Households moved $670 billion from employer plans to traditional IRAs in 2022, according to ICI's IRA report. That figure covers defined-contribution and defined-benefit plans, not 401(k)s alone. Plenty of people make the move, and plenty make avoidable mistakes.
A 401(k)-to-IRA rollover moves eligible employer-plan assets into an individual retirement account, generally preserving tax-advantaged status when account types match. This guide covers direct versus indirect rollovers, tax treatment, whether to roll over at all, the process, and common errors. It offers general US information, not personalized tax, legal, or investment advice.
Key Takeaways
- A direct rollover avoids the 20% withholding and 60-day deadline risks.
- Pre-tax 401(k) to traditional IRA is generally tax-deferred; pre-tax to Roth IRA is a taxable conversion.
- Compare fees, investments, creditor protection, withdrawal rules, and employer stock first.
- Staying in the old plan or moving to a new employer's plan can beat an IRA.
What Are the Key 401(k)-to-IRA Rollover Rules?
Direct and indirect rollovers
In a direct rollover, the plan sends the money straight to the receiving IRA custodian. The IRS says direct rollovers aren't subject to withholding. In an indirect rollover, you receive the distribution first and must generally deposit it within 60 days.
The catch with indirect rollovers is withholding. A taxable eligible distribution paid to you is generally hit with mandatory 20% federal withholding. To roll over the full amount, you must replace that 20% from other funds.
Miss the deadline and the money is generally taxable, possibly with a 10% early-distribution tax. Limited relief may still be available:
- Rev. Proc. 2020-46 allows written self-certification for specified reasons, such as a serious illness or postal error
- Self-certification isn't an IRS waiver, and the IRS can question it on examination
- A formal waiver requires a private letter ruling request
Account-type matching
Match the account types:
- Pre-tax 401(k) assets go to a traditional or rollover IRA
- Roth 401(k) assets go to a Roth IRA or another designated Roth account
- Pre-tax assets sent to a Roth IRA are a conversion, taxable to the extent not previously taxed
Mixed balances need care. Under IRS Notice 2014-54, a distribution counts as one distribution for allocating pre-tax and after-tax amounts.
You can send pre-tax money to a traditional IRA and after-tax money to a Roth IRA, but a partial distribution must include a proportional share of pre-tax funds. Ask the plan administrator to document each source in writing.
Limits and eligibility
A rollover is separate from your annual IRA contribution. For 2026, regular contributions are capped at $7,500 ($8,600 if 50 or older), and rollover amounts don't count against that.
The one-rollover-per-12-months rule applies to IRA-to-IRA rollovers, not direct plan-to-IRA rollovers.
Eligibility depends on plan terms. Separation from employment usually opens the door, while in-service distributions vary by plan.
These distributions generally cannot be rolled over:
- Required minimum distributions (RMDs)
- Hardship distributions
- Deemed loan distributions
Read the summary plan description and call the administrator.
How Are 401(k)-to-IRA Rollovers Taxed?
Traditional 401(k) to traditional IRA
Done correctly, this isn't a taxable event. Withdrawals later are taxed as ordinary income. Required minimum distributions still apply: age 73 for those reaching 73 before 2033, and age 75 for those reaching 74 after 2032.
Roth 401(k) to Roth IRA
Qualified Roth money moves without a conversion. Keep records of contribution history, because a qualified Roth IRA distribution needs a five-tax-year period plus a qualifying event such as age 59½, death, or disability.
Roth IRAs have no lifetime RMDs, and Roth 401(k) lifetime RMDs ended for tax years after 2023.
Traditional 401(k) to Roth IRA
The converted amount is added to that year's taxable income. That can push you into a higher bracket, trigger estimated tax payments, and raise Medicare premiums. Medicare uses income from two years earlier, so a 2024 conversion affects 2026 premiums.
For 2026, the standard Part B premium is $202.90 a month at 2024 income up to $109,000 (single) or $218,000 (joint). Cross the top threshold and it reaches $689.90 a month, per Medicare's 2026 costs. Run the tax and IRMAA numbers before you convert.
Withholding, penalties, and reporting
If you keep the distribution or miss the rollover deadline, the amount generally becomes ordinary income, plus the 10% additional tax before age 59½ unless an exception applies. Avoiding the penalty doesn't erase income tax.
Expect these forms:
- Form 1099-R from the plan (code G for a direct rollover, H for Roth to Roth IRA)
- Form 5498 from the IRA custodian
- Form 1040, lines 5a/5b, where the rollover is reported even if nothing is taxable
Keep statements, check copies, confirmations, and after-tax basis records. Consult a tax professional for mixed sources, employer stock, conversions, or missed deadlines.
Should You Roll Over a 401(k) to an IRA?
Reasons a rollover may make sense
- A broader investment menu than the plan offers
- Consolidating several old accounts
- More control over withdrawals and income sequencing
- Qualified charitable distributions, which must come from an IRA (2026 limit: $111,000)
- Beneficiary and legacy flexibility
Benefits depend on the custodian, investments, and fees.
