Setting Up a 401(k) Rollover Into an IRA

12 October 2025

Let’s talk money – and more specifically, your retirement money. If you've recently left a job (or are planning to), you're probably wondering what to do with that old 401(k) account. Ignoring it isn’t the best move. Letting it sit there with your old employer can feel like leaving your favorite sweatshirt at a friend’s house – sure, it’s safe, but it’s not doing you much good there.

Enter the 401(k) rollover to an IRA – a smart, flexible option that puts the money back in your hands. But before diving in, you’ve got to navigate a few steps, do some paperwork, and make the right calls. Don’t worry – I’ve got your back. We’ll walk through this together.

What is a 401(k) Rollover?

Let’s break it down first. A 401(k) rollover simply means moving the funds you've stashed in a 401(k) retirement plan from a previous employer to a new account – typically an IRA (Individual Retirement Account).

Why do that? Well, think of it like transferring your savings from a piggy bank to a high-interest savings account. Both keep your money, but one works harder for you.

So, when you leave your job (voluntarily or not), you usually have four choices for your 401(k):
1. Leave the money in your old employer’s plan
2. Roll it over into your new employer’s 401(k) (if allowed)
3. Roll it into an IRA
4. Cash out (with potential taxes and penalties – ouch!)

Of these, rolling it into an IRA often offers the most flexibility and control.

Why Consider Rolling Over to an IRA?

Great question. Here’s why an IRA can be a smart move:

1. More Investment Choices

401(k)s are like buffets with a limited menu – your options are chosen by your employer. IRAs, on the other hand, give you access to a whole gourmet kitchen. Stocks, mutual funds, ETFs, real estate investment trusts (REITs) – you name it!

2. Potentially Lower Fees

Some 401(k) plans come with high administrative fees. And let’s be real – no one likes fees that eat away at gains. With an IRA, you can compare providers and pick one with competitive (or even zero) fees.

3. Easier Consolidation

If you’ve worked multiple jobs and collected a few 401(k)s along the way, rolling them into a single IRA can make managing your retirement savings much simpler. One account. One statement. One login. Sounds nice, right?

4. Continued Tax-Deferred Growth

When you do a rollover the right way, there’s no tax hit. Your money keeps growing tax-deferred – just like it did in your 401(k).

5. Better Estate Planning Options

IRAs generally offer more flexible options when it comes to leaving money to your heirs. It’s not something we like to think about, but it’s good to plan for.

The Rollover Process, Step by Step

Now that you’re sold on the idea (or at least curious), let’s walk through the steps to roll over a 401(k) into an IRA. It’s not overly complicated, but you want to get it right to avoid taxes or penalties.

Step 1: Choose the Right IRA Provider

First things first: pick where you want your IRA to live. Some popular choices include:

- Vanguard
- Fidelity
- Charles Schwab
- E*TRADE
- TD Ameritrade

Look at fees, available investment options, ease of use, and customer service. Think of it like shopping for a new bank – choose a provider that fits your style.

There are two main types of IRAs to choose from:
- Traditional IRA – maintains the tax-deferred status of your 401(k)
- Roth IRA – requires you to pay taxes on the rolled-over amount now, but allows tax-free withdrawals in retirement (if certain conditions are met)

Most folks choose a Traditional IRA for a rollover, unless they want to do a Roth conversion.

Step 2: Open the IRA Account

You’ll want to open the IRA before starting the actual rollover. Many providers let you do it online in under 15 minutes. You’ll need:

- Your Social Security number
- Your employer’s plan info
- Existing account details
- A funding option (you’re not funding it yet – just prepping)

Step 3: Request a Direct Rollover

Now, this part is crucial. When contacting your old employer’s plan administrator, ask for a direct rollover. This means the funds go straight from your 401(k) to your new IRA – no detours, no taxes withheld.

If the check is made out to you, the IRS considers it a distribution, and you could get hit with taxes and a 10% early withdrawal penalty (unless you're over 59½). Even if you deposit it in your IRA within 60 days, 20% will be withheld for taxes. So yeah, direct rollover is the way to go.

Step 4: Deposit the Funds (If Indirect)

In the rare case you end up doing an indirect rollover, where the check is made out to you, make sure to deposit the full amount (including the 20% withheld) into your IRA within 60 days. You’ll need to make up that 20% out of pocket to avoid being taxed on it. Later, you can reclaim it on your tax return.

Step 5: Allocate Your Investments

Once the money hits your new IRA, it’s time to put it to work. Choose a mix of investments based on your goals, risk tolerance, and time horizon.

Not sure where to start? Many IRA providers offer target-date retirement funds – they adjust your asset mix over time as you near retirement.

If investing feels overwhelming, consider speaking with a financial advisor.

Common Mistakes to Avoid

Rolling over a 401(k) isn’t rocket science, but some pitfalls can trip up even the financially savvy. Keep these in mind:

❌ Taking a Cash Distribution

Tempting? Maybe. Smart? Nope. If you cash out your 401(k), you’ll pay taxes, penalties (if under age 59½), and you’ll lose the power of tax-deferred growth.

❌ Missing the 60-Day Rule

If you do an indirect rollover, the clock starts ticking. You’ve got 60 days to get that money into an IRA, or the IRS treats it like income. That means taxes, and likely a penalty too.

❌ Not Understanding Roth Conversions

Rolling from a 401(k) or Traditional IRA into a Roth IRA? You’ll owe taxes upfront. That’s fine if you plan for it, but it can be a shock if it catches you off guard.

❌ Forgetting About Beneficiaries

When you set up your IRA, be sure to name a beneficiary. This ensures your money goes where you want it to if something happens to you.

When Does a Rollover Make Sense?

Okay, we should also talk about when doing a rollover is actually the best route. It’s not a one-size-fits-all solution.

✅ Leaving a job and don’t want to leave money behind

✅ Looking for better investment options than your old 401(k)

✅ Wanting to consolidate accounts from various jobs

✅ Retiring and want more control over withdrawal strategies

✅ Planning a Roth conversion as part of your overall tax strategy

But keep in mind: if your new employer has an excellent 401(k) plan with low fees and solid investment choices, you might consider rolling your old plan into your new one. The key is comparing both options.

The Bottom Line

Moving your old 401(k) to an IRA isn’t just about switching accounts – it’s about taking charge of your retirement future. It gives you more control, more choices, and often, fewer fees. It’s like trading in a flip phone for a smartphone – same function, way more features.

Think of your IRA as a retirement toolbox. By choosing the right tools and using them wisely, you can build a comfortable, stress-free future.

So, don’t let that old 401(k) sit in the shadows. You’ve worked hard for that money – now make it work even harder for you.