401(k) Rollovers: Your Easy, Step-By-Step Guide

What is a 401(k) rollover?

A “401(k) rollover” is the technical term for transferring retirement funds from an old 401(k) retirement plan account to another retirement account. Most people who roll over their account end up transferring their 401(k) savings or another employer-sponsored retirement plan into a new or existing IRA (individual retirement account). Fortunately, most rollover options incur no income tax, and should go through penalty-free.

Rolling over an employer-sponsored plan 401(k) can help you streamline you’re retirement planning by consolidating multiple accounts into one. This can make it easier to manage, and once you’re ready to, access your retirement withdrawal.

How to Roll Over Your 401(k)

To roll over your 401(k), follow our simple, five-step rollover process.

STEP 1

Confirm a few key details about your old 401(k)

First, get together any information you have on your old 401(k). It’s okay if you don’t have a ton, but any details like an old qualified retirement plan account statement or an off-boarding e-mail from your former HR team can help. 401(k) paperwork can be confusing, so just focus on identifying the following three items:

Who is the 401(k) “provider”?

Sometimes called the “plan administrator”, the provider is the financial institution where your 401(k) retirement accounts, or other qualified retirement plans, are located. It’s usually a large financial company chosen by your employer and their logo appears on any old 401(k) statements you have. If you aren’t sure — try searching for your provider using our find your 401(k) tool.

Do you have a Traditional or Roth 401(k) retirement savings plan?

This will determine which type of IRA you’ll need to open (more on this in step 2). The vast majority of people have a traditional, or “pre-tax”, 401(k) for their retirement savings plan, and this is almost always the default option in a 401(k) plan you’d have access to at work. Only 12% of 401(k) plans even offer a Roth account option, but it’s worth checking your 401(k) account balance to be sure. What’s the difference between the two? Just the way your contributions were taxed. With a Traditional 401(k) your contributions come out of your paycheck with no taxes paid, however, you will have to pay taxes on your retirement income. With a Roth 401(k) your contributions came out after taxes were paid, and won’t be paid on your retirement income.

What’s your 401(k) provider’s phone number?

Jot this down since you’ll need it later on in the process when you initiate your rollover.

What if I don’t have any information on my 401(k)?

That’s okay. If you’re doing this on your own, we recommend emailing your former HR contact to begin and just asking them who the 401(k) provider is on the plan. That’s something they should know because the 401(k) provider is chosen by your former employer.

STEP 2

Decide where to move your money

In order to move the money out of your 401(k) account, you’ll first need to have an account opened for that money to move into.

Two main rollover options: IRAs and New 401(k)s

An IRA — an IRA is an “Individual Retirement Account”. As the name suggests, it’s an account you open up on your own and it isn’t connected to an employer.
A new 401(k) — you might have an active qualified retirement plan 401(k) account if you’ve already found a new job. If so, you may be able to transfer your previous employer’s 401(k) savings into your new employer’s plan. This isn’t always possible though, and you’ll need to check with your current 401(k) provider and HR person.

We’ve written a full guide on the five key differences between 401(k)s and IRAs if you’re trying to understand all of the differences, especially when it comes to contribution limits and required minimum distributions, or RMDS for short. It’s also may be helpful to know what happens to your 401(k) from your former employer’s plan when you change jobs.

Ultimately, most people who roll over an old 401(k) do so into an IRA for a few key reasons:

Not tied to an employer — IRAs are generally easier to keep track of since they’re opened at an institution of your choice, like Fidelity, Vanguard, or Betterment.
A wider range of investment options — your 401(k) account likely has a limited set of mutual funds as core investment choices (some plans also allow access to company stock). With an IRA, you can invest your money in a wide range of stocks, ETFs, and even private assets like angel investments and cryptocurrency.
Quicker process — according to the GAO, rollovers into 401(k)s tend to be more time-consuming and administratively challenging than rollovers into IRAs.

Think of your IRA as helping you do two key tasks:

Receive the money you’ve saved in your 401(k) at previous jobs so you can consolidate your savings and keep track of them.
Grow that money by allocating it to investments that will increase over time.

The good news? Opening an IRA can almost always be done online and should take you less than 10 minutes if you don’t already have one.

Allocating your IRA savings to investments will help it grow over time.

How do I choose an IRA provider?

Many financial institutions offer IRAs, including brokerage firms, banks, and newer “fintech” companies. In order to pick the best account for you, there are a few things to consider. One important consideration is whether you want to make your own investment decisions, or would you rather have the investment decisions made for you so you can just set it and forget it.

If you want to make your own decisions, then what you’ll want is a self-directed IRA. That allows you to make your own trading decisions and invest in whichever financial securities you’d like.

