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Any amount withdrawn is subjected to federal, and possibly state and local, taxes.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.

As of 2008, 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 problems 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. 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.

Get up to $600 with a new OptionsHouse IRA

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.

Alternatively, you can use the following service to help with your rollover:

Betterment offers a set-it-and-forget-it investment service that allows you to rollovers into both Traditional and Roth IRAs. With a fee of only 0.15% to 0.35%, Betterment empowers you to put more of your hard-earned income toward a comfortable future.

About the Author

By , on Jun 7, 2013
Pinyo
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 have enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (181 Comments)

  1. AARP Guy says:

    Pinyo,
    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).

  2. 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

    • 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.

      Russ

  3. 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!

      Russ

  4. RANDY says:

    Have 401k plan with securian investment with the company i work for .Want to know when i turn 59 1/2 can i use a in service distriution form to pull all my money out and put it into vanguard investment .if i still work the company /and how long to i have to do this .What is step by step process to do this .And why is it that company you work will not tell about this .Look for your reply

    THANK YOU

    • Pinyo says:

      @Randy – You have to call the plan administrator. In service distribution is an optional feature. If your plan administrator allows it, then you have it.

  5. alex villanueva says:

    I got laid my job in 2008 and i have $3,000 on my 401K with my last employer, I roll over my 401k to IRA to Merrill Lynch ever since. My question is, Is my money gain interest if I just leave it there?

    • Pinyo says:

      You have to invest the money in something. If it’s just sitting there, it’s earning very little interest, if any.

  6. Chyi says:

    Hi Pinyo,

    I am a non-resident alien and currently holding H1-b visa. I have around $6k in my 401k.

    If I plan to leave the country for good in the 3 months, what’s my best option?

    I understand that I could roll it over to IRA or cash out,
    1. How much of penalty I should expect if I cash it out.
    2. If I roll it over to a broker, would I be taxed? And says if I roll it over, 10 years later I want to withdraw it, would I get 30% income tax rate + 10% early withdrawal penalty as well?

    Thanks for your time, is a great blog!

  7. Investor says:

    At my retirement age of 66 I would like to continue working but transfer (rollover) my 401k into an IRA on a monthly or quarterly basis. Are there any issues with this?

  8. Rebecca says:

    I have about 5k in a 403b account from an old job I need to move, preferably into an IRA where I have the most flexibility in choosing my investments. I am particularly interested in bio pharmaceutical research and development companies. This money is not crucial to my retirement fund as I will have a generous pension and contribute the max to my 401k annually. Is there a IRA option that will give me control without paying penalties? What questions should I be asking? I need to move the money by 11/30!
    Thank you

    • Pinyo says:

      @Rebecca – talk to your old job about the rollover process. Typically, you can open an IRA account with any broker, then request your former employer to transfer the money from you 403b plan to the IRA account using a direct transfer (trustee-to-trustee). There shouldn’t be any penalty involved, but your former employer or the broker may charge a fee (not typical), and there may be some redemption fee for some of investments held in your 403b plan.

  9. Donna says:

    Hello,

    My son is a freshman in college, and my daughter is a junior in high school. We did not qualify for any type of financial aid for my son and have approximately three years worth of college expenses (tuition, room and board, etc.) in his PA 529 account. I anticipate that my daughter will probably be attending a more expensive school and that we only have a little less than two years of college expenses in her 529 account.

    We have always been relatively good savers, and have too much money in non-sheltered accounts (a non retirement Fidelity account, a couple DRIP stock accounts, etc.) to receive government aid (it is not that we make an enormous amount of money, just that we are penalized for not wasting it (that’s a whole ‘nother rant, lol)) . These accounts are relatively old and the tax consequences of liquidating them will be hard to absorb.

