How to Rollover your 401(k) in 5 Easy Steps

Are you thinking about rolling over your 401(k)? People usually arrive at this conclusion if they have changed jobs or just want better control over their retirement funds. A 401(k) rollover refers to transferring money from one retirement account, such as an old employer’s 401(k), into a new 401(k) or an Individual Retirement Account (IRA).

Why consider a rollover?

Well, maybe your old 401(k) plan has high fees, and you’re tired of seeing your profits reduced. Perhaps you would like more investment options to diversify your portfolio. Or maybe you are switching jobs and want to consolidate your accounts to make things easier to track. Whatever the reason, rolling over your retirement savings can give you many benefits and potentially help you save more money over time, too.

But you need to get the 401(k) rollover process right. Mistakes, such as missing deadlines or selecting the incorrect account, can trigger taxes and even penalties. This article can help you understand how to rollover a 401(k) in five simple steps. So, without further ado, let’s get to it.

Below are 5 steps of the 401(k) rollover process:

Step 1: Check your 401(k) statements to know the balance at the time of rollover

You need to start with the basics and check your account balance first. This can determine what your options are and how much control you have over the process.

Why does the balance matter so much? Because there are some thresholds set by the plan rules, and if your balance falls below those, your old employer might make the decision for you.

Let’s break this down.

If you have less than $1,000 in your 401(k), your former employer can automatically cash you out. In this case, they can send you a check for the balance, and if you are under 59½, you will also owe a 10% early withdrawal penalty. Sure, you can still roll that amount into an IRA, but you have to act quickly, within 60 days. If you do not know how much you have, you will not know what is coming. You might assume your money is sitting safely where you left it, but in reality, your employer could have already started the process of cashing it out or transferring it to another account. This can result in taxes, penalties, and more hassles down the line.

Now, if your balance is between $1,000 and $7,000, the rules change a bit. Your ex-employer can move your money into a default IRA of their choice, even without consulting with you. This is your company’s way of cleaning up small accounts while still keeping the money invested on your behalf. However, you may or may not love the investment options or the fees associated with that default IRA. Nevertheless, the good news is that you can move it to an account of your choice later.

Now, if your 401(k) balance is over $7,000, you are in complete control with respect to what happens to your 401(k). Your old employer cannot move your money without your say-so. Hence, now you get to choose whether you want to leave the money in the old plan (provided your employer allows it), roll it over to your new employer’s plan, or transfer it into an IRA. You get to call the shots here.

Let’s move on to Step 2.

Step 2: Consider your rollover options

You have three choices with respect to the rollover. Let’s discuss them all in detail:

     a. Transfer the money to your new employer’s 401(k) plan

If you have switched jobs, you have the option to move your old 401(k) into your new employer’s plan. Did you know that 401(k) accounts are protected under federal law from most creditors and lawsuits? This is why sticking to a 401(k) can be a good choice after all! But you need to make sure your new employer allows it. Not all companies accept rollovers from previous employers. Before you put on your thinking cap and start planning, ensure that you first confirm this with your new Human Resources (HR) department and understand how to transfer your 401(k) to the new company.

If they do accept rollovers, you can consider moving your old 401(k) into your new one. This way, you can keep growing your money tax-deferred. This can also simplify your life, as having everything in one place makes it easier to manage your retirement savings. You do not have to keep track of multiple 401(k)s, juggle between old and new accounts, or be forced to remember account details and logins of all plans. Moving to a new 401(k) can also be beneficial if you get lower fees in the new account. However, you need to compare the costs in the new and the old accounts to be sure you are moving to a low-cost account.

That said, this option is not perfect for everyone. You need to understand the rules of your new plan. Every 401(k) has its own rules about rollovers, investment choices, and fees. You must check the investment options in the new account. Check if your new plan offers low-cost, high-performing funds, so you can potentially earn better long-term returns. And if you hold appreciated company stock in your old 401(k), you should consider the impact of losing Net Unrealized Appreciation (NUA) benefits if you roll it over.

     b. Roll over the funds into an IRA

The second option is to roll over your old 401(k) into an IRA. But before you make the move, there is an important decision you need to make:

Should you roll into a Traditional IRA or a Roth IRA?

Both have tax benefits, but the advantages and consequences work in very different ways. Let’s walk through them so you can make a choice that fits your financial goals:

If you choose a Traditional IRA, you are keeping things in the same tax-deferred zone. You will not owe any taxes at the time of the rollover if your old 401(k) is also traditional. The money continues to grow tax-deferred, and you can contribute up to $7,000 a year in 2025 or $8,000 if you are over 50.

But just like 401(k)s, Traditional IRAs come with Required Minimum Distributions (RMDs) once you hit age 73. You will have to start withdrawing money, whether you want to or not, and pay taxes on those withdrawals.

