When you leave a job — whether through retirement, resignation, or redundancy — you typically have a decision to make about what to do with the money in your old employer’s 401(k). One of the most common and often sensible choices is to roll it over into an IRA. Done correctly, this moves your money without triggering taxes or penalties.
Why roll over into an IRA?
An IRA typically gives you access to a wider range of investment options than an employer 401(k) plan, which is limited to whatever funds your employer has chosen. IRAs can also offer more flexibility in withdrawal planning and estate planning. And consolidating old accounts into one place makes your retirement savings easier to manage and track.
What are the rollover options?
When you leave an employer, you generally have four choices for your old 401(k):
- Leave it in the old employer’s plan (if allowed)
- Roll it into your new employer’s plan (if that plan accepts incoming rollovers)
- Roll it into an IRA
- Cash it out (this triggers taxes and potentially a 10% penalty if you are under 59½)
Cashing out is almost always the least advantageous option. The rollover into an IRA is usually worth serious consideration.
Step 1: Open an IRA if you do not already have one
If you do not have an existing IRA, you will need to open one before you can complete the rollover. Most major brokerage firms — Fidelity, Vanguard, Schwab, and others — offer IRAs with no minimum opening deposit and a straightforward online application. Choose the type that matches your 401(k): a traditional 401(k) should roll into a traditional IRA; a Roth 401(k) should roll into a Roth IRA.
Step 2: Contact your old plan administrator
Reach out to the financial institution or HR department managing your old 401(k) and let them know you want to initiate a rollover. They will guide you through their specific process and paperwork. Ask specifically for a direct rollover.
Step 3: Request a direct rollover
A direct rollover means the funds are transferred directly from your old plan to your new IRA without passing through your hands. This is the cleanest approach — no tax withholding, no deadline pressure, and no risk of accidental taxation.
If instead you receive a cheque made out to you (an indirect rollover), 20% will be withheld for taxes. You then have 60 days to deposit the full original amount — including the withheld 20% from your own funds — into an IRA to avoid the rollover being treated as a taxable distribution. This is more complicated and carries more risk of error.
Step 4: Confirm the funds arrive and invest them
Once the rollover is complete, the money will typically land in your IRA as cash. It will not be invested automatically. Log in to your IRA account and direct those funds into your chosen investments. Leaving a large sum sitting in cash inside an IRA is a common and avoidable mistake.
Are there any deadlines?
For indirect rollovers (where you receive the funds directly), the 60-day rule applies. For direct rollovers, there is no strict deadline, though it is generally wise to complete the process promptly to avoid the money sitting out of the market longer than necessary.
What about the one-rollover-per-year rule?
The IRS limits you to one indirect IRA-to-IRA rollover per twelve-month period across all your IRAs. This rule does not apply to direct rollovers or to rollovers from a 401(k) into an IRA. If you are rolling an old 401(k) directly into an IRA, you are not affected by this restriction.
