401k Rollover to IRA: Step-by-Step Instructions

Key Takeaways

• A direct (trustee-to-trustee) rollover avoids all withholding and keeps the money growing.
• Indirect rollovers carry a mandatory 20% withholding and a strict 60-day deadline.
• Rollovers are not contributions — they never count against the 2026 limits.

Before You Start

Rolling a 401k to an IRA is one of the most valuable financial moves you can make when changing jobs, but only if you do it correctly. First, decide on the destination: a low-cost brokerage offering commission-free index funds, or a robo-advisor if you want automated management. Second, download your old plan's fee disclosure and fund list — you will want a record of what you held and what it cost. Third, check whether your old plan charges a rollover fee or requires a minimum balance to stay. None of this is taxable: a rollover simply moves assets between retirement accounts and never counts against the $24,500 elective deferral limit or the $72,000 total contribution limit for 2026.

Step-by-Step: Direct Rollover (Recommended)

1. Open the IRA. Choose a provider and open a Traditional IRA (not Roth, unless you want a taxable conversion).
2. Request a direct rollover. Ask your old plan for a "direct rollover" or "trustee-to-trustee transfer" to your new IRA.
3. Choose the check destination. If a check is issued, it must be made payable to the new custodian for your benefit — never to you personally.
4. Deposit and invest. Once the funds arrive, allocate them according to your target asset allocation.
5. Confirm basis. If any of the money was after-tax (e.g., after-tax 401k contributions), report the basis on Form 8606 so it is not taxed again later.

Step-by-Step: Indirect Rollover (Use With Caution)

An indirect rollover means the plan sends the money to you, and you deposit it into an IRA within 60 days. Two traps make this the most common rollover mistake. First, the plan must withhold 20% for federal tax — so a $50,000 distribution arrives as $40,000, and you must make up the missing $10,000 from other funds within 60 days or it is treated as a taxable distribution. Second, since 2015 you are limited to one indirect rollover per 12-month period across all of your IRAs. If you miss the 60-day window, you can request an IRS waiver using the self-certification procedure (Form 5329) if you meet the conditions listed in IRS guidance, but the safest path is simple: never take the check yourself.

What to Watch For

• If you are 73 or older (or will turn 73 this year), your first RMD from the old plan must be taken before you roll over the rest.
• Update beneficiaries on the new IRA — designations do not automatically carry over.
• Keep the old plan's statements for at least three years in case of questions about cost basis.
• If you might use the backdoor Roth strategy, a large pre-tax IRA balance will create a pro-rata tax problem — in that case, consider rolling into your new employer's 401k instead.

The Rollover Checklist

• Compare costs first: old plan's all-in fee versus the IRA's — the whole point of rolling is usually lower fees.
• Open the IRA before you initiate — you need the account number for the direct rollover paperwork.
• Request a direct rollover in writing and confirm whether the plan charges an exit fee (typically $50-$150).
• Never let the check be made payable to you — payable to the custodian FBO you, or electronic transfer only.
• Reinvest promptly: money that sits in cash for months is money not compounding; set the allocation the day it lands.
• Take any RMD first if you are 73 or older — RMDs cannot be rolled over.
• Keep the statements: you need the 1099-R and the cost-basis records (Form 8606) if any after-tax money was involved.
• Update beneficiaries on the new IRA within a week of the transfer.

Common Rollover Mistakes

Three mistakes cause most rollover problems. First, cashing out instead of rolling over when the balance is small — a $5,000 cash-out costs roughly $1,600 in tax and penalty, while rolling it preserves decades of growth. Second, missing the 60-day deadline on an indirect rollover: if you take a distribution yourself, you have 60 days to deposit it into an IRA, and the IRS allows only one 60-day rollover per 12-month period across all your IRAs. Third, ignoring the 20% mandatory withholding on indirect rollovers — the IRS withholds 20% for taxes, so you must make up the difference from your own pocket to avoid owing tax on the withheld amount. The clean fix for all three is a direct trustee-to-trustee transfer, where the money never touches your hands. Also remember: once-per-year rollover limits apply to IRAs, not to 401k plans, so plan-to-IRA direct transfers are not restricted by the rule.