The key features to compare when choosing among self-directed IRAs include:

What do you want to invest in? The exact investment options among IRA providers vary. Most of them allow you to invest in stocks, ETFs (exchange-traded funds), and options. Other specialized IRA providers will let you invest in private assets and cryptocurrency.
Access to research and data. Some brokers provide access to premium research and data. If you’re a more hands-on investor, this might be important to you.
Ease of use — while user interfaces are getting better across the board, newer fintech providers tend to be more popular with those who really value an intuitive app experience.

If you want the investing decisions made for you then you’ll be best served by an automated IRA, also known as a robo-advisor account. Here you’ll answer a series of questions (known as a “risk-tolerance questionnaire”), and your answers will be used to create a diversified portfolio that suits your personal and financial situation. That portfolio is then rebalanced automatically over time without you having to do any work. It’s a great tool for those who don’t want to spend much time managing their investments.

The key features to compare when choosing an automated account include:

Annual fee — most automated accounts charge an annual fee that’s expressed in percentage terms — e.g. 0.25%. This is the percentage of your assets that they’ll take annually for managing a portfolio for you. For example, if your automated IRA charges 0.25% and you have a $10,000 account you’ll pay $25 per year to the IRA provider. This fee is often referred to as an advisory fee or management fee. Most fees range from 0.25% – 0.50% so be wary of paying more than that. Some providers now even offer low-cost or zero-fee accounts. Nothing is truly free though, since these IRAs will often fill your portfolio with their own proprietary exchange-traded funds (ETFs) which have their own fees.
Ease of use — the original providers of automated accounts were tech-first companies like Betterment and Wealthfront who sought to provide a simpler, more intuitive user experience. While more established companies now offer automated accounts of their own, the newer upstarts maintain a usability advantage.
Level of customer support — on the other hand, the longer-standing, bigger companies have more robust customer support systems built over many years, including well-staffed call centers and often even branch networks that provide brokerage services. If that’s important to you, then a larger, more established institution might be your bet.

What type of IRA should I open?

During the process of opening your new account, you may get asked which type of IRA you’d like to open. You might see the following options: Rollover IRA, Traditional IRA, or Roth IRA. Here’s how to pick the right one:

If you had a Traditional, tax-deferred 401(k) — pick a “Rollover IRA” or, if that’s not available, “Traditional IRA” or, if that’s not available, just “IRA”. The only exception would be if you’re considering a Roth conversion, but this is an advanced tax planning strategy that most people don’t need to worry about.
If you had a Roth 401(k) — pick a Roth IRA. You’ll need to match the Roth 401(k) to a Roth IRA for tax reasons.
If your 401(k) has mixed assets — you’ll need to open two IRAs, one Roth and one Traditional for their respective assets. You may want to discuss additional options for mixed assets with a tax advisor, especially if you’re considering a Roth conversion.

STEP 3

Contact your 401(k) provider

You’re making great progress. You know where your qualified retirement plan 401(k) is and you have an IRA to transfer your retirement savings into. The next step is to initiate your rollover by contacting your 401(k) provider.

Often, the easiest way to do this is by phone. Your 401(k) provider’s phone number should be visible on an old account statement.

Tips to help your rollover call go smoothly

Set aside 30 minutes and a quiet space in which to make the call. Most of the time the call itself will take around 10 minutes, but there can often be a waiting time before you’re connected to an operator.
If you have an old 401(k) statement, keep it handy. No worries if not – you’ll be asked for your social security number and some other personal details to verify your identity.
Before you do the call, log into your new IRA account. Note down the following information:
Your IRA account number
- The IRA provider’s mailing address. Look for the specific address where they ask for any checks to be mailed. This is relevant because often your qualified retirement plan 401(k) provider won’t digitally transfer your funds — they’ll physically mail a check with your money to your new IRA provider (it’s a little outdated, we know).
- Any other check-related instructions. These details are usually found on the IRA provider’s website in a “Funding” or “Rollover instructions” section and include things like the name of the institution to whom the check is made out (usually the full legal name of the IRA provider you’ve chosen).

Then place the call. Be prepared for a little hold time but in our experience, the entire call should take no longer than 30 minutes.

What do I request on the call?

After your identity is verified, you’ll be able to tell the customer service representative that you want to do a rollover – make sure that you indicate you intend to do a direct rollover, if relevant.

Direct Rollovers

A direct rollover is where your funds are directly transferred to your new IRA provider. It often means the check is made out in the name of that IRA provider but “for the benefit of ” (FBO) you. This is generally the simplest approach. Your 401(k) provider will usually ask you for the name and mailing address of your new IRA provider and your new IRA account number. We also recommend that you take this opportunity to update your mailing address since they may have an old address for you. That’s because you’ll be sent additional documents, including a tax-related document known as a 1099-R that tells the IRS you’re doing a tax-free rollover.

