How to roll over a 401(k): direct vs indirect rollover
Quick answer: when you leave a job, you usually have four choices for your old 401(k): leave it, move it to your new employer’s plan, roll it into an IRA, or cash it out. The safest way to move it is a direct rollover, where the money goes straight from the old plan to the new account, with no tax and no withholding. Cashing out is usually the costliest option.
Your four options compared
| Option | Pros | Cons |
|---|---|---|
| Leave it in the old plan | No action needed; keeps plan protections | Can lose track of it; limited investment choices; small balances may be forced out |
| Roll into new employer’s 401(k) | Everything in one place; may allow loans | New plan must accept rollovers; its funds and fees may be limited |
| Roll into an IRA | Widest investment choice; often lower fees; easy to consolidate | Different creditor protection; no loans; may complicate backdoor Roth contributions |
| Cash out | Money now | Income tax plus usually a 10% penalty before 59 1/2; lost growth |
Direct rollover: step by step
- Open the receiving account (an IRA at a brokerage, or confirm your new 401(k) accepts rollovers).
- Contact your old plan administrator and request a direct rollover. You will need the receiving account’s details.
- The plan sends the money directly to the new provider, electronically or as a check made out to the new provider “for the benefit of” (FBO) you.
- If you get the check, forward it within the deadline the plan gives you.
- Invest the money once it arrives. Rollovers often land in cash.
- Keep the Form 1099-R you receive. A direct rollover is reported but not taxed.
Match account types
| Moving from | Move to | Tax result |
|---|---|---|
| Traditional (pre-tax) 401(k) | Traditional IRA or 401(k) | No tax |
| Roth 401(k) | Roth IRA or Roth 401(k) | No tax |
| Traditional 401(k) | Roth IRA | Taxable conversion |
Indirect rollover: the 60-day rule and 20% withholding
In an indirect rollover, the plan pays you. It must withhold 20% for federal taxes. You then have 60 days to deposit the full amount, including the 20% from your own pocket, into an IRA or plan. Anything you do not deposit is taxed and may face the 10% early withdrawal penalty.
Example: you have $50,000. The plan sends you $40,000 and withholds $10,000. To avoid tax, you must deposit the full $50,000 within 60 days, then recover the $10,000 when you file your tax return.
This is why a direct rollover is almost always better.
Other rules to know
- One indirect rollover per 12 months applies to IRA-to-IRA rollovers. Direct transfers and rollovers from a 401(k) to an IRA do not count.
- Company stock in your 401(k) may qualify for special tax treatment (net unrealized appreciation). Get advice before rolling it over.
- Outstanding 401(k) loans usually become due when you leave; unpaid balances may be treated as a distribution.
Related guides
Frequently asked questions
How long does a 401(k) rollover take? Usually 1 to 3 weeks, depending on the plan.
Is a 401(k) rollover taxable? Not if it is a direct rollover into the same type of account.
Can I roll over a 401(k) while still employed? Some plans allow “in-service” rollovers, often from age 59 1/2. Ask your plan.
This article is general information, not tax or financial advice.