Now, if you are thinking long-term and do not mind paying some taxes today, you might consider rolling your old 401(k) into a Roth IRA. Qualified withdrawals from a Roth IRA in retirement are completely tax-free, and there are no RMDs, ever! Plus, Roth IRAs are often favored for estate planning as they offer more flexible withdrawal rules for your beneficiaries. However, if your old 401(k) is pre-tax, as most are, moving it into a Roth IRA will trigger a tax on the full amount you convert. This happens in the year you make the rollover. So, you will need to plan ahead, maybe even spread the conversion over several years if you want to lower the tax hit. You can discuss this situation with a financial advisor to get a better idea of how big a tax hit this can be for you. On the flip side, if you are rolling over a Roth 401(k) to a Roth IRA, there is no additional tax liability, and you still get to enjoy the benefits of tax-free growth and no RMDs.

Irrespective of the type of IRA you select, one thing you should be aware of is that IRAs do not always offer the same legal protections as 401(k) plans. While 401(k)s are protected under federal law from most creditors, IRAs fall under state rules, which can vary. And while IRAs may offer a wider range of investment options, they may come with higher fees than what you were paying in your employer’s plan.

Hence, weigh the tax impact, fees, legal protections, investment choices, and long-term benefits carefully before selecting an IRA. And consider looping in a financial advisor to help you make the best move.

     c. Cash it out

The third choice is to cash out your funds. While not precisely a rollover, it is an option you have, and so understanding how it works is essential.
You can withdraw your 401(k) money entirely instead of rolling it over. However, if you are under 59.5 years of age, be prepared for a double hit:

• You will likely owe ordinary income taxes
• You will also incur a 10% early withdrawal penalty

A big chunk of your retirement savings could disappear in this process before it even reaches you. Nevertheless, this is a choice that you have and one you must consider.

Step 3: Begin the 401(k) rollover process

Once you have decided where your money is going, it is time to start the 401(k) rollover process officially. This part might involve a little paperwork and a few other simple steps.

First, you need to request the rollover from your old 401(k) provider. You can complete this online or submit a signed form to your employer, depending on your company’s policies. You might also need to inform your new 401(k) or IRA provider. You may also have to submit some documentation, such as a Letter of Acceptance (LOA) and basic identity proofs.

Step 4: Transfer the funds

Once your paperwork is in motion, it is time to actually move the money. You have got a few ways to transfer your 401(k) funds, but by far, the safest and best way to roll over a 401(k) is through a direct rollover.

In a direct rollover, the money moves straight from your old 401(k) to your new retirement account. So, you can ask your old employer for a direct rollover, and not a check made payable to you.

Why?

Because if the money is sent directly to your new plan or IRA, there are no taxes or penalties. It is also more straightforward and less hassle-free, with little left for you to do. If the check is made out to you personally, the Internal Revenue Service (IRS) steps in. Your plan administrator is required to withhold 20% for federal taxes, whether you plan to keep the money or not. And you have just 60 days to deposit the full amount into another qualified retirement account, or else it is treated as an early withdrawal. If this happens, you will owe income taxes on the full amount and possibly a 10% penalty if you are under 59½.

That is why it is crucial to be clear when making the request. Always ask for a direct rollover and double-check that the funds will go straight to your new retirement account and not to you personally. But you must know that, unfortunately, not all plan providers allow direct transfers, so you need to confirm this in advance. If your old 401(k) does not support direct rollovers, you may have to do an indirect one. In this case, you can hire a financial advisor to be extra cautious about the timing and tax implications.

Step 5: Follow up with the transfer

Rollovers typically take two to four weeks to complete, depending on how quickly both your old and new plan providers process the paperwork. You can keep track of the transfer and reach out to your plan provider directly to get a clearer picture of the expected timeline. However, at this step, you have to sit back and relax and let your plan administrator do the work.

To conclude

When it comes to rolling over your 401(k), you have a lot of options, but each of these has its own set of pros, cons, and long-term consequences. You can move your money into a new employer’s 401(k), roll it into a Traditional IRA or Roth IRA, or, if absolutely necessary, cash it out (although it may be better to avoid this last option).

But do not take this decision lightly. The choice you make now could and will impact your retirement savings and financial security down the road.

So, take the time to research each option. Compare the costs, the flexibility and control, penalties, and the tax implications. You must also understand the process and the timelines involved in rollovers.

And if you are unsure about how to transfer your 401(k) to another account, talk to a financial advisor. You can use tools like the Wiser Advisor’s free advisor match tool to connect with 2 to 3 seasoned financial advisors who can help make sense of the options ahead of you.

For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.