Rolling Over a 401(k) to an IRA: The Rules, the Traps and the Company Stock Decision

You have four, and you can combine them. Nothing has to happen on your last day; the money can sit while you decide.

• •Leave it in the old plan. Plans can push out small balances, but a six- or seven-figure account can generally stay. You keep the plan's funds, protections and fees, and you can roll it over later. Some plans allow only all-or-nothing withdrawals after you leave; ask.
• •Roll it to an IRA. The usual answer, and the subject of most of this guide. Pre-tax money goes to a traditional (rollover) IRA, Roth money to a Roth IRA.
• •Roll it into a new employer's plan, if you are taking another job and that plan accepts roll-ins. This matters more after 70 than most people realize, for reasons covered below.
• •Cash it out. The whole pre-tax balance becomes ordinary income in one year, most of it at your top bracket. On a large account that is rarely right, with one exception: employer stock taken out in kind under the net unrealized appreciation rules, which is a partial cash-out done deliberately.

The choices are not exclusive. A 57-year-old might leave two years of spending in the plan to use the rule of 55 and roll the rest. A 62-year-old with company stock might take the stock out in kind and roll everything else. The 401(k) calculator projects the balance either way.

Use a direct rollover. In a direct rollover the plan pays the new custodian, usually by wire or by a check made out to the custodian "for the benefit of" you. Nothing is withheld, there is no deadline to meet, and the move is reported but not taxed (IRS).

In an indirect, or 60-day, rollover the plan pays you. It must withhold 20% for federal income tax, even if you tell it you intend to roll the money over, and you then have 60 days from the day you receive the payment to deposit it in an IRA or another plan (IRS). To keep it all tax-free you must deposit the full pre-withholding amount, replacing the withheld 20% from other savings. The IRS example is a $10,000 distribution: you receive $8,000 and must add $2,000 of your own to roll over $10,000 (IRS Publication 575). Whatever you do not redeposit is taxable, and if you are under 59 and a half it may also carry the 10% additional tax.

At retirement scale the numbers stop being abstract. Had the plan cut a check for $1,100,000, it would withhold $220,000. Rolling over the full $1,100,000 would then require $220,000 from a taxable account within 60 days, with the refund arriving the following spring.

Miss the 60 days for reasons outside your control and the IRS can waive the deadline: automatically when a financial institution caused the delay, by self-certification letter for listed reasons such as serious illness or a misplaced check (deposit within about 30 days of the problem ending), or by private letter ruling with a $10,000 user fee (IRS).

The once-a-year limit that many articles mention does not apply to 401(k) rollovers. You may make only one 60-day rollover from an IRA to another IRA in any 12-month period, counting all your traditional, Roth and SIMPLE IRAs together, and the 12 months start on the day you receive the distribution. Direct transfers between IRAs, Roth conversions, and rollovers from a plan to an IRA or from an IRA to a plan are not counted (IRS Publication 590-A; IRS). A second IRA-to-IRA rollover inside the window is taxable and, left in the IRA, becomes an excess contribution.

Sources: IRS rollover rules, the IRS rollover chart, Publication 575 (loan offsets, Roth rollovers) and Tax Topic 413. If you still owe on a plan loan, see 401(k) loans after 55 for how the offset works.

Five things, and each is worth checking before the money moves, because a rollover cannot be undone.

The rule of 55. If you leave your employer during or after the calendar year you turn 55, withdrawals from that employer's plan are exempt from the 10% additional tax on early distributions. For qualified public safety employees the age is 50, or 25 years of service if earlier. The exception applies to qualified plans and not to IRAs (IRS). It must be the job you leave at 55 or later; someone who left at 49 cannot use it at 55 (IRS Publication 575). If you are between 55 and 59 and a half and will draw on this money before 59 and a half, leave enough in the plan to cover those years.

