How to Roll Over Your 401(k) to an IRA

Why Roll Over a 401(k) to an IRA?

When you leave a job, you have four options for your 401(k): leave it with your old employer, roll it to your new employer's plan, roll it to an IRA, or cash it out (don't do this). Rolling to an IRA is often the best choice for several reasons.

More Investment Choices

Most 401(k) plans offer 20-30 investment options, often with limited index fund choices and sometimes high fees. An IRA at a brokerage gives you access to thousands of stocks, ETFs, bonds, and funds. You can buy low-cost index funds like VTI (0.03% expense ratio) instead of being stuck with whatever your employer's plan offers.

Lower Fees

Many 401(k) plans have administrative fees, record-keeping fees, and higher-cost fund options. A rollover IRA at Fidelity, Schwab, or Vanguard typically has zero account fees and access to the lowest-cost funds available.

Better Control

With an IRA, you control the account completely. No waiting for plan administrators, no restrictions on when you can make changes, and no worry about your former employer changing plan providers.

Consolidation

If you've had multiple jobs, you might have 401(k)s scattered across different providers. Rolling them all into one IRA simplifies your financial life and makes it easier to manage your overall asset allocation.

IRA Match Programs

Some brokers now offer matching on IRA contributions and rollovers. Robinhood offers 3% on contributions (with Gold), Webull offers 3.5% (with Premium), and some brokers offer 1% or more on transfer amounts. These didn't exist a few years ago—it's free money that 401(k)s don't offer.

When NOT to Roll Over

Rolling over isn't always the right move. Consider keeping your 401(k) if:

You Have Employer Stock with Net Unrealized Appreciation

If your 401(k) holds appreciated company stock, special tax rules (Net Unrealized Appreciation, or NUA) may let you pay lower capital gains rates instead of ordinary income rates. This is complex—consult a tax professional.

You're Between 55 and 59½

The "Rule of 55" lets you take penalty-free withdrawals from a 401(k) if you leave your job at age 55 or older. IRAs don't have this provision—early withdrawals face a 10% penalty until age 59½. If you might need the money, keep it in the 401(k).

Your 401(k) Has Exceptional Funds

Some large employers negotiate institutional share classes with extremely low fees—sometimes lower than retail investors can access. If your 401(k) has a 0.01% S&P 500 fund, that's hard to beat.

Creditor Protection Concerns

401(k)s have stronger federal creditor protection than IRAs (which vary by state). If you're in a high-liability profession or concerned about lawsuits, this matters.

Traditional vs Roth: Which IRA?

The type of IRA you roll into depends on your 401(k) type:

Traditional 401(k) → Traditional IRA

This is the standard, tax-free rollover. Pre-tax money stays pre-tax. No taxes owed at rollover. You'll pay taxes when you withdraw in retirement.

Roth 401(k) → Roth IRA

After-tax Roth 401(k) money rolls to a Roth IRA tax-free. Already paid taxes on contributions, so no additional tax.

Traditional 401(k) → Roth IRA (Conversion)

You CAN convert traditional 401(k) money to a Roth IRA, but you'll owe income tax on the entire converted amount. This can make sense if you're in a low tax bracket now and expect higher taxes later, but it's a significant tax bill. Plan carefully.

Step-by-Step Rollover Process

Step 1: Open Your IRA

Before initiating the rollover, open an IRA at your chosen brokerage. Make sure it's the right type (Traditional or Roth) to match your 401(k). Most brokers let you open an account online in 15 minutes.

When opening, you may see an option to designate it as a "Rollover IRA." This is the same as a Traditional IRA for tax purposes—it's just a label that helps track the source of funds.

Step 2: Contact Your 401(k) Provider

Call your 401(k) plan administrator (the number is on your statement) and request a direct rollover. Key phrases to use:

• "I want to initiate a direct rollover to my IRA"
• "Please make the check payable to [New Broker] FBO [Your Name]"
• "I want a trustee-to-trustee transfer"

They'll either send a check to your new broker directly or send you a check made out to your new broker (not to you personally). Both are direct rollovers.

Step 3: Complete Required Paperwork

Your 401(k) provider will likely require a distribution form. You'll need:

• Your new IRA account number
• The receiving broker's name and address
• Specification that this is a direct rollover

Some providers have online portals; others require paper forms. Large providers like Fidelity, Vanguard, and Schwab often have dedicated rollover teams to help.

Step 4: Track the Transfer

Direct rollovers typically take 1-3 weeks. The money may arrive as:

• Electronic transfer (fastest)
• Check mailed to you (made out to new broker FBO you)
• Check mailed directly to new broker

If you receive a check, forward it to your new broker promptly. Don't deposit it in your personal bank account.

