What’s a 401(k) Rollover and How Does It Work?

By Ellevest Team

Updated for the 2024 tax year.

So … that job’s history. But that 401(k) from your old employer is still your money. Choose your own adventure time: What are you going to do with it?

You could leave it where it is, but you won’t be able to contribute any more to it after you’ve left. If you change jobs a lot, that’s a lot of old accounts to keep track of. And while many employers pay at least part of your 401(k) plan’s administration fees, there’s no guarantee they’ll keep doing that if you leave.

(That being said, there are some situations where leaving it where it is might make sense. For example, some really big companies provide investment options with super-low fees that you wouldn’t have access to elsewhere. In that case, definitely crunch the numbers before deciding to move your money.)

You could also cash it out, but wait — do not pass go, do not collect any of those dollars. This option comes with massive tax penalties. Like potentially over-50%-of-the-balance-in-your-account massive.

If you’ve decided that neither of those options is right for you, that leaves a 401(k) rollover.

What’s a 401(k) rollover?

Rolling over a 401(k) means transferring the money to another tax-advantaged retirement account. This could include many different types, but the two most common examples are your new employer’s 401(k) (if their plan allows it) or an individual retirement account (IRA).

So … should I roll my money into a 401(k) or an IRA?

Quick refresher: A 401(k) is an employer-sponsored, tax-advantaged retirement plan with a 2024 annual contribution limit of $23,000 ($30,500 if you’re over 50). An IRA isn’t connected to your employer, but it also has tax advantages (especially if your income is under the max for deductions). The IRA annual contribution limit is $7,000 ($8,000 if you’re over 50).

The decision about whether you should put new contributions into a 401(k) or IRA usually comes down to how those contributions will be taxed. But with rollovers, it’s more about investment options and fees — and having all your stuff in one place. Regardless of whether you roll over into an IRA or a 401(k) (or keep your old 401(k), for that matter), you still get to keep all your money (assuming it’s completed in 60 days — more below), and that money gets to keep growing in a tax-advantaged way. More good news: Rollovers don’t count toward the contribution limits mentioned above.

There are upsides to both options, depending on things like when you expect to withdraw the money and what kind of investment options and fees come with your 401(k).

Reasons to roll your money into an IRA

When you have a lot of retirement accounts in a lot of different places, it’s hard to a) wrap your mind around where you actually stand and b) make sure that everything you own is properly diversified. If you have all your retirement accounts in an IRA, on the other hand, balancing your investments — and forecasting whether you’re on track to hit your goals, like we do for you at Ellevest — is a lot easier.

Another big reason why many people choose to roll an old 401(k) into an IRA is to have more choice. When you can decide for yourself which company you’ll open your IRA with (and maybe pick from a wider range of investments), you often have greater control over things like how much you pay in fees and the types of businesses your money is supporting. With a 401(k), you’re stuck with whatever investment provider and investment options your employer picks for you (and the fees that go with them).

Also, if you’re trying to make certain special purchases, the government lets you take money out of an IRA before retirement without facing the 10% early withdrawal penalty. These include things like college costs and your first home. Not so with a 401(k).

Reasons to keep your money in a 401(k) (old or new)

Money in a 401(k) is typically protected from creditors, bankruptcy proceedings, and civil lawsuits, whereas IRAs have more limited protections. Also, you can sometimes take out loans against your 401(k) (although caution: If you leave your job with an outstanding loan, you’ll usually have to pay the whole thing back at once or pay big penalties and taxes) ... but there’s no such thing as IRA loan.

401(k)s and traditional IRAs both make you take required minimum distributions (RMDs) at age 72, or you’ll face penalties. With a 401(k), though, you can push off your RMDs if you’re still working. Also, you can start withdrawing your money from a 401(k) as early as age 55 if you retire from the same company that provides that 401(k). Roth IRAs, on the other hand, don’t have RMDs, and contributions can be withdrawn at any age without taxes or penalties.

What are the rules?

No matter where your rollover is destined to land, there are some rules you should know going in.

The 60-day deadline

This is the big one. Once you withdraw money from your 401(k), you have exactly 60 days to make sure it gets deposited into another tax-advantaged account, be it a new 401(k) or IRA. If you miss that deadline, the IRS will assume you cashed the money out (so you’ll owe those massive penalties we mentioned before).

The exceptions: In August of 2016, the IRS said, “OK, fine, life happens,” and introduced a list of 11 reasons why they might forgive you for missing the deadline. It includes things like your check got lost and was never cashed, your home was badly damaged, or you experienced a death or serious illness in your family.

Company stock

This one’s important, too: If your old 401(k) includes stock in the company you just left, there are tax advantages that you may sacrifice if you roll those assets into an IRA. (And because the investment options for a new 401(k) will be determined by your new employer, they aren’t likely to let you bring your company stock with you there.) It might be better for you to either keep your company stock in your old 401(k), or maybe to move it into a taxable investment account. If you’re in this situation, definitely ask a tax pro for help figuring out what’s best for you.

