401(k) Rollover Rules

Direct rollovers vs. indirect (60-day) rollovers

There are two very different ways to move 401(k) money, and the difference matters a great deal for taxes:

• Direct rollover (trustee-to-trustee transfer): the money moves directly from your old plan to the new plan or IRA custodian — you never personally receive a check. No withholding applies, and there's no tax consequence.
• Indirect rollover: the plan sends the money to you directly, and you then have 60 days to deposit it into another retirement account. Plans are required to withhold 20% for federal taxes on this type of distribution before sending it to you, meaning you'd need to come up with that withheld 20% out of pocket to complete a full rollover — otherwise the shortfall is treated as a taxable distribution (and possibly penalized if you're under 59½).

Because of the mandatory withholding and the 60-day deadline risk, a direct rollover is almost always the safer mechanical choice when one is available.

Rolling pre-tax money into a Roth account

Rolling traditional (pre-tax) 401(k) money into a Roth IRA or Roth 401(k) is allowed, but it's a taxable event — sometimes called a "Roth conversion." The full converted amount is added to your taxable income for the year, though it is not subject to the 10% early withdrawal penalty specifically because of the conversion (you generally are not permitted to have taxes withheld from the rolled amount itself without reducing what gets converted). This is a deliberate tax-timing decision, not a routine mechanical rollover, and is worth planning with a tax professional given the potential to push you into a higher bracket.

The once-per-year rule applies to IRAs, not to 401(k)s

IRAs are subject to a rule limiting indirect (60-day) rollovers between IRAs to one per 12-month period, across all of your IRAs. Direct trustee-to-trustee transfers are not counted against this limit, and rollovers from a 401(k) into an IRA are also not counted against the IRA-to-IRA limit. This distinction trips people up because "rollover" gets used loosely — the once-per-year restriction is specifically an IRA-to-IRA rule.

Leaving a job: your options for an old 401(k)

• Leave it with your former employer's plan, if the plan and balance size allow it.
• Roll it into your new employer's 401(k), if the new plan accepts incoming rollovers.
• Roll it into an IRA, which usually widens your investment choices but can mean losing plan-specific protections (like the rule-of-55 exception described on the early withdrawal penalty page) and, in some states, different creditor protection than an employer plan.
• Cash it out — generally the least favorable option, since it's fully taxable in the year received and may trigger the 10% penalty if you're under 59½ (or the rule-of-55 exception doesn't apply).

Net unrealized appreciation and rollovers

See net unrealized appreciation for how that strategy works.