How to Roll Over a 401(k) to an IRA: Step by Step

When you leave a job, your 401(k) (opens in new tab) doesn't follow you automatically. You have four choices: leave it in the old plan, roll it into your new employer's plan, roll it into an IRA, or cash it out. Leaving it where it is works fine if the investment menu is good and the fees are low. Rolling it to a new employer's plan consolidates accounts but you're still limited to whatever that plan offers. And cashing it out? That means paying income tax on the full amount plus a 10% early withdrawal penalty if you are under 59.5. Almost always the most expensive option, and the money permanently loses its tax-advantaged status.

Rolling a traditional 401(k) to a traditional IRA preserves the tax-deferred status. No tax is owed. The money moves from one qualified account to another. Once it's in the IRA, you can invest it in individual stocks, ETFs, bonds, mutual funds, whatever your IRA custodian supports. That's the reason most people roll old 401(k)s to IRAs instead of leaving them sitting in a former employer's plan.

For background on how IRAs compare to 401(k)s and other account types, see the retirement accounts explainer.

A direct rollover sends money straight from your old 401(k) plan to your IRA custodian. The check is made payable to the IRA custodian for the benefit of your account, not to you personally. You never touch the money. No tax withheld. No 60-day deadline. This is the method to use.

An indirect rollover is where things get messy. The distribution goes to you first. The plan is required by law to withhold 20% for federal income taxes, so you only receive 80% of the balance. From there you have 60 days to deposit the full original amount (opens in new tab) into an IRA, including the withheld 20%, which you have to cover out of pocket. Deposit only the 80% you received and the withheld 20% is treated as a taxable distribution, subject to the 10% early withdrawal penalty if you are under 59.5. You'll get the withheld amount back as a tax refund when you file, but the penalty and any additional taxes due are real costs that don't go away.

The indirect rollover is legal. There's just almost no reason to use it for a standard 401(k)-to-IRA transfer. Request a direct rollover. Always. If the plan administrator seems confused by the terminology, ask them to make the check payable to your IRA custodian rather than to you. That phrasing settles the question.

A traditional 401(k) contains pre-tax money. A Roth IRA holds post-tax money. Rolling a traditional 401(k) into a Roth IRA means converting pre-tax dollars to post-tax dollars, and the entire amount becomes taxable income in the year of the conversion. No 10% early withdrawal penalty on the conversion itself, though earnings withdrawn too early from the Roth later may be subject to penalty depending on your age and how long the account has been open.

So when does a Roth conversion make sense? It depends on your current tax bracket versus your expected bracket in retirement, the size of the account, and several other factors. A large conversion can push you into a higher bracket in the year you convert, so this isn't a quick back-of-the-envelope calculation. The IRS publishes detailed rules on IRA contributions and conversions in Publication 590-A (opens in new tab). It benefits from a tax professional's review. The general principle: converting is more likely to make sense when you expect to be in a higher tax bracket in retirement than you are today, or when the account is small enough that the tax bill is manageable.

If you have a Roth 401(k) (contributions already made with after-tax dollars), rolling it into a Roth IRA is a tax-free transfer, similar to the traditional-to-traditional rollover. Same advice applies: direct rollover is the right method.

First, decide where the IRA will live. Open the account at your chosen custodian before you initiate the rollover. The IRA needs to exist and be open before the money arrives. If you plan to have it managed by an investment adviser, open the account under their advisory agreement first. Narstar manages rollover IRAs held at Interactive Brokers, starting at $100. If that's the direction you're considering, see how it works below before you start the paperwork. Still deciding on an adviser? Understanding the difference between fee-only and fee-based structures matters before you sign anything.

Second, contact your old 401(k) plan administrator and tell them you want a direct rollover to an IRA. They'll ask for the receiving custodian's name, account number, and often a letter of acceptance from the new IRA custodian. Get this paperwork from your IRA custodian first so you have it ready.

Third, confirm the check is made payable to the IRA custodian, not to you. The payable-to line looks like: "[Custodian Name] FBO [Your Name], IRA." FBO means "for the benefit of." If the check is made payable to you instead, you're in indirect rollover territory with a 60-day deadline. That's the situation you're trying to avoid.

Fourth, once the money arrives at the IRA, it sits in cash until it's invested. This is an active decision. The IRA custodian won't invest it for you unless there's an advisory agreement in place. Working with a managed account? The adviser invests it once the funds clear. Managing it yourself? You decide where to put it. Cash sitting uninvested in an IRA still has the same tax treatment, but the investment risk of leaving it in cash is yours to account for.

If you roll a 401(k) into a Rollover IRA at Interactive Brokers, we can manage that account under one of our three model portfolios. The account is yours, held in your name at IBKR. Narstar has trading authority to manage the investments but can't withdraw funds or transfer money out. The rollover itself is something you initiate with your old plan and IBKR. Once the money is in the account and you've signed the advisory agreement, we match it to the Income Portfolio or Growth Portfolio based on your goals and how long you plan to invest.

The advisory fee applies to the balance: 0.60% annually for Income, 1.20% for Growth, 1.60% for Speculative, billed quarterly. The homepage shows the dollar amount at any balance. No setup fee. No rollover processing fee. The only fee is the ongoing advisory fee on the balance.

One thing to be clear about: we don't help with the rollover paperwork itself. Contacting your old plan administrator and arranging the transfer is between you, your old plan, and IBKR. What we do is manage the portfolio after the money arrives. Before you sign on with any adviser, ask how they get paid, what they invest in, and what happens if you want to leave. Those three questions matter more than people think. If you have questions about what the account would look like once it's set up, the contact form is the right starting point.