401(k) Rollovers

The plain answer

A rollover moves eligible retirement money from a 401(k) to another eligible retirement account, such as a new employer’s plan or an IRA. A direct rollover is usually the cleaner route because the money goes to the receiving account without being paid to you.

An indirect rollover pays the distribution to you first. That creates a deadline, possible tax withholding, and more room for an expensive mistake.

How it actually works

Direct rollover

You tell the old plan to send the money directly to the new plan or IRA. The check may be mailed to you, but if it is payable to the receiving trustee or custodian for your benefit, it can still be a direct rollover. Ask both providers for their exact instructions before starting.

A properly completed direct rollover generally does not create current taxable income. Moving pre-tax 401(k) money into a traditional 401(k) or traditional IRA keeps it tax deferred. Moving pre-tax money to a Roth account is a conversion and generally creates taxable income.

Indirect rollover

The old plan pays the distribution to you. You generally have 60 days to deposit the eligible amount into an eligible retirement account. If you miss that deadline, the amount not rolled over is generally treated as a distribution unless an exception or relief applies.

The payer may be required to withhold tax when an eligible rollover distribution is paid to you rather than sent directly to the new plan or IRA. To roll over the full eligible amount, you may need to replace the withheld money from another source and recover any excess withholding through your tax return.

Taking cash

Money you keep instead of rolling over is generally included in taxable income. An additional tax may apply to an early distribution unless an exception applies. Taking cash also reduces the amount left to grow for retirement.

What this means for you

If your goal is to keep all of the money invested for retirement, request a direct rollover and confirm how the receiving account wants the check titled. Keep copies of the distribution and deposit records, then verify that the full intended amount reached the correct account and was invested.

Before choosing the destination, compare plan fees, investment choices, account services, and withdrawal rules. An IRA and an employer plan can treat money differently, so the lowest visible fee is not the only factor. Start with what to do with an old 401(k) and how an IRA works.

Common mistakes

• Asking for payment to yourself when you intended a direct rollover
• Missing the 60-day deadline on an indirect rollover
• Depositing only the amount received and overlooking tax that was withheld
• Rolling pre-tax money into a Roth account without planning for the tax bill
• Leaving the rollover in cash after it reaches the new account
• Assuming the new employer’s plan accepts incoming rollovers

Related pages

• What to Do With an Old 401(k)
• How a 401(k) Works
• Vesting
• The Order of Operations for Your Money
• How an IRA Works