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

When you leave a job, you have four options for your 401(k): leave it with your old employer, roll it into your new employer's plan, roll it into an IRA, or cash it out. The last option is usually a mistake. Rolling into an IRA is often the best move — more investment choices, lower fees, and full control. Here's how to do it correctly.

Direct Rollover vs. Indirect Rollover

This is the most important distinction. A direct rollover means the money goes straight from your 401(k) to your IRA — you never touch it. An indirect rollover means your 401(k) sends you a check, and you deposit it into your IRA within 60 days.

• Direct rollover: No taxes withheld, no risk of penalties — always prefer this
• Indirect rollover: Your employer withholds 20% for taxes, you must deposit 100% (including the withheld amount from your own pocket) within 60 days to avoid taxes and penalties
• Miss the 60-day window: The entire amount becomes taxable income, plus a 10% penalty if under 59½

Step 1: Open an IRA (if you don't have one)

Open a traditional IRA if your 401(k) has pre-tax money (which most do). Open a Roth IRA only if you're doing a Roth conversion and want to pay taxes now. Good low-cost options: Fidelity, Vanguard, Schwab — all offer $0 commission trades and access to index funds with expense ratios under 0.05%.

Step 2: Contact Your Old 401(k) Plan

Call your old employer's HR or the 401(k) plan administrator (often Fidelity, Vanguard, Empower, Principal, or similar). Ask for a 'direct rollover to an IRA.' They'll ask for:

• Your new IRA account number and custodian's name
• The receiving institution's address or wire instructions
• Your signature on a distribution form

Step 3: Initiate the Transfer

Some plans allow online transfers. Others require paperwork and can take 2–6 weeks. The check is usually made payable to 'Fidelity FBO [Your Name]' or similar — you may need to deposit it yourself. Don't panic if it arrives by mail; just deposit it promptly.

Step 4: Invest the Money

Once the funds land in your IRA, they'll sit in cash until you invest them. Don't forget this step. Choose low-cost index funds — a three-fund portfolio (US total market, international, bonds) or a target-date fund does the job.

Traditional 401(k) vs. Roth 401(k)

• Traditional 401(k) → Traditional IRA: No taxes due, straightforward rollover
• Roth 401(k) → Roth IRA: No taxes due, maintains Roth status
• Traditional 401(k) → Roth IRA: Taxable event — entire rollover amount added to income for that year. Only do this if you're in a low tax year or want to pay taxes now for future tax-free growth

What About the Old Plan's Fees?

Many 401(k) plans have institutional pricing with low expense ratios. But others charge 1–2% in administrative fees. Compare your 401(k)'s total annual cost (find it on your plan's fee disclosure) to what you'd pay in a self-directed IRA with index funds. The difference can be tens of thousands over a decade.