401(k) Rollover Guidance
Rollover 401k to Roth IRA or Traditional IRA: A Planning Guide
How a 401(k) rollover works, what each path could mean for your taxes and Medicare costs, and when leaving money in the plan may make sense.
A 401(k) rollover moves money from an old employer plan into an IRA, a Roth IRA, or a new employer plan. A direct rollover sends the money straight between institutions, so no tax is withheld. Rolling pre-tax money into a Roth IRA is a taxable conversion. Whether any rollover fits depends on your taxes, plan costs, and timeline.
Rules reflect information as of October 2026.
Quick answers
- Direct rollover: the money moves between institutions and no tax is withheld.
- Indirect rollover: the money is paid to you first. A plan distribution paid to you has 20% withheld, and you generally have 60 days to deposit it.
- Traditional IRA: pre-tax money is generally not taxed at the time of the rollover. It is generally taxed when you withdraw it.
- Roth IRA: pre-tax money is generally taxed as ordinary income in the year it moves. That could raise your income for Medicare premium purposes two years later.
- Roth IRA withdrawals: two separate five-year clocks can apply, one for qualified withdrawals and one for each amount of pre-tax money moved into a Roth IRA.
- Staying in the plan: may fit when plan costs are low, the Rule of 55 matters, creditor protection is a priority, or you hold employer stock.
Written for pre-retirees 5 to 10 years from retirement, recent retirees, and high-earner and equity-comp professionals who have one or more old employer plans. This is education, not a recommendation to roll over, convert, or leave any account where it is.
Direct vs. indirect rollover: what changes
A direct rollover keeps the money moving between institutions, so nothing is withheld. An indirect rollover puts the money in your hands first, which adds withholding and a deadline.
Direct rollover
- Your plan administrator sends the money to the new IRA or plan, or issues a check payable to the new account.
- No taxes are withheld from the transfer amount.
- The IRA one-rollover-per-year limit does not apply to plan-to-IRA rollovers.
Indirect (60-day) rollover
- The distribution is paid to you, and you generally have 60 days from receipt to deposit it in an IRA or plan.
- A retirement plan distribution paid to you is subject to mandatory 20% withholding, even if you plan to roll it over.
- To roll over the full amount, you must replace the withheld amount from other funds. Any part not rolled over may be taxable, and the 10% additional tax on early distributions may apply if you are under 59½ and no exception fits.
- The IRS may waive the 60-day deadline in limited situations beyond your control.
Hypothetical example for illustration only: a $100,000 pre-tax 401(k) balance is paid to you by check. The plan withholds $20,000, so you receive $80,000. To roll over the full $100,000 within 60 days, you would need to add $20,000 from other funds. The $20,000 withheld is treated as taxes paid on your return. Your own numbers and results would differ.
Not every payment can be rolled over. The IRS lists required minimum distributions, hardship distributions, and loans treated as distributions among the exceptions. A new employer plan is also not required to accept rollover contributions, so confirm with that plan first.
Source: IRS: Rollovers of retirement plan and IRA distributions
Rolling to a traditional IRA vs. converting to a Roth IRA
Rolling pre-tax money into a traditional IRA is generally not taxed at the time. Rolling it into a Roth IRA is generally taxed as ordinary income in the year it moves, so the trade-off is a tax bill now against potential tax-free qualified withdrawals later.
Pre-tax 401(k) to traditional IRA
Potential upside: the rollover is generally not taxable when it happens, and taxes are generally deferred until you withdraw.
Trade-off: withdrawals are generally taxed as ordinary income, and distributions from an IRA do not qualify for the Rule of 55 exception described below.
Pre-tax 401(k) to Roth IRA
Potential upside: qualified withdrawals from a Roth IRA are generally tax-free, so future growth may not add to later taxable income.
Trade-off: the pre-tax amount is generally included in your income for the year of the conversion. A large conversion could move you into a higher bracket and raise your modified adjusted gross income (MAGI). If you are under 59½, withdrawing converted amounts within five years may also trigger a 10% additional tax (see the five-year rules below).
MAGI also matters for Medicare. Social Security generally uses your tax return from two years earlier to set Medicare Part B and Part D premiums, so a conversion this year could raise premiums two years from now. Timing a conversion around your Medicare enrollment and your other income is part of the decision.
For more on how this works, read Roth conversions and Medicare premiums, the IRMAA two-year look-back rule, the Roth Conversion Planning Guide, and the IRMAA Planning Guide.
Source: IRS Publication 590-A: IRA contributions and rollovers
Rolling a Roth 401(k) to a Roth IRA: the five-year rules
A direct rollover from a Roth 401(k) to a Roth IRA is generally not taxed, but Roth IRA five-year rules still apply, and two separate clocks can be involved. The clocks may not work the way you expect.
- A qualified distribution is generally one made after a five-taxable-year period and on or after age 59½, after death, or because of disability.
- When you roll a designated Roth account into a Roth IRA, the time the money spent in the Roth 401(k) does not count toward the Roth IRA's five-taxable-year period.
- If you contributed to any Roth IRA in an earlier year, the Roth IRA period is measured from that earlier contribution instead.
- A withdrawal that is not qualified may make the earnings portion taxable, while the contributions (basis) portion is generally not included in income.
A direct rollover into another employer plan's designated Roth account may carry your original start date, while a rollover to a Roth IRA does not. If you may need Roth withdrawals within a few years, that difference is worth checking before you move the money.
Two different five-year clocks
- Qualified-withdrawal clock: this decides whether earnings can come out of a Roth IRA tax-free. It is measured from January 1 of the first year you contributed to any Roth IRA, and a qualified withdrawal also generally requires age 59½, death, or disability.
