When Is a Good Time to Roll Over Your 401(k)?

There is no universally optimal time to roll over your 401(k). Rather, the right timing will depend on your individual financial circumstances, retirement goals and the specific options available to you. Here’s what you need to consider to determine when the best time to rollover a 401(k) is.

For personalized guidance deciding when to roll over your 401(k) to an IRA, a financial advisor can help.

When Does It Make Sense to Roll Over Your 401(k)?

A 401(k) rollover refers to the process of transferring your accumulated retirement savings from a 401(k) plan to another retirement plan, like an individual retirement account (IRA) or another 401(k) account with a new employer. Rollovers typically happen after employees change jobs, retire or seek more investment options. They may also be necessary to consolidate multiple retirement accounts, avoid higher fees or take advantage of superior investment choices.

Here are the factors to consider when determining when to roll over your 401(k):

Employment status. If you’re still employed by the company that sponsors your 401(k), check with your plan administrator to understand the rules regarding in-service withdrawals or rollovers. Some plans may allow for in-service rollovers while you’re still employed, but others may not.
Age requirement. If you’re over the age of 59 ½, you’re generally eligible for a penalty-free rollover of your 401(k) at any time.
Investment options. If you aren’t happy with the investment choices or fees in your current plan, you may consider a rollover to gain access to a wider range of investment options in an IRA or another employer’s plan if you switch jobs.
Diversification. Consider whether you want to diversify your retirement savings. Rolling over your 401(k) to an IRA can give you more control over your investment choices, allowing you to build a diversified portfolio tailored to your risk tolerance and retirement goals.
Employer match. If your employer matches 401(k) contributions, take note of any vesting schedules. You may need to stay with the company for a certain period to become fully vested in those employer contributions. Depending on your vesting status, you may want to wait until you’re fully vested before considering a rollover.
Retirement timing. Your planned retirement date can influence when you should roll over your 401(k). If you plan to retire soon, you may want to initiate the rollover to an IRA or another retirement account soon. This will allow you to consolidate your assets and begin managing your retirement portfolio.
Tax implications. It’s possible to move funds from a 401(k) to a traditional IRA without incurring immediate taxes. However, if you decide to convert to a Roth IRA, you will owe taxes on that converted amount. Evaluate your current and future tax situation when making this decision.
Fees and costs. Compare the fees and costs associated with your 401(k) to those of an IRA. Ensure that the fees of the new account align with your budget and long-term goals before making the switch.
Financial advisor guidance. You might also consider consulting with a financial advisor or retirement planning professional. They can help you assess your specific situation and offer personalized advice on the timing of your 401(k) rollover.
Company policies. Make sure to review your current employer’s policies regarding 401(k) rollovers, especially if you are planning to leave your job. Some employers may have specific procedures or timelines for departing employees.

How to Rollover Your 401(k)

A retired woman checking on her IRA is doing.

After you’ve determined when to do your 401(k) rollover, follow these common steps to complete the process:

Open new account. You can either open a 401(k) account with your new employer or an IRA account with a financial institution of your choice, if you don’t already have one.
Fill out the paperwork. Contact your 401(k) plan administrator and request the necessary rollover forms. Complete the required forms, specifying that you want to initiate a direct rollover to your new 401(k) or IRA and providing your new account details. Sign and return the completed paperwork to the plan administrator.
Notify your new provider. Give your new provider a heads up on the expected rollover deposit. Make sure to monitor the rollover process to ensure it occurs promptly and accurately.
Select your investments. Review and adjust your investment strategy within the new 401(k) or IRA to align with your retirement goals.
Keep records. Hang onto any records documenting the rollover process. After it’s complete, follow up on any tax law changes that may affect your retirement accounts.

When Should You Avoid a 401(k) Rollover?

There are some situations when you may want to avoid a 401(k) rollover. One common example is if your current 401(k) plan offers low-cost investment options and provides access to institutional shares or other unique investment opportunities that are not available in your new 401(k) plan or an IRA.

You might also reconsider a rollover if you think you may need access to your 401(k) funds before age 59½. In this case, your 401(k) plan may allow you to make a hardship withdrawal without imposing a 10% penalty. However, you must meet the IRS requirements to qualify.

Direct vs. Indirect 401(k) Rollovers

A rollover can take two different paths: You can transfer your 401(k) balance directly to another retirement account, known as a direct rollover, or you can receive the distribution and redeposit it yourself, which is an indirect rollover.

An indirect 401(k) rollover creates an important deadline. Once you withdraw the funds, you generally have just 60 days to complete the rollover. Otherwise, the IRS may consider the eligible amount you keep as taxable income.

Federal withholding can also complicate the transaction. When you receive an eligible 401(k) rollover distribution, your employer generally withholds 20% of that amount for tax purposes. On a $100,000 balance, that would mean you receive $80,000, and the other $20,000 would go toward federal income taxes. As such, moving the full $100,000 into the new account would require replacing that $20,000 with your own funds before the 60-day period expires. Any eligible portion you keep instead of rolling it over generally becomes taxable and may also trigger a 10% additional tax when applicable.

A direct transfer avoids that cash requirement. The mandatory 20% withholding generally does not apply. A direct rollover also reduces the risk of creating a taxable distribution by missing the rollover deadline.

But before choosing either method, check whether the distribution qualifies for rollover and whether the destination accepts it. Required minimum distributions (RMDs) and hardship distributions generally are not eligible for rollover.

Bottom Line

There is no one-size-fits-all answer to when to roll over a 401(k). Therefore, you should carefully evaluate your specific circumstances, retirement objectives and the options available to you. Additionally, make sure that you follow all IRS rules and regulations to avoid the penalties and tax consequences that are associated with retirement account transactions.

Tips for Retirement Planning

A financial advisor can walk you through the pros and cons of making a 401(k) withdrawal. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When planning for retirement, consider the tax laws in your state. Some have no state income tax, no tax on retirement income or a significant tax deduction on retirement income.