Recently, two people I love asked me for the same favor.
My wife, Sara, needs to roll her old 401(k) into an IRA because her bank got out of the IRA business. A good friend wants to move part of her 401(k) into an IRA for more investment choices.
Both were a little nervous about it. And that surprised me.
I’ve been moving retirement money around since I started out as an investment advisor about 45 years ago. I’ve done it more times than I can count. To me, it’s routine. To most people, it’s a big, confusing box they’d rather not open.
Here’s the good news: It’s easier than you think.
Here’s the catch: There’s one wrong move that can hand the IRS 20% of your money and stick you with a tax bill. Miss a deadline, and you could owe a penalty on top of that.
So let’s do this right. Here’s exactly how to roll a 401(k) into an IRA, step by step.
1. First, make sure you’re allowed to roll it over
Most people can roll a 401(k) into an IRA once they leave the job — whether they quit, got laid off, or retired. That’s the usual trigger.
Still working there? You may be stuck for now. Some plans allow an in-service rollover, often once you hit 59½, but plenty don’t. A quick call to your plan administrator or a look at your plan documents settles it.
Sara’s situation was simple. Her only hitch was that her old bank got out of the IRA business — so she just needed to pick a new place to send the money.
2. Get clear on why you’re moving it — and whether you should
People roll over for good reasons. An IRA usually offers far more investment choices than a workplace plan’s short menu. Fees are often lower. And combining a few old accounts into one makes your money easier to track.
My friend’s reason was choice. She’s moving part of her 401(k) into an IRA to get options her plan doesn’t offer. Perfectly valid.
But rolling over isn’t always the right call. Two things to weigh first:
- Creditor protection. Money in a 401(k) generally gets strong protection from lawsuits and creditors under federal law. IRAs get some protection too, but it’s often weaker and varies by state. If you’re in a high-liability job, that matters.
- The “rule of 55.” If you leave your job in the year you turn 55 or later, you can usually tap that 401(k) penalty-free before 59½. Roll it into an IRA and you can lose that early-access door.
Neither is a dealbreaker for most people. But know what you’re trading before you move.
3. Pick where the money’s going
This is where a lot of people freeze. There are hundreds of brokerages and fund companies out there, every one of them insisting it’s the best. How are you supposed to choose?
Start by knowing what you’re shopping for. You want three things: low or no account fees, a deep bench of cheap index funds and exchange-traded funds, and customer service that’ll actually pick up the phone or otherwise and help you with the transfer.
Now here’s a trick. Pull up your favorite AI chatbot and ask it something like this:
“I’m rolling a 401(k) into an IRA and need to pick a brokerage. I want low or no account fees, a wide selection of low-cost index funds and ETFs, and customer service that will actually help me complete the transfer. Which companies would you suggest, and why?”
Ten seconds later you’ll have a short list of names, with reasons attached. That beats staring at a search page full of ads.
But don’t stop there. AI makes mistakes, and fee schedules change. Take those names and check them yourself — go to each company’s own site, confirm the fees, look at the fund lineup, and call their rollover desk to see how they treat you on the phone.
The AI narrows the field. You still make the call.
If your whole 401(k) picture is still a little fuzzy, here’s a plain-English primer on how these plans work.
4. Open the new IRA first — and match the account type
Open the receiving IRA before you touch the old 401(k). This isn’t just tidiness. Your old plan can’t send the money anywhere until you hand it a destination — the new custodian’s name and your new account number. No account, no rollover.
One detail trips people up: Match the type. Roll a traditional 401(k) into a traditional IRA and you owe no tax. Roll that same pre-tax money into a Roth IRA and you’ve triggered a taxable conversion — meaning you’ll owe income tax on the whole amount this year.
Sometimes a Roth move is worth it on purpose. But do it by accident, and you’ve handed yourself a nasty April surprise.
Quick aside — most internet financial advice comes from people who weren’t alive during the last recession. I’ve been writing about money for more than 35 years. Want rock-solid advice? Sign up for the free Money Talks Newsletter. Takes 10 seconds. No fluff. No spam.
