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

When you leave a job, you have options for the 401(k) (opens in new tab) account at that employer: 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 in the old plan is fine if the investment menu is good and the fees are low. Rolling it to a new employer's plan consolidates accounts but keeps the same investment menu constraints. Cashing it out means paying income tax on the full amount plus a 10% early withdrawal penalty if you are under 59.5. That is almost always the most expensive option and permanently removes the money from tax-advantaged growth.

Rolling a traditional 401(k) to a traditional IRA preserves the tax-deferred status. No tax is owed at the time of the rollover. The money simply moves from one qualified account to another. Once it is in the IRA, you can invest it in individual stocks, ETFs, bonds, mutual funds, or whatever your IRA custodian supports. That investment flexibility is the main reason people roll old 401(k)s to IRAs rather than leaving them in place.

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

A direct rollover sends the 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 is withheld. No 60-day deadline applies. This is the method to use.

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

The indirect rollover is legal, but there is almost no reason to use it for a standard 401(k)-to-IRA transfer. Request a direct rollover. If the plan administrator is unclear on the terminology, ask them to make the check payable to your IRA custodian rather than to you. That phrasing usually settles the question.

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

Whether a Roth conversion makes sense depends on your current tax bracket, your expected tax bracket in retirement, the size of the account, and other factors. The IRS publishes detailed rules on IRA contributions and conversions in Publication 590-A (opens in new tab). A large conversion can push you into a higher bracket in the year you convert. This is a decision that benefits from a tax professional's review, not a quick calculation. 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) (meaning contributions were already made with after-tax dollars), rolling it into a Roth IRA is generally a tax-free transfer, similar to the traditional-to-traditional rollover. Again, a direct rollover is the right method.

First, decide where the IRA will be held. Open the account at your chosen custodian before initiating the rollover. The IRA needs to exist and be open to receive the funds. If you plan to have the IRA managed by an investment adviser, open the account under their advisory agreement before the money arrives. Narstar manages rollover IRAs held at Interactive Brokers, starting at $100. If that is the direction you are considering, see how it works below before you start the paperwork. If you are 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. Tell them you want to do a direct rollover to an IRA. They will 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.

Third, confirm the check is made payable to the IRA custodian, not to you. The exact payable-to language typically looks like: "[Custodian Name] FBO [Your Name], IRA." FBO means "for the benefit of." If the check is made payable to you instead, you are now in indirect rollover territory with a 60-day deadline.

Fourth, once the money arrives at the IRA, it sits in cash until it is invested. This is an active decision, not an automatic one. The IRA custodian will not automatically invest it for you unless there is an advisory agreement in place. If you are working with a managed account, the adviser will invest it once the funds clear. If you are managing it yourself, you decide where to put it. Cash sitting uninvested in an IRA is still subject to 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. We cannot 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 have signed the advisory agreement, we match the account 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 in the account: 0.60% annually for Income, 1.20% for Growth, 1.60% for Speculative, billed quarterly. The homepage shows the dollar amount at any balance. We do not charge a setup fee or a rollover processing fee. The only fee is the ongoing advisory fee on the balance.

One thing to be clear about: we do not help with the rollover paperwork itself. The process of 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. If you have questions about what the account would look like once it is set up, the contact form is the right starting point.