Reasons to stay put or choose another option
FINRA lists four choices:
- Leave the money in the old plan if permitted
- Move it to a new employer plan
- Roll to an IRA
- Cash out
| Factor | 401(k) | IRA |
|---|---|---|
| Fees | Possible institutional share classes | Depends on custodian and funds |
| Early access | Penalty-free after separation at 55 or later | Age-55 exception doesn't apply |
| Loans | Possible if plan allows | Not available |
| Creditor protection | ERISA anti-alienation rules | Federal bankruptcy cap of $1,711,975 |
| Employer stock | May preserve NUA treatment | NUA treatment lost |
Pew's 2022 analysis found median retail mutual-fund share expenses 0.34 percentage points above institutional shares. That's a share-class comparison, not proof every IRA costs more.
A lump-sum cash-out isn't a rollover. It can trigger immediate tax and a possible penalty.
Decision checklist
- What do the plan and IRA each charge, including advice costs?
- Are the investment choices better?
- Do you need early access or loans?
- What's your tax bracket now and later?
- Does the plan hold employer stock?
- Are beneficiary designations current?
- How does this fit your retirement income and legacy goals?
Zebulon Tax & Wealth Advisory can review a rollover through its tax-first Zebulon Method, coordinating tax strategy, investment management, retirement income, and estate planning rather than judging the account alone.
If an advisor recommends moving money into an IRA it manages for an asset-based fee, that creates a conflict of interest. Ask about it directly.
How Do You Complete a 401(k)-to-IRA Rollover?
Prepare first
- Identify balance types: pre-tax, Roth, after-tax
- Confirm the plan permits the distribution you want
- Compare custodians on fees, investments, and whether they accept your account type
- Decide between traditional IRA, Roth IRA, or a new employer plan
- Check beneficiary designations and paperwork requirements
Initiate and track a direct rollover
- Open the receiving account.
- Request the rollover from the plan administrator.
- Choose check or electronic transfer, following both custodians' instructions.
- Make any check payable to the receiving custodian for your benefit. Fidelity, for example, asks for Fidelity Management Trust Company, FBO you, with your account number.
- Track it until it posts.
Don't deposit an eligible distribution into your bank account unless you understand the indirect-rollover rules and can replace the 20% withheld.
Post-rollover review
- Confirm the full balance arrived
- Invest it according to your plan, since cash sitting idle earns little
- Review fees and statements
- Update beneficiaries
Timing varies. Vanguard says deposited assets typically reach the settlement fund 2-4 weeks after receipt, a provider estimate rather than a federal rule. If it stalls, call the plan administrator.
Special Situations and Common Rollover Mistakes
Employer stock and net unrealized appreciation
NUA is the increase in employer stock value while held in the plan. Special treatment requires a qualifying lump-sum distribution of your entire balance within one tax year after a qualifying event. If you roll the stock into an IRA, NUA treatment is gone, likely for good. Get specialized tax advice first.
Plan access and future flexibility
- Outstanding loans: a plan loan offset can be rolled over by your tax return due date, including extensions
- Early retirement: the age-55 exception disappears once money enters an IRA
- Future employer plans: acceptance of IRA rollovers is optional, and Roth or commingled money may not qualify
Common mistakes
- Sending money to the wrong account type
- Missing the 60-day deadline
- Not replacing the withheld 20%
- Overlooking fees
- Leaving proceeds uninvested
- Ignoring employer stock
- Misreporting rollover forms
- Forgetting beneficiaries
Get written instructions from both custodians, keep every record, rely on current IRS guidance, and seek tax advice for complex cases. Zebulon Tax & Wealth Advisory doesn't prepare taxes or give legal advice, but can coordinate with your tax professional.
Frequently Asked Questions
Does it cost to roll over a 401k to an IRA?
Costs vary by old plan, IRA custodian, investments, advisory arrangement, and transfer method. Some custodians charge outgoing transfer fees, so compare all account and investment fees.
Can I do a direct rollover from a 401k to an IRA?
Generally yes. Qualified plans must offer a direct transfer for eligible distributions, though mechanics vary. It usually avoids withholding and deadline risk.
How long does a 401k to IRA rollover take?
It depends on the administrator, custodian, paperwork, and method. Ask for a timeline and confirm receipt.
What happens when you roll over a 401k into an IRA?
Your retirement assets move to the IRA and keep tax-advantaged status when account types match. Withdrawal rules change, and you must choose investments after the transfer.
Do I pay taxes if I roll over my 401k to an IRA?
A traditional-to-traditional direct rollover is generally tax-deferred. Moving pre-tax money to a Roth IRA is a taxable conversion. Incomplete or late rollovers can create tax bills.
Should I roll over a 401k into an IRA?
It depends on fees, investments, plan protections, withdrawal needs, taxes, employer stock, and income and legacy goals. Compare your options personally before acting.
