401(k) Rollovers: Everything You Need to Know

Did you know that millions of people leave their jobs every month? In 2026, 3.1 million people quit their jobs in the month of July alone.¹

There’s nothing wrong with exploring new career paths. But many of those folks are leaving a trail of forgotten 401(k)s in their wake. Don’t let it happen to you!

If you have money gathering dust in a long-forgotten retirement account, it’s time to find it a new home with a 401(k) rollover.

What Is a 401(k) Rollover?

A 401(k) rollover simply allows you to transfer your retirement savings from a 401(k) you had at a previous job into an IRA or another 401(k) with your new employer. And if you play your cards right, it’s possible to do a 401(k) rollover without ending up with a tax bill.

What Options Do You Have for an Old 401(k)?

Imagine you’re starting a new job and wondering what to do with the money in a 401(k) you had at an old job. Let’s take a closer look at your options and how they stack up:

Option 1: Cash out your 401(k).

Let’s get this out of the way—cashing out is the worst thing you can do with your old 401(k).

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If you withdraw the money from your 401(k) plan and take a direct cash distribution, you’ll have to pay any state and federal income taxes you owe on every last penny. And if you’re under 59 1/2 years old, you’ll also get hit with a 10% early withdrawal penalty.

Plus, cashing out early robs you of the chance to continue earning tax-free or tax-deferred growth on your investments for years, maybe decades. It’s almost always just a bad idea all around.

That said, there are a few rare exceptions where you may be able to cash out your 401(k) without paying the early withdrawal penalty—though there’s no escaping paying taxes on the balance. These include situations like huge life events, such as a birth or adoption—or a genuine emergency like a disability, terminal illness or domestic abuse.²

Option 2: Do nothing and leave the money in your old 401(k).

Leaving your money in your old 401(k) might feel like the easy answer. But it’s not always the smartest one, for a couple of reasons.

As long as your funds are still parked in an old account, you’ll keep paying administrative fees and sometimes even “former employee” fees. While it may not feel like a big deal now, random fees can take a big bite out of your growth over time.

Not to mention that you’ll stay stuck with whatever investment options your old employer happened to choose.

In this respect, most people come out way ahead by doing a direct transfer rollover to an IRA (more on how that works later).

Option 3: Roll over the money into your new employer’s plan.

Rolling your money over to your new 401(k) plan has some benefits. It simplifies your investments by putting all your retirement savings in one place and allows you to access your money at 55 under certain conditions. You also have higher contribution limits with a 401(k) than you would with an IRA—which means you can save more!

But there are lots of rules and restrictions for rolling money over into your new employer’s plan, so it’s not always your best bet. Plus, your new 401(k) plan probably only has a handful of investing options to choose from. And if you don’t love them, why sink all your retirement savings into them?

Which brings us to . . .

Option 4: Roll over the funds into an IRA.

Most of the time, transferring the money from your old 401(k) into an IRA is your best option. That’s because a rollover IRA gives you the most control over your investments.

You see, an IRA gives you potentially thousands of mutual funds to choose from. You can pick from the best of the best instead of just a few so-so options. You can work with an investment professional who can walk you through the rollover and help you manage your investments for the long haul—no matter where your career takes you.

Ramsey Solutions is a paid, non-client promoter of participating pros. 

Should You Choose a Direct or Indirect Rollover?

Once you decide to roll money from one account to another, you have two options for how to do the transfer: a direct rollover or an indirect rollover. A direct rollover is always the safest way to avoid taxes and penalties.

With a direct rollover, the money in one retirement account—an old 401(k) you had at your last job, for example—is transferred directly to another retirement account, like an IRA. That way, you never touch the money, and you won’t have to pay any taxes or penalties on the cash being transferred. Once it’s done, it’s done!

Indirect rollovers, on the other hand, are a bit more complicated—and are much riskier. When you do an indirect rollover, the cash goes to you first instead of going straight into your new account. Here’s the problem with that: You only have 60 days to deposit the funds into a new retirement plan. If you don’t, you’ll get hit with taxes. If you’re under 59 1/2, you’ll also rack up 10% early withdrawal penalties.

See why the direct rollover is the only way to go? There’s no reason to take a chance on an indirect rollover that leaves you open to heavy taxes and penalties. That’s just dumb with a capital D!

Do You Have to Pay Taxes When You Roll Over a 401(k)?

It depends on whether or not you’re changing account types (traditional versus Roth) with the rollover. Let’s take a look at the tax implications of different types of rollovers:

• Traditional 401(k) to a new traditional 401(k) or traditional IRA: If you go from one traditional account to another, you won’t owe any taxes on the transfer. But you will have to pay taxes when you withdraw the money in retirement.
• Traditional 401(k) to a Roth 401(k) or Roth IRA: This is called a Roth conversion—and you will owe taxes on the money you transfer, which could create a hefty tax bill!
• Roth 401(k) to a new Roth 401(k) or Roth IRA: Transferring funds from one Roth account into another generally isn’t taxable. But employer matches are often treated as traditional (pretax) contributions, so they may be taxable if you roll them into another Roth.   

If you have questions about whether your 401(k) rollover counts as a taxable event, get in touch with a tax advisor. They’ll also be able to answer any questions you have about your new account and any withdrawal or contribution rules that come along with it.

How Do You Start a 401(k) Rollover?

Rolling over a 401(k) comes down to three moves: decide where the money’s going, request to have it sent there, and pick your new investments. Here’s how that breaks down:

1. Whether you want to transfer your funds to a new employer’s account or an IRA, make sure you have the account details ready to go. If you don’t already have an IRA, you can open one yourself online or with the help of an investment professional.
2. Reach out to your old plan’s administrator to request a direct rollover to your new account. You should be able to find their contact info on old statements or the plan’s online portal. Or you can just call your former company’s HR department and ask them to point you in the right direction.
3. Don’t forget to pick your new investments. This part’s important! When you roll over a 401(k), your investments are usually sold and turned into cash before the money is transferred. Once it hits your new account, you’ll have to reinvest it. Otherwise, all that cash will just sit there doing nothing for you.