    I just work part time and have an old 401K account from an old job with approximately $100K in it. I was just reading and it sounds like if I rolled my 401K into an IRA, I am allowed to withdraw money for college expenses. Are the tax consequences the same as say selling some personally held stock? Do you have an suggestions on what would be the best avenue to pursue to liquidate more funds for college expenses?

    Thanks for your advice,
    Donna

    • Pinyo says:

      Hi Donna – Yes, you can rollover to an IRA and withdraw it for educational purpose. You don’t have to pay the early withdrawal penalty, but you still have to pay income taxes. That said, it’s not advisable. If you want to go this route, I suggest you talk to a CPA.

      A better option (in my opinion), is to discuss this with your son and daughter to see if they are willing to spend less for their college education. Also, ask if they are willing to share the money between the two accounts so that both of their 4 years education would be covered. I think this teaches them a much more important life lesson than any college education could.

      Also, this would not put your own retirement in jeopardy.

  10. Srini Siva says:

    I have 401K account with my company. It is setup in such a way that I can buy/sell any security ( not just few mutual funds ). I liked that setup because it gives you the power to invest in companies that I feel are worth investing. But now, they are moving to a typical 401K setup with just few mutual funds to trade. They are asking us to liquidate the assets and move to the new setup. But I like the portfolio I have built so far. Is there any way I can move those securities to a different account so that I don’t have to liquidate? I like the company and am still employed in that company. Thanks.

  11. viridianne says:

    hi, i am now a single mother without a job but have a 401k from my last job of nearly $9,000. Id like to know if i should cash it all or would a loan feel better for me until i can get a job. My baby needs milk and diapers still plus all my bills are pilling up on me…

    • Pinyo says:

      @viridianne – I’m sorry about your situation. If it’s me in your shoes, I’d take out a loan (e.g., from a bank, or Lending Club) and try to figure out what to do. If you cash out your 401k, you will have to pay taxes and 10% penalty (for sure). You might be able to do a hardship withdrawal, if your former company allows it, but you’d still have to pay taxes.

      Also, are you already getting aids from the government? Another idea is to use cloth diapers (not the fancy ones, just a square piece of cloth). It’s a little messy, but some parents do make them work.

  12. Tom says:

    I was recently separated from my employer and have a 401k and a supplemental exec retirement plan. I am planning to roll over the 401k to an IRA. The employer is going to send me a check for the supplemental retirement plan..(est 60k).. Question.. What options do I have to minimize the impact of just depositing the check? Should i ask for a Trustee-to-Trustee Transfer (Direct Transfer) to an IRA? Thank you

    • Pinyo says:

      @Tom – Supplemental Executive Retirement Plan (SERP) are non-qualified plan. I believe it works like a big regular paycheck. You’ll have to pay taxes on it and you can use the money however you wish. You can also reduce your tax burden the same way you do with your normal paycheck. If you haven’t max out your 401(k) for the year, you can ask if you could max out your 401(k) using SERP money (assuming you don’t need the money).

      To be sure, check with your HR department for advice.

  13. Red says:

    I am currently switching jobs from one Credit Union to another. My new job has informed me that there is a rule governed by the IRS that they cannot start matching funds until after 1 yr. of employment. Is that correct?

    • Pinyo says:

      @Red – I looked at a few places including the IRS web site just to confirm my original understanding. The IRS doesn’t impose the timing of the matching contributions, that’s really depends on your employer. As long as the rule is uniform, they can impose a 1 year delay if that is what they want to do.

  14. chris golicic says:

    hi. i recently was fired from my job of 13 years. i put very little in my 401k, seeing as though i live paycheck to paycheck with my wife and two kids. got another job but behind on bills. car got reposessed and need money now. have 13000.00 vested but cant touch it till feb 2014. can i get a loan or anything? dont care about penaties taxes etc, need money now or will be carless and jobless and eventually homeless. help?

