 590, it says you’re only permitted to make one tax-free rollover per year. I want to be sure that sending the money to several different mutual fund companies (simultaneously) will not be considered more than one rollover. Thanks for your help.


    • Russ Kidd says:

      Well, this is embarrassing. I just found the answer to my question. IRS Publication 590 (page 27, next-to-last paragraph) says: “The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. You can roll over more than one distribution from the same employer plan within a year.”

      Sorry for the false alarm.


  5. Andrea says:

    I’m probably asking the same question as prior commenters but I’ll take a go at it either way. I just got laid of from my job and do not really have much invested in my 401k. I have about $8,500 with a $1900.00 loan still left. I’m interested in rolling it over into an IRA instead of pulling out and paying all the fees. Would I still be able to—-lets say to place it into another company’s 401k (if available, when applicable)later down the line.
    Basically when I do get another job, or would I have to keep it in the invested IRA?

    • Russ Kidd says:

      Andrea, there’s an article above that covers exactly what you’re asking. Scroll up a little to just before where the Comments begin, and find the heading “Read Another Article.” The second listing under that heading addresses your question (“What Should You Do With Your 401(k) When You Get Laid Off?”).

      In almost all cases, rolling over your 401(k) to an IRA is the best way to go. That way you’ll have pretty much unlimited choices of what to invest in. If you keep the money in the 401(k) plan, you’re limited to the funds offered by that particular plan. When I changed jobs a few years ago, I rolled over my 401(k) from my old employer to an IRA and it’s worked out beautifully.

      Another benefit of going the IRA route is that you’ll probably reduce the annual expenses you’re charged. I rolled my 401(k) to Fidelity, which is one of the low-cost, no-load mutual fund companies. But I also have an IRA account with Vanguard, which is the other major no-load, low-cost fund family.

      The safest way to do the rollover is to call Fidelity or Vanguard and tell them you want to roll your 401(k) into an IRA with them. They will lead you through the process and take care of everything. There’s no charge for any of this service. And by having them take care of the transaction, you’ll keep the IRS happy and won’t trigger any taxes.

      As for your question about possibly putting that money into the 401(k) of a new employer in the future, I wouldn’t recommend that. You’d be limiting yourself to whatever choices that new plan offered.

      You can have as many IRA accounts as you want in addition to a 401(k) with your employer. I have a 401(k) with my current employer, but I also have IRAs with Vanguard, Fidelity, T. Rowe Price, and Interactive Brokers. In my opinion, the more money you can move into the IRAs, the better.

      Good luck!


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