Indirect Rollovers

An indirect rollover is where funds are first transferred to you, or a check is made out in your name. You deposit the funds in one of your own accounts, but then you have 60 days to send that money to your IRA account if you want the rollover to be tax-free. This can create a little extra work for you which is why most people opt for a direct rollover.

STEP 4

Finish any last transfer steps

Chances are that by this stage you’re done, and your 401(k) provider has initiated the process of rolling over your 401(k) into your new IRA. If so, congrats on getting to the finish line!

But there can sometimes be a small extra step at this stage. That’s because some 401(k) providers will only make distributions of your 401(k) funds to you, not to your new IRA provider. If that’s the case then they’ll send a check with your money to your mailing address. It’s then up to you to forward that check to your new IRA provider using the mailing details that you’d previously looked up. If you’re working with a financial advisor, you may want to discuss retirement investment options and allocations for your rollover.

How long do I have to forward the check?

You should forward the check you get right away. Even if the check is made out to your IRA provider (and thus not an “indirect rollover”), you should try to do it within 60 days of receiving it. This helps make the transfer free of any tax implications or an early withdrawal penalty (commonly known as “cashing out”). A 10% early withdrawal penalty can be incurred if you don’t transfer the money into your rollover account within that 60-day window, and face additional federal tax implications, and potentially other state tax penalties. For more information, consult a local tax professional.

What if my check gets misplaced or lost in the mail?

This unfortunately does happen every once in a while, but don’t worry — your money hasn’t disappeared. If your check doesn’t arrive, then you’ll have to call your 401(k) provider again and ask them to issue a new one.

They’ll place a stop on the first one, and nobody will be able to cash the first (lost) check since it’s generally made out to you or your IRA provider and will always stipulate that it’s “for the benefit of” or FBO, your name.

STEP 5

Make sure your IRA is being invested appropriately

Remember there are two goals of rolling over an old 401(k) into an IRA — the first is to consolidate your 401(k) assets, and the second is to grow those retirement funds by developing your retirement investment allocation and, hopefully, increasing your account balance over time.

Your very last step in executing a rollover is to make sure that the second goal is being met and that the funds in your IRA are being appropriately invested. If you chose an automated IRA then this should happen automatically. That’s because as soon as your funds arrive they’ll be allocated into a portfolio that was created for you during the sign-up process for your new IRA account. You should still log in and check to make sure that’s the case, but usually, there’s nothing more for you to do.

If you choose a self-directed account then you’ll have to invest the money yourself. Often the simplest option is to purchase a target-date retirement fund — this is a retirement investment vehicle that puts your retirement funds into a combination of higher-risk, higher-return stocks and lower-risk, lower-return bonds. The exact mix changes as you age so that you have more stocks when you’re younger and less as you get older: because stocks generate higher returns but are more volatile we should own more of them early on when we can withstand their fluctuations in order to achieve their higher long-term returns.

Otherwise, you can assemble a retirement investment portfolio on your own by making trades and make additional IRA contributions. It can be helpful to work on retirement planning with a financial advisor who can help with everything from forecasting your retirement income to planning your retirement withdrawal strategy. This can be especially helpful if you’re looking to better understand your tax rate, plan rules, and more.

Conclusion

401(k) rollovers are a great way for you to transfer your retirement funds from your old employer-sponsored plan without any tax consequences. If you roll over into an IRA, you may also be able to invest in a wider range of assets, which can be helpful in retirement planning.

The process can seem a little daunting, but there are just five key steps to follow. Most people who complete a rollover are glad they did. The assets in accounts like your IRA will probably end up being your biggest source of financial support when you retire. Investing a little time to get those assets set up and working for you in the right way can really pay off. Don’t be afraid to reach out to a financial advisor if you have any remaining questions.

Is there a service out there that can handle this process for me?

Yes — that’s where Capitalize comes in!

We’ve made it our mission to make this process easier for everyone. If you choose to do a 401(k)-to-IRA rollover, we can handle the entire process for you. Most of the process can be done online and our rollover experts will guide you through any of the manual parts. It’s 100% free to you (we make money if you choose to open a new IRA).

Extras

Roth conversions

For those who want extra credit: you may have heard of the term “Roth conversion”. That’s when somebody rolls over a traditional 401(k) into a Roth IRA. Why would somebody do this? It all comes down to taxes. Recall that with a traditional 401(k) your contributions are made pre-tax. When you roll over a traditional 401(k) into a traditional IRA, your assets continue to grow with no taxes being paid — until you start withdrawing your money, usually at the time of retirement. At that point, you’ll pay income taxes at whatever your rate will be then. If you believe your income tax at retirement will be greater than your income tax today, then it might make sense to consider a Roth conversion. This allows you to pay income taxes on your rollover amount today. Then, the money in your Roth IRA grows and can be withdrawn tax-free.

If you’re having trouble deciding on a Roth conversion, consult a qualified tax advisor or qualified financial advisor.