    • Pinyo says:

      @Chris – Sorry about your situation. I am not sure about the details as to why you can’t touch it until Feb 2014. Assuming you can take money out from your 401(k) at that time, you will have to pay taxes and early withdrawal penalty, e.g., you’ll probably lose about 35% leaving you with about $8,500. In the mean time, you can look for personal loan that will get you by until you can get your hand on that money. Here’s an article to help you find a personal loan: http://www.moolanomy.com/4297/.....-mriddix2/

      I hope this helps, and good luck!

      • chris golicic says:

        thanks for your time, however my poor credit rating going years back got me into this mess in the first place (paying 399.00 a month for a 2005 toyota Rav 4 wasnt by choice), leaving me untouchable by any lender. the only asset i have is that 401k, which i cant withdrawl until 1 full year after my firing date. im told by them 10% penalty and 20% tax. if i could access that $ now or somehow get a loan (family/friends not an option) with that as the payoff i could buy a reasonable car that i dont have to make an exorbitant monthly payment i may be able to catch up on my bills and get to and from work. any other options for me? im desperate. ive been allowed for the last few days to take a work van home but that wont be allowed to go on much longer at all, and my employer frowns on unreliable transportation. ugh.

      • Pinyo says:

        @Chris – how old are you? Also, what’s wrong with the Rav 4 and why are you still paying for it? Are you thinking about replacing it with a cheaper car?

      • chris golicic says:

        41years old. the rav 4 has been repossesed. im completely carless.

      • chris golicic says:

        also, yes. acompact car that will last and is good on gas milage. one that doesnt cost an arm and a leg and will eventually let me get my head above water seeing as i wont have a monthly paymnent.

  15. Jazzmine says:

    I have recently left my employer to pursue graduate education and would like to rollover my 401k to an IRA in order to withdraw from it for education-related expenses. How should I go about this?

    • Pinyo says:

      @Jazzmine – If you can get your education without tapping into your retirement savings, I’d highly recommend you do it that way. You can certainly rollover into an IRA, then withdraw for educational expenses. Only some expenses are eligible. I recommend you take a look at this: http://www.irs.gov/publications/p970/ch09.html and consult with a tax advisor.

    • Torrie says:

      I’m curious what you ended up deciding about this. I am thinking of doing the same thing, rolling over 401k into IRA to fund graduate school expenses.

  16. jean chapman says:

    I have a client who rolled over his 401K into an IRA, and then rolled over the IRA to a Solo 401K. I can’t find anything that says he can or can not do that. What do you think?

    • Pinyo says:

      @Jean – I have rolled over my 401k to an IRA, I have rolled over SIMPLE IRA into an IRA, I have converted a Traditional IRA into a Roth IRA, and I have a Solo 401k — but I have never rolled over an IRA into a Solo 401k. Apparently, it is allowed according to this:

      “Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans).”

      Source: http://www.broadfinancial.com/.....1-k–

  17. Rose says:

    I have a loan against my 401k that I’m halfway done paying off. I just got a new job that also has a 401k plan. If I transfer it over to the new plan, does the loan transfer as well? If not, how is the loan reconciled? The original amount was about $3000 and I have about $1500 to finish paying.

    • Pinyo says:

      @Rose – Unfortunately, you have to come up with the $1,500 and pay back the loan. Check with your plan administrator to see how much time you have to do this. If you don’t have the money, you have to find a way to get a loan from somewhere else (to repay the 401k loan), or pay the taxes and early withdrawal penalty on the balance.

  18. Tom says:

    Hello Pinyo,

    My goal is to keep contributing to my 401K while keeping the same mix of investment provided by my previous company’s 401K plan account.I have company stocks also in the investment mix. I can’t contribute now coz i am not with the company anymore.
    What are my options?

    Thanks in advance!
    Tom

  19. Sirknight says:

    Recently , my company was bought out by another and then asset dissolved. I continue to work under the new company but will soon receive the former company’s retirement benefits package as a direct trustee to trustee rollover to an IRA recipient. I am still deciding plans meanwhile on where to invest the amount . Initially it will be as a lump sum ….lets say $ 70,000.