Plan-level creditor protection. Assets in an ERISA plan such as a 401(k) are shielded from most creditors by federal law. IRAs are protected in bankruptcy up to a cap of $1,711,975 per person from April 1, 2025, adjusted every three years, and money rolled over from an employer plan (plus its earnings) does not count against that cap (11 U.S.C. §522(n); Federal Register). Outside bankruptcy, a lawsuit judgment for example, IRA protection depends on your state, and it ranges from complete to partial. If you have real liability exposure, ask an attorney in your state before rolling, and keep rollover money in its own IRA, unmixed with contributions.

The still-working exception for required distributions. Participants in a workplace plan can delay RMDs from that plan until the year they retire, unless they own more than 5% of the business. IRA owners get no such delay: RMDs start at 73, or 75 if you were born in 1960 or later, working or not (IRS). The exception covers only the plan of the employer you are working for. That is why a 72-year-old taking a new job might roll old 401(k)s and even pre-tax IRAs into the new employer's plan, if it accepts them, to defer distributions on all of it.

Institutional funds and stable value.Large plans often offer index funds and collective trusts at costs below what any retail investor can buy, and many offer a stable value fund, which pays a bond-like yield with a guaranteed book value and is generally not available in an IRA. Look at your plan's annual fee disclosure. A large, cheap plan is a perfectly good place to keep money.

Your spouse's automatic claim. A 401(k) generally must pay the whole death benefit to your surviving spouse unless the spouse consents in writing, before a notary or plan representative, to another beneficiary (IRS). Federal law gives an IRA no such rule; community property states have their own. Whether that is a loss depends on your marriage and estate plan, but it should be a conscious change.

Control. An IRA at a large custodian can hold nearly any fund, ETF, individual bond or Treasury, so you can build the portfolio you want rather than choose from a menu of twenty. Several old 401(k)s become one account, one statement and one set of beneficiary forms, which helps you now and whoever settles your estate later.

Roth conversions on your schedule. From a traditional IRA you can convert any amount at any time, which lets you fill a bracket precisely in the low-income years between retirement and Social Security or RMDs. Many 401(k)s allow in-plan Roth conversions, but departed employees often cannot take partial distributions, and a plan's processing calendar is not yours. Our guide to Roth conversions before RMDs covers how much to convert each year.

Qualified charitable distributions. From 70 and a half, you can give up to $111,000 a year directly from an IRA to charity; the gift counts toward your RMD and never enters your income. QCDs come only from IRAs, not from a 401(k), so charitably inclined readers usually want at least some money in an IRA by then. See how QCDs work.

Simpler RMDs and more beneficiary flexibility. RMDs from several traditional IRAs can be added up and taken from any one of them, whereas each 401(k) must pay its own (IRS). IRA custodians generally offer the full range of payout options the law allows to beneficiaries, and you can name different beneficiaries for different IRAs, or split one, without a plan administrator's forms. Our inherited IRA guide explains what your heirs will face.

Stop and look at net unrealized appreciation before rolling anything. If you take employer shares out of the plan in kind, into a taxable brokerage account, you pay ordinary income tax only on the plan's cost basis in the shares. The growth while the shares were in the plan, the NUA, is not taxed until you sell, and then it is long-term capital gain no matter how briefly you hold the shares after the distribution. Growth after the distribution is long- or short-term depending on how long you hold it (IRS Publication 575). Roll the same shares into an IRA and every dollar eventually comes out as ordinary income.

The deferral of all the NUA requires a lump-sum distribution: your entire balance from all of the employer's plans of the same kind, paid within a single tax year, after a triggering event. The triggers are separation from service, reaching 59 and a half, death, or, for the self-employed, disability (IRS Publication 575). The shares go to a brokerage account and everything else goes to an IRA by direct rollover, in the same calendar year. Your plan reports the NUA in box 6 of Form 1099-R.