Step 5: Invest the Funds

Once the money arrives in your IRA, it typically lands in a money market or cash sweep account. You'll need to invest it in your chosen funds. Don't let it sit in cash—that's a common mistake that costs returns.

Step 6: Verify and Document

Confirm the full amount arrived. Keep records of the rollover (statements from both accounts, any forms) for your tax files. You'll receive a 1099-R from your old 401(k) showing the distribution, but a direct rollover should show code "G" (direct rollover) and not trigger taxes.

Common Rollover Mistakes to Avoid

Mistake 1: Taking an Indirect Rollover Check

If the check is made out to YOU (not your new broker), your employer must withhold 20% for taxes. You then have 60 days to deposit the FULL original amount (including replacing the 20% from your own pocket) or face taxes and penalties on the shortfall. This is messy—avoid it.

Mistake 2: Missing the 60-Day Window

If you do an indirect rollover, you have exactly 60 days to complete it. Miss the deadline by even one day, and the entire amount becomes a taxable distribution plus 10% penalty if under 59½. Set calendar reminders.

Mistake 3: Rolling to the Wrong Account Type

Rolling a traditional 401(k) into a Roth IRA triggers immediate taxes. If you didn't intend a conversion, this is an expensive mistake. Double-check account types before initiating.

Mistake 4: Forgetting About Outstanding Loans

If you have an outstanding 401(k) loan, it typically becomes due when you leave employment. Unpaid balances are treated as distributions—taxable income plus potential penalties. Pay off loans before leaving if possible.

Mistake 5: Not Investing the Rolled Funds

Money arrives in your IRA in cash. If you don't invest it, it sits earning minimal interest while you miss market returns. Log in and invest promptly.

Choosing the Best Broker for Your Rollover IRA

The best broker depends on your priorities:

For Maximum Free Money: Robinhood or Webull

Robinhood Gold offers 3% match on IRA contributions. Webull Premium offers 3.5%. On a $100,000 rollover, that's $3,000-$3,500 free (though vesting periods apply). No traditional broker offers this.

For Traditional Stability: Fidelity or Schwab

Fidelity offers excellent research, 24/7 customer service, no PFOF, and low-cost index funds. Schwab adds 400+ branches for in-person help and the thinkorswim platform. Both are rock-solid choices trusted by millions.

For Index Fund Purists: Vanguard

Vanguard invented index funds and offers the lowest-cost options. The interface is dated, but if you're buying VTI and forgetting about it, that doesn't matter.

For Active Traders: Interactive Brokers

If you want to actively manage your IRA with options, international stocks, or margin strategies, IBKR offers the most sophisticated platform and lowest margin rates.

Rollover Bonuses and Incentives

Many brokers offer bonuses for large rollovers:

• E*TRADE: Up to $10,000 bonus for large transfers (use code OFFER25, expires Jan 31 2025)
• Tastytrade: Up to $5,000 bonus (code MYNEWBONUS)
• Robinhood: 3% match on all IRA contributions including rollovers
• Webull Premium: 3.5% match on IRA contributions
• Public: 1% match on transfers (uncapped)

Read the fine print on vesting periods and requirements. But these bonuses can add thousands of dollars to your retirement savings.

Tax Reporting

A direct rollover is not a taxable event, but it does require reporting:

• Your old 401(k) issues Form 1099-R showing the distribution
• Box 7 should show code "G" for direct rollover
• You report this on your tax return, but owe no tax
• Your new IRA issues Form 5498 confirming receipt

If done correctly, you'll see the rollover reported on your tax forms but no additional tax liability.

Timeline Expectations

• Opening new IRA: Same day (online)
• Requesting rollover: 1-3 days for paperwork
• Processing by old provider: 3-10 business days
• Funds arriving at new broker: 1-5 business days after processing
• Total time: Usually 2-4 weeks

Some providers are faster than others. Large brokers with established rollover processes (Fidelity, Schwab, Vanguard) tend to be most efficient.

The Bottom Line

Rolling over your 401(k) to an IRA is usually the right move when leaving a job. You get more investment choices, lower fees, and better control—plus potential match bonuses that didn't exist a few years ago.

The key is doing it right: always choose a direct rollover (trustee-to-trustee), make sure you're rolling to the correct IRA type, and invest the funds once they arrive.

Take your time choosing a broker—this account could hold your retirement savings for decades. Consider both the immediate bonuses and the long-term factors like fund selection, fees, and customer service.