Rolling a 401(k) into an IRA is one of the most common retirement moves, and it’s often sensible: more investment choices, one place for everything, easier withdrawals.
But it’s not automatic. A few features of employer plans are lost the moment the money moves, and a sloppy rollover can trigger tax that didn’t need to happen.
Your options when you leave
| Option | Good when | Watch for |
|---|---|---|
| Leave it in the plan | Low-cost funds, retiring between 55 and 59½, strong protection | Limited investment menu; withdrawal options may be rigid |
| Roll to an IRA | You want broader choices or to consolidate | Loses age-55 access and plan-specific features |
| Roll to a new employer’s plan | You’re still working and like the new plan | Check whether it accepts rollovers |
| Cash it out | Rarely | Taxed as income; 20% withheld; possible 10% penalty |
The five checks
1. Your age
Leave your employer in or after the year you turn 55 and you can take withdrawals from that plan without the 10% penalty. Roll it into an IRA and that access ends until 59½.
2. Company stock
If your 401(k) holds your employer’s stock, a rule called net unrealized appreciation may let you pay capital gains rates on its growth instead of income tax rates. It only works if you handle it before a rollover.
3. Costs
Compare the plan’s fund expenses and fees with the IRA’s all-in cost, including any advisory fee. Big employer plans can be very cheap.
4. Protection
Employer plans covered by ERISA generally have stronger protection from creditors than IRAs, which are protected in bankruptcy only up to a federal cap.
5. Still working?
If you keep working, money in your current employer’s plan can often avoid required withdrawals until you retire. Old plans and IRAs don’t get that.
- Tax due now on the cost basis
- $25,600
How to move it without a tax bill
- Ask for a direct rollover, made payable to the new IRA custodian for your benefit. No tax is withheld.
- If a check is made payable to you, the plan must withhold 20%. To avoid tax on the full amount, you’d have to deposit the whole balance, including the withheld 20% from other money, within 60 days.
- Keep pre-tax and Roth money separate: Roth 401(k) dollars go to a Roth IRA.
- Handle after-tax contributions carefully. They can often go to a Roth IRA tax-free.
- Keep the paperwork. Your CPA will need the 1099-R.
Mistakes that cost money
- Rolling over at 56 and then needing money before 59½
- Rolling over company stock without considering the net unrealized appreciation rule
- Taking a check payable to yourself and missing the 60-day window
- Moving into an IRA product with surrender charges or high fees because someone recommended it
- Forgetting to name beneficiaries on the new IRA
How Morrowgate helps. Greg runs the five checks with you and compares the plan and the IRA in dollars. If a rollover makes sense, he arranges a direct transfer so nothing is withheld. If staying in the plan is better, he’ll say so. Rolled-over accounts are held in your name at Fidelity, with Schwab available.
Questions people ask
Do I have to roll over my 401(k) when I retire?
No. Most plans let you leave the money where it is, at least until required withdrawals begin.
Will I pay taxes on a 401(k) rollover?
Not on a direct rollover of pre-tax money into a traditional IRA. Converting pre-tax money to a Roth IRA is taxable.
What is the rule of 55?
If you leave your employer in or after the year you turn 55, withdrawals from that employer’s plan aren’t subject to the 10% early-withdrawal tax. It doesn’t apply to IRAs.
How many rollovers can I do a year?
One IRA-to-IRA 60-day rollover in 12 months. Direct trustee-to-trustee transfers and plan-to-IRA direct rollovers don’t count toward that limit.
Where this guidance stops
This article is general education on 401(k) rollovers: how the rules and the options generally work.
It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- IRS: Rollovers of retirement plan and IRA distributions
- IRS: Exceptions to tax on early distributions
- IRS Publication 575: Pension and annuity income (net unrealized appreciation)