Details that decide whether it works:

• •The cost basis is ordinary income in the year of distribution, and if you are under 59 and a half it is also subject to the 10% additional tax unless an exception such as the rule of 55 applies.
• •You do not have to take every share. Plans commonly let you choose lots. Shares bought at prices close to today's have little NUA and are usually better rolled to the IRA with everything else.
• •NUA is excluded from the 3.8% net investment income tax. Appreciation after the distribution is not (26 CFR 1.1411-8).
• •NUA does not get a step-up in basis at death. It is income in respect of a decedent, so heirs still owe capital gains tax on it when they sell; only growth after the distribution is stepped up (Rev. Rul. 75-125).
• •It is a one-time decision. Rolling the shares into an IRA, or taking a partial distribution that breaks the one-year lump sum, ends the option for good.

The rule of thumb: NUA is most valuable when the basis is a small fraction of the market value, when your future ordinary tax rate is well above your capital gains rate, and when you would sell the shares to diversify anyway.

Richard is 62 and leaves his engineering firm at the end of June 2026. Linda is 60 and retired from teaching. His 401(k) holds $1,400,000: $1,100,000 in diversified funds and $300,000 of company stock that the plan bought over the years for $60,000. The NUA is $240,000. His wages for the half year are $130,000 and they have $8,000 of interest a year. From next year they will live on savings while Richard delays Social Security.

The NUA route, step by step. In 2026 the plan distributes the shares to a brokerage account and sends the $1,100,000 to a rollover IRA by direct rollover, completing the lump sum in one tax year. The $60,000 basis is added to Richard's wages and interest and falls entirely in the 22% bracket, adding $13,200 to their federal tax. He is over 59 and a half, so there is no 10% additional tax.

Early next year, with no wages, they sell all the shares for $300,000. Of that, $60,000 is basis already taxed and $240,000 is long-term gain. Their $8,000 of interest is less than the $32,200 standard deduction, and the unused deduction offsets part of the gain. The first $98,900 of taxable gain falls in the 0% band, which runs to $98,900 of taxable income, and the remaining $116,900 is taxed at 15%: $17,535. Their modified adjusted gross income of $248,000 is below the $250,000 net investment income tax threshold, and the NUA would be exempt from that tax in any case. Total federal tax on the stock: $30,735.

The rollover route. The shares go into the IRA, where Richard can sell and diversify without tax. But the $300,000 now comes out one day as ordinary income. With a $1,400,000 IRA, delayed Social Security and RMDs from 75 (Richard was born in 1964), their marginal rate in their 70s is likely to be 22% or 24%, which puts the tax on the same dollars at $66,000 to $72,000.

NUA saves them roughly $35,265 to $41,265 of federal tax, before counting what they give up: tax deferral on the $300,000 while it sits in the IRA, and a portfolio in which dividends and later gains are taxed each year. If they instead sold half the shares next year and half the year after, each year's gain would fall largely or wholly in the 0% band, and total federal tax on the stock would fall to about $13,200. The price is holding a concentrated position a year longer and spending two years of low brackets on capital gains rather than on Roth conversions.

Two cautions apply to them and to most readers. Capital gains count toward the income that sets marketplace health insurance premium credits before 65 and Medicare IRMAA surcharges two years later, so a large sale at 63 or later can raise Medicare premiums at 65. And the advantage shrinks when the basis is a large share of the value or your future ordinary rate is low: at 12%, the rollover route here would cost $36,000, only $5,265 more than NUA. A CPA who has done NUA distributions before is worth the fee; the plan's paperwork has to be exactly right. Our guide to which accounts to draw from first shows how the brokerage account, the IRA and the Roth fit together once the move is done.

