How to Roll Over a 401(k): Step-by-Step Guide
- liveyourmoneystyle
- 2 days ago
- 9 min read
You changed jobs six months ago. Maybe a year ago or even longer. In the process of starting your new position like learning new systems, meeting new people, proving yourself in a new role, there was one thing you may have forgotten about: your old 401(k).
It's still sitting there at your former employer. You know you should probably do something about it, but it feels like one more complicated financial task you don't have the bandwidth for. So it sits there and you tell yourself you'll handle it later.
Does this scenario sound familiar? You're not alone. Millions of Americans have old 401(k) accounts scattered across former employers.
It’s worth noting that having an old 401(k) at a previous employer isn't an emergency. It's not going to disappear overnight or disrupt your financial plan. But ignoring it can cost you in unnecessary fees, lost growth potential, and the mental clutter of having retirement money you're not actively managing or completely forgetting that you have.
Rolling over an old 401(k) isn't urgent, but it is important. And it's way less complicated than you probably think.
In this guide, you'll learn why it matters to make a decision about your old 401(k), what your four options actually are, how to execute a rollover step-by-step, and how to avoid common mistakes.
Let's turn that forgotten retirement account into part of your intentional financial strategy.
Why It's Important to Do Something With an Old 401(k)
Before we dive into your options, let's talk about why this actually matters. What's the real cost of just leaving that 401(k) where it is indefinitely?
You May Be Paying Higher Fees
Not all 401(k) plans are created equal. Some employer plans have excellent, low-cost investment options with minimal administrative fees. Others have expensive funds with high expense ratios and administrative costs that quietly eat into your returns year after year.
When you worked there, you didn't have a choice in the provider plan. You invested in whatever options your employer's plan offered. But now that you've left? You have options.
And some of those options likely come with lower fees that mean more of your money actually stays invested and growing instead of going to fund management companies.
Even a difference of 0.5% in annual fees compounds significantly over decades. On a $50,000 balance over 30 years, the difference between a 0.5% expense ratio and a 1% expense ratio is tens of thousands of dollars in lost growth.
It Creates "Money Clutter"
Think about how many financial accounts you currently have. Checking, savings, maybe a couple credit cards, your current employer's 401(k), possibly an IRA, maybe investment accounts. Now add one or two or three old 401(k)s from previous jobs into that mix.
Every additional account makes it harder to see your complete financial picture. You can't easily track your total net worth. You can't easily rebalance your overall investment allocation. You can't remember which beneficiaries you named where or whether you've updated them since major life changes.
Multiple retirement accounts scattered across former employers create mental and logistical clutter. Consolidation creates clarity to build confidence.
You Lose Strategic Alignment
Your life changes. Your risk tolerance shifts as you age. Your financial goals evolve. Your tax situation becomes more complex.
That 401(k) from a job you left five years ago? The investment choices you made back then might not align with where you are now or where you're headed. But if you're not actively managing it, it just keeps running on autopilot with a strategy that might no longer serve you.
Bringing that money into your current financial ecosystem means it can be part of your broader retirement and tax strategy instead of just existing in isolation.
It's Easy to Forget About It Entirely
This is the scariest risk of all. Passwords get lost. Addresses change and the plan administrator can't reach you. Small (or large) balances get left behind and forgotten for years or even decades.
The bottom line: consolidation equals clarity. And clarity builds the financial confidence that lets you actually enjoy your money instead of constantly worrying about whether you're handling things correctly.
Your 4 Options When You Leave a Job
When you leave an employer where you had a 401(k), you have four distinct options for what to do with that money. Let's break down each one, including the pros, cons, and when each option makes the most sense.
Option 1: Leave It Where It Is
Yes, you can simply leave your 401(k) with your former employer. The money stays invested in the plan, and you retain access to it even though you no longer work there.
Pros:
Requires no immediate action on your part
If the plan has strong, low-cost investment options, there's no downside to staying
Large balances may benefit from institutional pricing on funds
Cons:
You have no control over if the plan changes or gets worse over time
Managing multiple accounts across different platforms is cumbersome
Some plans don't accept rollovers from other sources, limiting future consolidation
You may eventually lose track of it as years pass
When this makes sense:
You have a large balance in an excellent plan with low fees
The investment options are better than what your new employer offers
You're happy with the plan and don't mind managing one more account
If your old employer had a truly great 401(k) plan and you have a substantial balance there, leaving it might genuinely be your best option. Just make sure it's an active choice, not passive neglect.
Option 2: Roll It Into Your New Employer's 401(k)
If your new employer offers a 401(k) plan that accepts rollovers, you can move your old 401(k) money directly into your current plan.
Pros:
Keeps all your retirement money consolidated in one place
Simplifies tracking and management with a single login and dashboard
All your payroll contributions and previous savings are together
Cons:
Your new employer's plan might have limited investment options
Fees might not be as competitive as what you'd find in an IRA
You're locked into whatever investment choices that specific plan offers
Best for:
People who value simplicity and want everything in one place
Those who want to avoid managing multiple types of accounts
This option works beautifully if your new employer has a solid 401(k) plan and you want the ease of seeing all your retirement money in one statement.
Option 3: Roll It Into an IRA (Traditional or Roth)
This is one of the most popular options and often provides the most flexibility. You can roll your old 401(k) into an Individual Retirement Account (IRA) that you control entirely.