    Can that lump sum be split into two amounts…say $ 35,000 each and directed to two different investment groups,….say Schwab , and say…T Rowe Price, so as to invest in two IRA accounts? instead of using in just one?

    • Pinyo says:

      @Sirknight – That’s depend on your plan administrator. If they allow it, then yes you can split it. But why would you want to do that? Splitting it would mean extra work to administer the two accounts.

  20. keith says:

    HI i recently left my job and have a small 401k account 2000 and am having trouble with bills till receiving my first full paycheck would I be better to cash out the 401 or roll it over into a ira and withdraw from that.

    thanks

    • Pinyo says:

      @Keith – I normally advise against taking money out of 401k account to pay bills. However, you know your situation best and if you feel it makes sense to pay taxes (which you normally pay anyway) and the 10% penalty, then go ahead and do it.

  21. Lynn Garlipp says:

    Great site! I am 62, retired and have $70,000 in a 401K. I just took out a mortgage for $60,000. And would like to withdraw from the monies on a bi-monthly basis to pay mortgage. Is the best way to do this to open a Roth? Trying to has the least impact on paying taxes. Thank you

    • Pinyo says:

      @Lynn – You’re over 59.5, so you can withdraw from your 401(k) without incurring an early withdrawal penalty. Unfortunately, you have to pay taxes on your 401(k) — you can avoid it. The good news is that you can turn around and claim mortgage interest deduction when you file your tax returns.

  22. Kimya says:

    I have been left in a situation where I need to take money out of my 401K after being fired from my job. I have no choice but to do this. The CSR that works for the 401K company explained that I could roll my money over into a ROTH and then withdraw it and I would be able to withdraw the full amount without paying taxes immediately. (He stated that I would have to pay taxes in the future). Is this true?

  23. Martin Registrada says:

    Hi, I retired about a year ago and need to roll my 401k over to an IRA (traditional). Some after-tax money is in the form of company stock, which I know I must liquidate.

    Should I first sell shares with the lowest basis? What are the pros and cons of the “bottom up” and “top down” approaches? Thank you for your help.

    • Pinyo says:

      @Martin – I don’t think you can choose to liquidate the shares with lowest basis first. It’s usually the average or the FIFO method (oldest shares are sold first). That said, you might be able to rollover your shares without liquidating (check with your plan administrator).

  24. Jill Adlawan says:

    I got laid off my job in 8/2011 and have a 401K ($60K) with my employer. I don’t have job yet & want to rollover the 401K to a Roth IRA. I’m 60 years old. I bank with a credit union and recently went to a financial advisor. He told me I would be in a better position financially with a Roth IRA because I would have better options and diversification with my money plus the fact I’m in lower tax bracket now. I could do this before 4/17/2012 so I could file it in 2011 when still working. I hope this makes sense because I’m still looking into my options with the Roth IRA rollover. Also, would I have my former employer make the rollover check out to the credit union to put into Roth IRA account?

    Thanks for any advice you can offer.

    Jill

    • Pinyo says:

      @Jill – Rolling over to an IRA is probably the right decision. The choice between Traditional IRA vs Roth IRA really depends on how much taxes you expect to pay now vs. at the time of withdrawal. If you are the 15% tax bracket or higher now, I’d suggest rolling over into a Traditional IRA so that you don’t have to pay additional taxes — you’ll be taxed when you withdraw the money, but you can control that better than paying taxes on $60k all at once.

  25. Jack Snipes says:

    I have money in a ROLLOVER IRA. What are the rules if I want to withdraw money to purchase a home as a first-time home buyer?

    Thank you, great site, very informative.

    JS

    • Pinyo says:

      @Jack – For home purchase, I believe you can withdraw upto $10,000 (without the 10% penalty) but you still have to pay taxes on the amount.

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