The stakes are real. In Vanguard's 2025 plan data, Vanguard's How America Saves reports that 28% of terminating participants took cash, even though 94% of distributable assets stayed invested for retirement.
This guide covers a four-step process, when a rollover makes sense, what to review, and the mistakes to avoid. Verify current IRS rules and consult a qualified tax or financial professional for your situation.
Key Takeaways
- Correctly completed rollovers generally preserve tax-advantaged status.
- Direct rollovers usually avoid mandatory withholding and deadline risk.
- IRAs are not automatically better than an old or new employer plan.
- Compare costs, investments, protections, RMDs, loans, and employer stock first.
- Keep confirmations, then update beneficiaries and investments.
How to Roll Over Retirement Accounts
Step 1: Identify the account, assets, and rollover objective
Pull your latest statement and note:
- Plan type and vested balance
- Pre-tax, after-tax, and designated Roth amounts
- Employer contributions and employer stock
- Outstanding loans and beneficiaries
- Any distribution restrictions
Then name the goal: consolidation, broader investment choices, retirement-income planning, or moving money to a new employer plan.
Mixed pre-tax and after-tax distributions are generally allocated proportionately. For example, if an account holds $80,000 pre-tax and $20,000 after-tax and you take $50,000, you receive $40,000 pre-tax and $10,000 after-tax. You can't roll over only the after-tax dollars.
Step 2: Select and prepare the receiving account
The IRS rollover chart covers traditional and Roth IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, governmental 457(b)s, and designated Roth accounts. Match source to destination:
- Pre-tax plan money can go to a traditional IRA or another eligible plan.
- Pre-tax money moved to a Roth IRA is a taxable conversion.
- Designated Roth accounts go to a Roth IRA or another designated Roth account, not a traditional IRA.
- A Roth IRA rolls only to another Roth IRA.
- SIMPLE IRA money generally can't move to a non-SIMPLE account until two years after the first contribution.
Open the receiving account first and confirm both sides accept the transfer.
Step 3: Request the transfer using the safest method
Call the current plan administrator and the receiving custodian. Ask for a direct rollover, and confirm the payee name and delivery instructions.
The IRS uses three terms:
- Direct rollover: plan money goes straight to the receiving plan or IRA.
- Trustee-to-trustee transfer: money moves between IRA custodians.
- 60-day rollover: money is paid to you, then redeposited.
If a plan pays you directly, it generally withholds 20%. You have 60 days to redeposit, and you must replace the withheld amount from other funds to defer tax on the full taxable amount.
Step 4: Confirm receipt, documentation, and investments
Verify the full eligible balance arrived in the intended account. Keep statements and transfer confirmations.
For 2026 reporting, a direct rollover is generally reported on Form 1099-R (box 2a typically shows zero), and the IRA custodian reports the contribution on Form 5498. Check beneficiaries too.
Then invest the money. Vanguard's seven-year rollover analysis found a median of nine months to invest, and 28% of rollovers that arrived as cash were still uninvested after seven years.
When Should You Roll Over Retirement Accounts?
A rollover is a choice, not a requirement. The right answer depends on plan quality, your tax situation, and your retirement goals.
Situations where a rollover may make sense
- Consolidate several old accounts into one view
- Move beyond a narrow old-plan investment menu
- Gain more flexible withdrawal planning
- Add professional portfolio management
These are possible benefits, not guarantees. Tax timing still matters on Roth money: SECURE 2.0 removed lifetime RMDs for designated Roth workplace accounts starting January 1, 2024, and Roth IRAs have none for the owner.
Situations where staying put or using a new employer plan may be better
- Age-55 exception: If you separate from service in or after the year you turn 55, workplace-plan distributions can avoid the 10% early tax. IRAs can't use that exception.
- Still working: You may delay RMDs in your current employer's plan if you aren't a 5% owner. Traditional IRAs don't qualify.
- Low-cost, well-designed plan: Institutional pricing and plan-level protections can be hard to match.
- Loan features: Some plans allow loans; IRAs don't.
Alternatives to a full rollover
- Leave the money in the old plan
- Move it to a new employer plan
- Roll over part of the balance
- Take a permitted distribution
- Cash out
Cashing out can trigger income tax and possibly a 10% penalty. Employer stock may qualify for net unrealized appreciation (NUA) treatment, which generally defers tax on the appreciation until the shares are sold. Get tax advice before rolling it away.
A practical decision checklist
Before signing a distribution form, compare:
- Total costs and investment options
- Tax classification (pre-tax, Roth, after-tax)
- Withdrawal needs and RMD timing
- Creditor protection and beneficiary treatment
- Advice and service needs
- Employer stock, loans, or other special assets
What to Review Before and After a Rollover
Gather documents and confirm compatibility
Collect these materials before you start:
- Recent account statements
- Plan summary materials and distribution instructions
- Fee disclosures and beneficiary forms
- Loan details and employer-stock information
Confirm eligibility with both administrators, and check current IRS guidance.