Pros:
Significantly more investment flexibility because you can invest in virtually any stock, bond, ETF, or mutual fund
Often lower fees, especially if you choose low-cost providers like Vanguard, Fidelity, or Schwab
You control everything. No employer plan changes can affect your investments
Access to better investment options and tools
Cons:
Requires slightly more setup work upfront (opening the IRA, initiating the rollover)
Important Note when choosing the type of IRA:
Traditional 401(k) → Traditional IRA: No tax consequences, money rolls over tax-deferred
Roth 401(k) → Roth IRA: No tax consequences, money stays in Roth status
Critical reminder:Â Always request a direct rollover (also called a trustee-to-trustee transfer) where the money moves directly from your old 401(k) to your new IRA without ever touching your hands. This avoids taxes, penalties, and withholding complications.
Best for:
People who want maximum control and flexibility over their investments
Those who value access to low-cost index funds and ETFs
Anyone who wants to consolidate multiple old 401(k)s into one IRA they fully control
Option 4: Cash It Out (Generally Not Recommended)
Technically, you can withdraw your 401(k) balance as cash when you leave a job. But understand what this costs you.
What happens when you cash out:
You owe ordinary income tax on the entire amount
If you're under 59½, you pay an additional 10% early withdrawal penalty
You lose all future compound growth on that money
Your retirement timeline gets set back significantly
Example:Â If you cash out a $30,000 401(k) in your 30s:
Income tax at 22%: -$6,600
Early withdrawal penalty: -$3,000
You receive: $20,400
Cost to you: $9,600 immediately, plus decades of lost growth
That same $30,000 left invested until retirement could grow to well over $200,000. Cashing it out is almost always the most expensive option long-term.
When it might make sense:Â Honestly? Almost never. The only exception would be a true financial emergency where you've exhausted all other options and need the money to avoid a crisis. Even then, explore every alternative first.
Step-by-Step: How to Roll Over an Old 401(k)
If you've decided to roll over your old 401(k)—either to your new employer's plan or to an IRA—here's exactly how to do it. The process is more straightforward than you probably think.
Step 1: Confirm Your Account Type
First, verify whether your old 401(k) is Traditional (pre-tax) or Roth (after-tax). This matters because you need to roll Traditional to Traditional and Roth to Roth to avoid creating a taxable event.
Check your old statements or log into your account. If you can't remember, call the plan administrator and ask.
Step 2: Open Your Receiving Account
If you're rolling into your new employer's 401(k), confirm with your HR department that the plan accepts incoming rollovers and get the necessary information.
If you're rolling into an IRA, open the appropriate account:
Traditional IRA for Traditional 401(k) money
Roth IRA for Roth 401(k) money
Opening an IRA takes about 10-15 minutes online with providers like Vanguard, Fidelity, or Schwab. You'll need your Social Security number, address, and bank account information.
Step 3: Request a Direct Rollover
Contact your old 401(k) plan administrator. You can usually initiate this online through the plan website, or you can call their customer service number.
Specifically ask for a direct trustee-to-trustee transfer. This means the check gets made out to your new account custodian for your benefit, not to you personally.
Provide them with:
The receiving provider and account information (your new 401(k) or IRA)
The account number where funds should be deposited
Any rollover forms your new provider requires
The old plan will process your request and send the money directly to your new account. This typically takes 2-4 weeks.
Step 4: Invest the Funds
This is the step people most commonly forget, and it's critical. When your rollover money lands in your new account, it often sits in cash or a money market settlement fund.
Cash doesn't grow. You need to actually invest that money.
Log into your new account, confirm the funds have arrived, and choose your investments. If you're not sure what to choose, target-date funds based on your expected retirement year are a simple, diversified option.
Step 5: Confirm It Was Processed Correctly
Check that:
The full balance transferred (no unexpected fees or withholding)
It went into the correct account type (Traditional to Traditional, Roth to Roth)
The funds are now invested, not sitting in cash
You received confirmation documents
Keep the rollover confirmation documents. You'll need them for your tax records, even though direct rollovers aren't taxable events.
4 Common Mistakes to Avoid
Doing an Indirect Rollover
If the check is made out to you personally instead of to your new account custodian, that's an indirect rollover. The plan will withhold 20% for taxes, and you have only 60 days to deposit the full amount (including replacing the 20% from your own pocket) into your new retirement account to avoid taxes and penalties.
Direct rollovers are simpler and safer. Always request direct transfers.
Forgetting to Actually Invest After the Rollover
This is extremely common. Money sits in the new account in cash or money market for months or years because the person thought the rollover process included investing the funds. It doesn't.
After confirming your rollover is completed, immediately choose investments.
Mixing Pre-Tax and Roth Funds Incorrectly
Traditional (pre-tax) money must stay in Traditional accounts. Roth (after-tax) money must stay in Roth accounts. If you accidentally roll Traditional money into a Roth account, you trigger a taxable event.
Double-check account types before initiating any rollover.
Ignoring Beneficiary Updates
When you open your new IRA or roll into your new 401(k), you need to designate beneficiaries. Don't skip this step or leave it for later.
Your 401(k) and IRA beneficiary designations override your will. If you don't update them, the wrong person might inherit your retirement savings.
Final Thoughts: Don't Let Old Money Sit Without a Plan
You worked hard for that 401(k) balance. Every paycheck, a portion of your earnings went into that account. It represents your time, your effort, your labor.
That money deserves strategy, not neglect.
You don't need to rush this decision, but you do need to make it eventually. Set aside 30 minutes this week to review your options, gather the information you need, and take action.
Resources & Tools
Investing Made Simple Guide - Beginner-friendly investing basics
Deeply Invested Podcast - Episode on retirement account fundamentals
50/30/20 Budget Template - Free up money to increase retirement contributions
Your Money Style Newsletter - Weekly money confidence in your inbox
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