Involuntary cash-outs

If your 401(k) has more than $5,000 in it, your previous employer must allow you to keep your money where it is. But if you have less than $5,000, that’s not guaranteed — it costs companies money to have people on their 401(k) plan, so this rule helps to protect employers.

If your balance is less than $1,000, your employer might just cut you a check. If that happens, get it into an IRA or new 401(k) ASAP so you don’t miss the 60-day deadline.

If you have between $1,000 and $5,000, your employer has to contact you in writing to tell you your options. Then you have to tell them what to do with your money next. If you don’t, they’re allowed to transfer your money into an IRA on your behalf. This is called an “involuntary cash-out” (also a “mandatory cash-out” or an “involuntary distribution”).

A couple of important notes here: First, this $5,000 benchmark only counts for the money you put in while you worked for that employer. Even if your balance is, say, $20,000, if you only put $4,000 in while you worked for that employer, they can move your entire balance to an IRA. Second, employers usually reassess every year. So if you’re barely over $5,000, and then a market drop puts you below $5,000, they can move you.

How does a 401(k) rollover work?

There are two main types of rollovers: indirect and direct. Here’s how they typically go.

Indirect rollovers

  1. You tell your new plan administrator or IRA provider that you’d like to initiate a rollover.

  2. You tell your old 401(k) administrator that you’d like them to empty your account.

  3. They mail you a check, made out to you. 20% of your account balance is withheld to pre-pay your taxes in case you miss the 60-day deadline.

  4. You deposit the funds into your own bank account.

  5. You make out a check to your new plan administrator/IRA provider and mail it to them. This check has to be for the full account balance. (Yep — you have to come up with the cash to replace that 20% withholding.) Then, if the check’s deposited within the 60-day timeframe, you can get your 20% back at tax time.

That’s a lot of steps and a lot of money changing hands, and you have to float the 20% out of your own pocket — less than ideal, and definitely risky. Generally, a direct rollover is much smoother and has less room for human error.

Direct rollovers

  1. You tell your new 401(k) administrator or IRA provider that you’d like to initiate a rollover.

  2. You tell your old 401(k) administrator that you’d like to roll your funds into the new plan.

  3. They mail or electronically deliver a check directly to your new plan administrator/IRA provider, made out to them. No taxes are owed (assuming you’re transferring “traditional to traditional” or “Roth to Roth”). The funds are deposited into your new plan.

Much more straightforward.

Where you roll it over matters, too

Women retire with two-thirds as much money as men and live six to eight years longer. But Ellevest IRAs are built to do something about that.

First things first: We’re a fiduciary. That means your interests come first, always. When you tell us you’re interested in a rollover into an Ellevest IRA, our rollover team can make it super easy. They can answer your questions, talk you through your options, and help get the paperwork started with your old provider.

Oh, and one more thing. Ellevest Impact Portfolios allow you to invest for both returns and in companies that advance women.

Whatever you decide to do with that old 401(k), it’s all about one thing: being intentional with your investments. Because taking control of your money means knowing what you have, where you have it, and why.


© 2024 Ellevest, Inc. All Rights Reserved.

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness. The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

Planning to work past the age of 73?

Once an individual reaches age 73, the rules for both 401(k) / 403(b) plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution (RMD).

If you continue to work past the age of 73, however, your plan might not require you to make withdrawals from your 401(k) / 403(b) plan until you stop working. That means the funds in your plan can continue to grow tax-deferred until you retire. This is different from an IRA, where you’re required to start making withdrawals starting at age 73, whether you’re working or not.

Filing for bankruptcy?

If you are considering filing for bankruptcy, then funds you have held in a 401(k) or 403(b) plan are generally protected from creditors. Depending on your state of residency, funds in your IRA may not be fully protected from creditors. Please consult with your legal professional for additional guidance as to what may be applicable for your situation.

Comparing important factors when considering a 401(k) or 403(b) rollover:

Fees and Expenses
In general, both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. “Investment-related expenses” may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. (Ellevest does not charge loads or commissions.) “Plan fees” typically include plan administrative fees (ex, recordkeeping, compliance, trustee fees) and fees for services such as access to customer service representatives. In some cases, employers pay for some or all of a plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account set-up, and custodial fees. (Each of the fee types listed here may or may not apply to your portfolio managed by Ellevest; please see your Client Agreement for details.)

Click here to read Ellevest’s Form ADV.

Required Minimum Distributions
Once an individual reaches age 73, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 73, however, they generally are not required to make required minimum distributions from their current employer’s plan. This may be advantageous for those who plan to work into their 70s.

Penalty-Free Withdrawals
If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

Ellevest Team

Ellevest helps women build and manage their wealth through goal-based investing, financial planning, and wealth management. Our mission is to get more money in the hands of women.