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401(k) Rollover: Options & How To Roll Over to an IRA

Updated: May 18, 2022Written By: Marcia WendorfReviewed By:

Knowing the rules for rolling over funds in a 401k account into an IRA can keep you from leaving money on the table.

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401k Basics

A 401k plan is a company-sponsored retirement plan where employee contributions reduce the employee's taxable income. For example, an employee earning $100,000 who contributes $10,000 to their 401k would only be taxed on $90,000 in salary. Most 401k plans allow participants to select from among several investment options, most of which are mutual funds or ETFs.

The money in a 401k account grows tax-free, and can be withdrawn once an employee turns 59.5 years of age. Those withdrawals are taxed as income. Some 401k plans allow participants to contribute to Roth accounts that allow employees to make after-tax contributions, with the benefit being that withdrawals of gains made after the employee turns 59.5 years old are tax-free.

Employees must start withdrawing money from their 401k plan once they turn 72-years-old regardless of whether they're still working or not. In 2022, employees younger than age 50 can contribute up to $20,500 to a 401k, while those 50 or older can contribute up to $27,000.

Employers make matching contributions, such as 50 cents for every dollar the employee contributes up to up to 6% of the employee's gross salary. This means a maximum of 3% of an employee's gross pay. In 2022, the maximum amount per year that can be put into a 401k account including both employee and employer contributions is $61,000 for those younger than 50, and $67,500 for those 50 or older.

What To Do With a 401k When You Leave An Employer

By law, when an employee leaves their current job, they have a minimum of 30 days to decide what to do with the money in their 401k plan. They have the following options:

  1. Cash out
  2. Leave the money
  3. Roll over the money to the new employer's plan (if that plan accepts transfers)
  4. Roll over the money from your 401k into a Roth IRA or a traditional IRA

1. Cash Out


  • All you need to do is inform your old company's retirement savings plan administrator, and the money is yours.


  • That administrator will withhold 20% of your account's balance to prepay any taxes that might be owed, however, you might get some of this money back in as a tax refund if your withholding exceeds your tax liability.
  • If you're younger than 59.5-years-old, the IRS will assess a 10% "early withdrawal penalty" on top of any federal, state, and local taxes that are owed.
  • If you stop working for your employer during or after the year in which you turn 55-years-old, you will not be assessed an early withdrawal penalty so long as the money isn't rolled over into an IRA.
  • Penalties and taxes could take up to 50% of your account balance.

Tip: There's something called a 401k hardship withdrawal that allows exceptions to the norm for withdrawing.

2. Keep a 401k Account Open With Old Employer


  • You retain the right to move your 401k account balance to a new retirement savings plan at any time.


  • You won't be able to make any new contributions to your 401k account.
  • You might be charged a higher fee by the plan's administrator if you are no longer an active employee.
  • You may not be able to take out a loan from your 401k plan.

3. Move 401k to Your New Employer's 401k


  • Having all your retirement savings in a single account makes managing it easier.


  • Your new employer's retirement savings plan may not accept rollovers.
  • You may have to wait until your new employer's next "enrollment period", or until you've been on your new job for a year before you can transfer money from your old 401k account into the new one.
  • Your new plan may charge higher fees than your old plan did, and it may also have less attractive investment options.

401k Rollover To Self-Managed IRA

If you choose to roll your 401k over into an individual retirement account, the steps are:

Step 1: Deciding Where to Open your IRA

You can open an IRA through banks, brokerage companies, and online services called robo advisors. Robo advisors generally charge low management fees, so look for one charging 0.40% or less, and most also perform portfolio allocation and re-balancing for their investors.

If going with a bank or brokerage, look for ones having either no or low account fees, and ones that offer commission-free trades or low commission trades. Some banks and brokerages have investing minimums which could affect those transferring low balances.

Step 2: Choosing the Type of IRA Account

The two main types of IRAs are traditional and Roth. Additionally, there is a less-common option called a SEP IRA.

1. Converting to a Traditional IRA

Most likely, the 401k at your old company was funded with pre-tax dollars, and when you roll those funds over to a traditional IRA, they stay tax-free. You only pay taxes on that money when you begin to withdraw it after age 59.5.

When you roll over funds from a standard 401k into a traditional IRA, you don't have to pay income tax on the money.

2. Converting to a Roth IRA

While representing only a small percentage of 401k accounts, Roth 401k accounts are funded with post-tax dollars, meaning with money you've already paid income taxes on. The money in a Roth 401k account can be withdrawn tax-free once the account holder turns 59.5-years-old. Roth 401k accounts are a smart option for those who think their tax bracket will increase once they retire.

If you roll your 401k money over into a Roth IRA, the funds are subject to taxes at your ordinary income tax rate. To be withdrawn tax-free, funds in a Roth IRA must remain in the account for five years, earnings are not taxed, and withdrawals starting at age 59.5 are not taxed.

In practice, when you roll funds over from a 401k to a Roth IRA, you must first transfer the funds into a traditional IRA and then into a Roth IRA using the backdoor Roth conversion process.

3. Converting to a SEP IRA

Another type of IRA is called a SEP IRA, which stands for Simplified Employee Pension. These IRAs are designed for the self-employed and business owners, and they operate similarly to a traditional IRA in that they are funded with pre-tax dollars. Withdrawals are then taxed.

SEP IRAs offer immediate vesting, have high contribution limits such that an employer can contribute up to 25% of each employee’s income up to a maximum of $61,000, and the self-employed can contribute up to 25% of their net income up to a limit of $61,000.

Step 3: Providing Documentation

To open an IRA, you will need to provide the following:

  1. A copy of a government-issued ID, such as a driver's license or passport, with your name, address, phone number, date of birth, and Social Security number.
  2. A list of beneficiaries
  3. Information about the 401k account from which you are rolling over funds
  4. Filled-out forms from your old 401k provider

If your old 401k plan sends you a check instead of directly transferring the funds, you'll need to deposit those funds within 60 days, or else they will be considered a withdrawal, which would trigger an early withdrawal penalty of 10%.

Note: In 2022, the maximum amount that you can contribute annually to an IRA is $6,000, or if you're older than age 50, $7,000. Both traditional and Roth IRAs also have income limits, with single people who are heads of a household or those who are married but filing separately, limited to an income of $129,000 or less. Those who are married and filing jointly are limited to a combined income of between $204,000 and $214,000.

Step 4: Making Investment Choices

IRAs offer the following investment options:

  • Stocks of publicly traded companies
  • Bonds some of which are issued by governments
  • Index funds which aim to match the returns of a specific market index, such as the S&P 500
  • Exchange Traded Funds (ETFs) which are baskets of securities that track an index, such as the S&P 500
  • Mutual funds which are investment pools comprised of many different types of investments
  • Target-date funds that automatically shift investments to those having lower risk as an employee's retirement date approaches.

Bottom Line

Most employees will have more than one job during their working lives, and that means it is likely that they will have more than one 401k account. Knowing the ins and outs of rolling over the money in a 401k account to an IRA can keep you from losing a significant portion of your retirement savings.

This article was written by

Marcia Wendorf profile picture
Marcia is a former high school math teacher, technical writer, author, and programmer. She stays on top of worldwide news about science, government policies, finance, infrastructure, and medical issues. She is always "sniffing the wind" for the latest trends and directions, and keeping her readers abreast of these developments.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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