- Conversion clock: a separate five-year period starts on January 1 of the year you move pre-tax money into a Roth IRA, whether by conversion or by rollover from a 401(k). If you are under 59½ and withdraw the taxable part of that amount within its five years, the 10% additional tax may apply unless an exception fits. Each conversion has its own clock.
Meeting one clock does not satisfy the other, and ordering rules determine which dollars come out of a Roth IRA first. If you are under 59½, confirm how both clocks apply before taking a withdrawal.
Source: IRS: Retirement plans FAQs on designated Roth accounts
When leaving money in the plan can make sense
Leaving money in a former employer's plan is not always the wrong call. These situations may favor staying, and each one comes with its own trade-offs.
Plan fees and investment menus
Some plans offer low-cost investment options that can be hard to match in an IRA. Others carry higher fees and a narrow menu. Compare total costs on both sides, including any IRA or advisory fees, before deciding. The trade-off: a lower-cost plan may still offer fewer choices, and your plan's menu can change.
Source: U.S. Department of Labor: A Look at 401(k) Plan Fees
Creditor protection
Money in an ERISA-covered 401(k) generally has federal protection from most creditors. A rollover IRA may be protected in bankruptcy, but outside bankruptcy its protection generally depends on your state's law. The trade-off: protection rules are technical and vary by situation, so confirm with an attorney if this is a priority.
Source: 11 U.S.C. § 522: bankruptcy exemptions for retirement funds
The Rule of 55
If you leave an employer during or after the year you turn 55, distributions from that employer's plan may avoid the 10% additional tax on early distributions. IRA withdrawals generally do not qualify for this exception. The trade-off: the distributions are still taxed as ordinary income, and the plan must allow the withdrawals.
Source: IRS Topic no. 558: additional tax on early distributions
Employer stock
If your plan holds company stock, a special rule for net unrealized appreciation (NUA) may let the growth be taxed as capital gain when the shares are sold rather than as ordinary income. Rolling the shares into an IRA generally gives up that treatment. The trade-off: the stock's cost basis is generally taxed in the year of distribution, and holding concentrated company stock adds risk.
On the other side, consolidating old plans may make tracking, withdrawals, and Roth conversions easier to coordinate. See Should I roll my 401(k) into an IRA when I retire? and Should I consolidate old 401(k)s? for that side of the question.
What to gather before you decide
Missing information can lead to costly rollover mistakes. Gather these items first so each option can be compared with real numbers.
- The latest statement for each old plan, showing pre-tax, Roth, and after-tax balances separately
- Each plan's fee disclosure and investment menu
- Whether you hold employer stock, and its cost basis
- Your age and the year you left each employer (this matters for the Rule of 55)
- The year of your first Roth 401(k) contribution and, if any, your first Roth IRA contribution
- Your last two tax returns and a rough estimate of this year's income
- Your Medicare timeline: already enrolled, or enrolling within the next two years
- Each plan administrator's rollover instructions, including how to make a check payable to the new custodian
- Beneficiary designations on the old plans and on any new account
How a rollover decision fits your retirement plan
A rollover is rarely a standalone transaction. It touches your investments, your tax bracket, your Social Security timing, and your Medicare premiums, and each of those could change the answer for the others.
Within The Sentient System™, Patrick Thompson looks at an old 401(k) alongside your withdrawal order, Roth conversion timing, and income needs. Results depend on your individual circumstances, and a rollover is not the right step for everyone.
401(k) rollover questions
In a direct rollover, the plan sends the money straight to the new IRA or plan, and no tax is withheld. In an indirect rollover, the money is paid to you first. A plan distribution paid to you is subject to mandatory 20% withholding, and you generally have 60 days to deposit it.
Generally yes, you can roll pre-tax 401(k) money into a Roth IRA, but the pre-tax amount is generally included in your taxable income for that year. That could raise your tax bracket and, two years later, your Medicare premiums. Rolling into a traditional IRA is generally not taxed at the time.
For an indirect rollover, you generally have 60 days from the date you receive the distribution. The IRS may waive the deadline in limited situations beyond your control. A direct rollover avoids the 60-day clock because the money moves between institutions rather than passing through your hands.
Yes. The IRS says time spent in a Roth 401(k) does not count toward the Roth IRA's five-taxable-year period for qualified withdrawals, which also generally require a qualifying event such as age 59½. A separate five-year period applies to each amount of pre-tax money rolled into a Roth IRA, which matters if you are under 59½.
It may make sense if the plan has low-cost investment options, if you may need penalty-free access under the Rule of 55, if creditor protection is a priority, or if you hold employer stock with possible net unrealized appreciation. Each has trade-offs, and the right answer depends on your plan and situation.
It could. A Roth conversion adds to your modified adjusted gross income for that year, and Social Security generally uses your tax return from two years earlier to set Medicare Part B and Part D premiums. A larger conversion may push you into a higher premium tier two years later.
Keep reading
Sources
Rules reflect information as of October 2026.
- IRS: Rollovers of retirement plan and IRA distributions
- IRS Publication 590-A: Contributions to Individual Retirement Arrangements
- IRS: Retirement plans FAQs on designated Roth accounts
- IRS Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)
- Social Security: Medicare premiums
- IRS Topic no. 558: Additional tax on early distributions from retirement plans other than IRAs
- IRS Topic no. 412: Lump-sum distributions
- U.S. Department of Labor: A Look at 401(k) Plan Fees
- 11 U.S.C. § 522: Exemptions
Sentient Financial, LLC is a state-registered investment adviser in California. This page is provided for educational and informational purposes only and is not individualized investment, tax, or legal advice. It is not a recommendation to roll over, convert, or leave any account where it is. Please consult a tax or legal professional about your situation. See our Disclosures page.
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