Roth 401(k) money can go only to another Roth 401(k) or to a Roth IRA (IRS Publication 590-A). The trap is the five-year clock. Earnings come out of a Roth IRA tax-free only after 59 and a half and five tax years after your first contribution to any Roth IRA. The years your money spent in the Roth 401(k) do not count toward the Roth IRA's clock; the two periods are measured separately (26 CFR 1.408A-10, Q&A-4). If you have had a Roth IRA open for five years, rolled money is covered immediately. If you have never had one, open one now with a small contribution or conversion to start the clock, or roll the Roth 401(k) over early rather than at the moment you need it. Contributions you rolled over remain available tax-free at any time; if the 401(k) distribution was already qualified, the entire amount is treated as contributions in the Roth IRA (same regulation, Q&A-3).

Since 2024, Roth 401(k)s have no required distributions during the owner's life, the same as Roth IRAs (IRS), so the old reason to roll them out before 73 is gone.

After-tax contributions (not Roth, not pre-tax) are common in older plans and in plans that allow "mega backdoor" contributions. Under IRS Notice 2014-54, when a distribution is sent to several destinations at the same time it is treated as one distribution, so you can send the pre-tax part, including the earnings on the after-tax contributions, to a traditional IRA and the after-tax contributions themselves to a Roth IRA, tax-free. The IRS example: of a $100,000 distribution with $80,000 pre-tax and $20,000 after-tax, the $80,000 can go to a traditional IRA and the $20,000 to a Roth IRA. You cannot take only the after-tax money in a partial distribution; each partial withdrawal carries a pro-rata share of pre-tax money (IRS). Ask the plan for the breakdown by source, and give it both sets of account instructions in a single request.

Pre-tax money can also go straight from the plan into a Roth IRA. That is a Roth conversion: the amount is ordinary income that year, but the 10% additional tax does not apply (IRS Publication 575). Converting from the rollover IRA over several years usually costs less than converting a large balance at once.

You must take the year's required minimum distribution before anything can be rolled. RMDs are not eligible for rollover, and in any year an RMD is due, the first dollars distributed count toward it until it is satisfied (26 CFR 1.402(c)-2(f); IRS). Ask the plan to pay the RMD to you first and roll the remainder. If the plan rolls everything, the RMD portion lands in the IRA as an excess contribution, which has to be withdrawn with its earnings to avoid a 6% excise tax each year it stays.

This applies in the year you retire even if the still-working exception applied until then. When you leave, that year becomes your first distribution year from the plan. The first RMD can wait until April 1 of the next year, but the amount due for the year you retire still cannot be rolled over. The RMD calculator gives the amount from the prior December 31 balance, and the retirement age calculator shows your RMD start year from your birth date.

Also worth knowing if you join a new employer: its plan will not accept an RMD, but once the money is in your current employer's plan, RMDs from it can wait until you retire. Contribution limits for a new plan are the same as for anyone else your age: $24,500 plus the catch-up for 2026. Our guide to maxing out a 401(k) covers the catch-up amounts by age.

• •Taking the check. 20% is withheld, and anything not redeposited within 60 days, including the withheld part you did not replace, is taxable.
• •Rolling company stock into the IRA without looking at NUA. The option disappears once the shares are in an IRA.
• •Rolling everything at 56 and then withdrawing from the IRA. The rule of 55 applied only in the plan; the IRA withdrawal carries the 10% additional tax.
• •Rolling an RMD. The year's RMD comes out first; rolled, it becomes an excess contribution.
• •Doing two IRA-to-IRA 60-day rollovers inside 12 months. The second is a taxable distribution. Use trustee-to-trustee transfers between IRAs.
• •Sending after-tax money to a traditional IRA. It stays after-tax basis that you must track on Form 8606 for decades, instead of growing tax-free in a Roth IRA.
• •Assuming the Roth 401(k)'s five years carry over. The Roth IRA has its own clock.
• •Leaving the money in cash. Rolled money often lands in a money market fund and stays there for months.
• •Letting the rollover become a sale. A large rollover is the moment many retirees are sold high-fee annuities and wrap accounts. Compare costs in writing, and read our guides to choosing an adviser and investment scam red flags.