5. Ask for a direct rollover — this is the whole ballgame
Here’s the one step that separates a clean rollover from an expensive mess.
First, something that surprises people: Depending on whether it’s an IRA or 401(k), your new IRA provider might not be able to just reach in and grab the money for you.
If you’re moving an IRA from one brokerage to another, no problem. You give the new firm the old account info and the new firm will pull it. Easy peasy.
But a 401(k) is different. It’s an employer plan, and you have to tell it to let go of the money.
So you have to start the process. That might mean a phone call to your old plan, a request through the plan’s website, or a paper form. Depends on the plan.
Your new IRA provider will often help. Some have rollover desks that’ll get on the phone with the plan administrator right alongside you. They just can’t do it without you.
However you reach them, here’s what you say: You want a direct rollover. The money goes straight to your new IRA custodian. You never touch it. Some folks call this a trustee-to-trustee transfer. Same idea: institution to institution.
Do it this way and, according to the IRS, there’s no tax withholding and no clock ticking.
Now the alternative — the trap. If the plan instead cuts a check payable to you (an indirect rollover), the IRS requires them to withhold 20% for taxes right off the top. Even if you swear up and down you’re rolling it over.
Then you’ve got 60 days to deposit the full amount into your new IRA — and here’s the kicker: You have to replace that withheld 20% out of your own pocket to make the deposit whole.
Miss the deadline or come up short, and the shortfall gets taxed as income. Under 59½? Add a 10% penalty.
On a $100,000 rollover, that’s $20,000 you’d have to cover from savings just to avoid a tax hit. Why deal with any of that? Say you want a direct rollover and skip the whole circus.
One more thing that scares people off: You may have heard you can only do one rollover a year. That limit applies to IRA-to-IRA rollovers — not to moving a 401(k) into an IRA, and not to direct trustee-to-trustee transfers. Don’t let that myth stop you.
6. If they mail a check, handle it the right way
Sometimes, even with a direct rollover, the old plan won’t wire the money. They’ll mail a paper check instead. Don’t panic — just check who it’s made out to.
For a proper direct rollover, the check should be payable to your new custodian “for the benefit of” you — something like “New Custodian FBO Your Name.” Not payable to you personally. That distinction is what keeps it withholding- and penalty-free.
Get a check like that? Forward it to your new IRA provider right away, or deposit it through its app. The faster it lands, the less there is to worry about.
7. Confirm it landed — then actually invest it
Once the money shows up in your new IRA, you’re not quite done. Here’s a mistake I see constantly: People finish the transfer, then leave the whole balance sitting in cash.
Remember: An IRA isn’t an investment. It’s an account. When I was on Wall Street, I’d say, “Imagine your IRA is an empty bucket. You still have to fill that bucket with investments.”
Rolled-over money usually arrives as uninvested cash. You have to choose where it goes — index funds, ETFs, a money market fund, whatever fits your plan. Until you do, it just sits there earning next to nothing while inflation nibbles away.
So log in. Confirm the full amount arrived. Then put it to work.
Not sure how? Don’t let that stop you, and don’t let anyone convince you it’s complicated. I’ve laid out everything a beginning stock investor needs to know in a single article — index funds, dollar-cost averaging, why fees matter more than you think.
If you’d rather start with the ground rules, these eight basics for beginning investors cover the traps that catch people early. Read one, or read both. Just don’t leave the money in cash. Further questions about which investments to choose? Ask your AI buddy. It will explain everything as many times as you’d like.
The bottom line
That’s the whole thing. Seven steps, and the one that matters most is Step 5: say the words “direct rollover,” and never let the money touch your hands.
Once I walked Sara and my friend through these steps, the whole thing stopped looking so intimidating. It usually does.
If you’ve been putting this off because it felt complicated, I get it. But now you know the moves — and the one trap to dodge. Go get it started.
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