Compare fees, investments, and services
Don't assume an IRA is cheaper than your workplace plan. In 2023 BrightScope data, ICI's plan profile shows total plan cost of 0.74% of assets for the average plan, 0.48% for the average participant's plan, and 0.30% for the average dollar.
Those are differently weighted figures, not an IRA comparison. On the IRA side, FINRA lists administrative, account setup, and custodial fees. Commissions and transaction costs can add more. Ask for a written breakdown of:
- Administrative and account-level fees
- Fund expenses and transaction costs
- Advisory fees, if any
- Services, education, and portfolio management included
Advisers typically charge a percentage of assets. Lewis & Associates Capital Advisors, for example, charges a monthly fee on assets under management. Ask any adviser how they're paid and what their fees cover.
Evaluate tax treatment and account classification
- Traditional-to-traditional and Roth-to-Roth rollovers are generally not taxed.
- Pre-tax-to-Roth is a conversion, taxable to the extent pre-tax.
- A Roth 401(k) rolled into a Roth IRA doesn't carry over its five-year clock. The Roth IRA's own period applies, measured from your earliest Roth IRA contribution if you made one.
RMDs can't be rolled over, so take any required amount first.
Review access, protections, and post-rollover management
- Bankruptcy: the adjusted federal cap for IRA assets is $1,711,975 (effective April 1, 2025). Outside bankruptcy, IRA creditor protection varies by state.
- ERISA-covered plans: generally bar assignment of benefits, which can mean stronger creditor protection than an IRA.
- Inherited IRAs: the Supreme Court held in Clark v. Rameker (2014) that they aren't "retirement funds" under the federal bankruptcy exemption.
- Ongoing management: set an allocation, update beneficiaries, and review periodically. Watch market exposure during the transfer.
Common Mistakes and Troubleshooting
Missing the deadline or mishandling withholding
Common causes include:
- Receiving a check personally
- Not replacing the withheld 20%
- Missing the 60-day window
- Sending funds to the wrong account
If it happens:
- Contact the plan administrator and receiving custodian right away.
- Ask if the transfer can be corrected or reissued.
- Review IRS guidance. Rev. Proc. 2020-46 allows self-certification for reasons such as institution error or a misplaced uncashed check, but it isn't an IRS waiver and can be rejected later.
- Talk to a tax professional.
The one-rollover-per-12-months rule applies only to IRA-to-IRA rollovers. Direct plan-to-IRA rollovers and trustee-to-trustee transfers are excluded.
Choosing the wrong destination or confusing a rollover with a Roth conversion
Mismatched account types, mixed balances, employer stock, or an outstanding loan can create surprise taxes. If a loan is offset, a qualified plan loan offset can be rolled over by the tax-return due date, including extensions. Other defaults don't automatically get that deadline.
If anything looks off, pause and confirm treatment before proceeding.
Focusing only on fees or leaving money unmanaged
A low advertised fee doesn't prove a better outcome. Before you settle:
- Compare total costs and services
- Confirm the money was invested according to your plan
- Update beneficiaries
- File every confirmation
Market risk is also part of the plan. Lewis & Associates Capital Advisors notes that a $100,000 portfolio that falls 30% and then gains 30% ends at $91,000. Add a 6% annual withdrawal and recovery requires a 56.25% gain.
Conclusion
Rollovers work best when account types, destination, transfer method, tax treatment, and goals line up. Most avoidable problems come from a few repeat mistakes:
- Skipping eligibility checks
- Mishandling an indirect transfer
- Overlooking special assets
- Never comparing the old and new accounts
If your situation involves tax complexity, employer stock, loans, retirement-income planning, or several accounts, personalized guidance can help. Lewis & Associates Capital Advisors is a fiduciary, registered investment adviser in North Carolina offering tailored retirement and investment planning. Advisory clients pay a monthly fee on assets under management and no commissions. Even so, a rollover isn't right for everyone, and staying put may be the better call.
Frequently Asked Questions
How can I avoid taxes when rolling over a 401(k) to an IRA?
A direct rollover to a traditional IRA generally preserves tax deferral. Moving pre-tax money to a Roth IRA is a taxable conversion. Verify current IRS requirements.
Is there a fee to roll over your 401(k)?
It depends on the plan, custodian, investments, and adviser. Compare transfer, account, investment, and ongoing management costs in writing.
Can I transfer retirement accounts between 401(k)s and IRAs without penalty?
An eligible direct rollover generally avoids current taxes and the early-distribution penalty. Account type, distribution method, and special assets can change that.
How do I roll over a 401(k) to an IRA or a new employer's plan?
Confirm eligibility, open or identify the receiving account, and request a direct rollover from the plan administrator. Then verify the deposit and keep your tax documents.
Should I roll over my 401(k) to an IRA when I leave my job?
It depends on fees, investment options, services, protections, withdrawal rules, taxes, and the quality of both plans. Compare before deciding.
Can I keep my 401(k) after I retire, or do I need to transfer it?
Plan rules often allow you to leave assets in place. Compare staying, moving to an IRA or new plan, and taking distributions before you choose.
