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Rolling Your Old 401(k) Account Into an IRA

David J. Blount, CFP®

LPL Financial Advisor

You’ve bid farewell to your previous job and now find yourself at a crossroads with your old 401(k) account. The good news is that leaving your old job behind means you’re in the driver’s seat when it comes to managing your hard-earned money. The question now is: what should you do with your old 401(k) account?

In this article, we’ll explore the most common option for managing your retirement savings: rolling over your funds into an individual retirement account (IRA). By taking the time to assess your current circumstances, risk tolerance, and long-term objectives, you can select the IRA that can help expand your potential for growth. However, it’s important to understand that not all IRAs are created equal. That’s why we’ll walk you through the different types of IRAs to help you determine which one is the best fit for your needs and goals.

401(k) Rollover Options

Before diving into the IRA options, let’s first review the choices available when you leave an employer. Depending on your specific circumstances, there are generally four main options available, each with its own set of advantages and disadvantages.

  1. Leave the money in your former employer’s retirement plan: Not every employer will allow this, so be sure to check with your company before making a rollover decision. If you are able to leave the money in the plan, this option allows you to enjoy the tax-deferred growth of the assets until you are ready to withdraw them. The downside is that you may have limited investment options and less control over your funds. It’s also not uncommon for employees to forget about their old 401(k) accounts when they are left with a previous employer’s plan.

  2. Roll over into a new employer’s plan: You can also transfer the assets to a new employer’s plan, if one is available and rollovers are permitted. This option allows you to consolidate your retirement savings into a single account. If you don’t have access to a new employer’s plan, or if there is a delay in eligibility, this option becomes less feasible.

  3. Roll over into an IRA: This option allows the participant to maintain control over their retirement savings and may offer a wider range of investment options. There are two types of IRAs available, as discussed in greater detail below.

  4. Cash out the account balance: This option allows you to receive the full amount of your retirement savings in cash, but it comes with significant tax consequences. You will be subject to income taxes on the full amount of the pre-tax contribution and earnings. If you are under age 59½, you will also be subject to a 10% early withdrawal penalty. This option gives you full control of your retirement funds, but you may significantly reduce the account value when taxes are considered.

IRA Rollover Options

When looking at the rollover IRA option specifically, there are several considerations to keep in mind. First you’ll have to decide which IRA makes the most sense for your financial situation.

Traditional IRA

Prior to 1997, there was only one kind of IRA, which is now referred to as a traditional IRA. It is a tax-deferred retirement account in which the contributions may be tax deductible in the contribution year and the taxes are paid when the money is withdrawn in retirement. Also, if you are in a lower tax bracket in retirement, you’ll end up paying less in taxes than you would have originally.

IRAs can be invested in just about everything except life insurance or collectibles, so there is a much broader range of investment options available. Unlike employer-sponsored retirement plans, with an IRA you are the complete owner and the plan is in no way tied to your employment. You can change jobs as frequently as you want and it does not impact your account or your ability to contribute to it (as long as you have earned income). You can even withdraw money penalty-free before age 59½ if it’s for a qualified first-time home purchase or education expenses.

Roth IRA

Out of the Taxpayer Relief Act of 1997, a new kind of IRA was born, named after Senator William Roth of Delaware, who was the chief legislative sponsor of the act. Roth IRAs differ from traditional ones in a few key ways. The biggest difference is the tax treatment. Whereas traditional IRAs are tax-deferred, with a Roth you pay all taxes up front. The key, though, that makes Roths so popular, is that you don’t have to pay taxes on any of the growth. Everything generated by compounding interest is yours, and the government doesn’t take any of it if you follow the rules.

Roths also differ from traditional IRAs in that there are no required minimum distributions. So, you can leave your money in the account to grow for perpetuity, instead of being required to take withdrawals (and stop contributions) at age 73 like with a traditional account. Some people even utilize Roth IRAs as a way to provide tax-free income for their children or grandchildren. In addition to the traditional IRAs allowances for special withdrawals, contributions (not growth) can be taken out at any time for any reason without penalty.

There are income limitations on who is allowed to open a Roth IRA outright, but anyone can rollover a 401(k) to a Roth IRA as long as they pay the associated tax liability.

Roth Rollover Considerations

Because of the different tax treatment of the two types of IRAs, there are tax consequences depending on the type of account you roll your 401(k) into. A traditional 401(k) can be rolled into a traditional IRA without paying taxes. A Roth 401(k) can be rolled into a Roth IRA without paying taxes. However, to roll a traditional 401(k) into a Roth IRA creates a tax liability. Since most 401(k)s are pre-tax and a Roth IRA is after-tax, you will have to pay ordinary income taxes on the money to move it from one to the other. In order to roll a traditional 401(k) into a Roth IRA, you should have sufficient money saved elsewhere to cover the tax bill.

One final thing to keep in mind when rolling over 401(k) funds into an IRA is whether the money is sent to you or directly to your IRA custodian. If your old 401(k) plan writes you a check, they are required to withhold 20% for the IRS. However, if you don’t deposit the full original amount into an IRA within 60 days, it will be considered a withdrawal and you may be penalized. For example, say you have a $100,000 401(k) you want to roll over. Your previous employer writes you a check for $80,000 because they are required to withhold $20,000, or 20%. You, however, are required to deposit $100,000 into your new IRA in order to avoid the penalty, so you have to find the remaining $20,000 somewhere else in order to complete the transaction. It is much easier to do a direct rollover, or trustee-to-trustee transfer, where your previous employer sends the money directly to the IRA custodian and nothing is withheld for taxes.

Need Guidance on Your Decision?

The choice between a Roth IRA and a traditional IRA relies heavily on your specific financial situation. While a Roth IRA offers long-term tax advantages and is well suited for younger people, a traditional IRA may be more suitable for those nearing retirement or needing early access to funds.

When it comes to rolling over your 401(k) into an IRA, selecting the right IRA type can have an impact on your financial future. Seeking guidance from a financial professional to evaluate your financial priorities before making a decision allows you to make an empowered decision that aligns with your long-term financial goals.

If you’re ready to seize control of your financial future and transfer your old 401(k) into an IRA, don’t hesitate to schedule a complimentary call to discuss your current financial planning considerations and see if our services match your needs. Reach out to us at or (407) 542-3249. You can also send us a message here. Our dedicated team is ready to assist you in making the right decision for your situation. Take the first step toward a successful financial future by getting in touch today.

About David

David is President and CEO of Investment & Insurance Planning Services, LLC (IIPS), an independent and fee-based firm that helps clients establish their financial goals and creates custom financial plans to help them pursue those goals. They specialize in working with pre-retirees, individuals in a career transition, L3 Harris engineers, and JetBlue pilots. David’s motivation comes from seeing his clients pursue their goals. He says, “It’s very rewarding to help people make successful transitions from one career to another, start a small business, or retire.”

David received his bachelor’s degree from Troy University, and prior to becoming a financial planner in 2000, he had a nine-year career in the United States Coast Guard. He obtained the CERTIFIED FINANCIAL PLANNER™ designation in 2007. He has served as the guest financial expert on Orange Television’s Adult Lifestyle Magazine Show and frequently provides financial and retirement planning workshops. Outside of work, he enjoys spending time with his wife, Michelle, their two kids, Ryan and Alana, their dog, Jack, and visiting with friends. An avid outdoorsman, he enjoys fishing, hiking, exercise, and as a committed person of faith, he enjoys attending church and is passionate about helping people in his community. To learn more about David, connect with him on LinkedIn.

This material was prepared for David Blount’s use.

The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

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