Changing jobs, retiring, or being part of a layoff often leaves behind a 401(k) at a former employer. Some people leave the old account untouched for years, while others cash it out without realizing the tax cost. A 401k rollover is one of several options, and the right choice depends on fees, investment options, tax considerations, and how the account fits your long-term plan. If you are deciding what to do with an old 401(k), a complimentary, no-obligation wealth and tax review can help you compare options.
This guide explains the main choices for an old 401(k), how rollovers generally work, the tax rules to watch, and special situations such as company stock and Roth balances.
Your Main Options for an Old 401(k)
When you leave an employer, you generally have four choices:
Leave it in the old plan. Many plans allow former employees to keep their balance, especially above a minimum amount. This requires no immediate action, though you can no longer contribute and the account may be easier to lose track of over time.
Roll it into your new employer's plan. If the new plan accepts rollovers, this can consolidate accounts and keep employer plan features, though you are limited to the new plan's investment menu and fees.
Roll it into an IRA. An IRA rollover may offer broader investment choices and more control, though fees may be higher than in some employer plans, creditor protection may differ, and plan features such as loans are not available.
Cash it out. Taking a distribution provides immediate access to the money, but it generally triggers income tax and, if you are under a certain age, a possible additional early withdrawal tax.
Each option has tradeoffs, and there is no single answer that fits everyone.
Factors to Compare
Fees and expenses. Compare plan administrative fees, fund expenses, and any advisory fees for an IRA.
Investment options. Employer plans may offer institutional share classes or stable value funds, while IRAs typically offer more choice.
Creditor protection. Employer plans generally have strong federal protection, while IRA protection depends partly on state law.
Early access rules. Some employer plans allow penalty-free withdrawals for people who leave their job in or after a certain year of age, a rule that does not apply to IRAs.
Loans. Employer plans may allow loans; IRAs do not.
Simplicity. Consolidating accounts can make it easier to manage investments, track beneficiaries, and calculate required distributions later.
Our article on the rule of 55 explains one reason some people keep money in an employer plan before rolling it over.
Direct Rollovers vs Indirect Rollovers
A direct rollover moves money straight from the 401(k) to the new plan or IRA, often by check payable to the new custodian. This is generally the simplest approach and avoids mandatory withholding.
An indirect rollover pays the money to you first. The plan generally must withhold a portion for federal taxes, and you then have a limited number of days to deposit the full amount, including the withheld portion from other funds, into an IRA or plan to avoid taxes. Missing the deadline or failing to replace the withholding can turn part of the rollover into a taxable distribution. There are also limits on how often certain IRA-to-IRA rollovers can be done. A direct rollover generally reduces the chance of mistakes.
Roth 401(k) Balances
Roth 401(k) money generally rolls into a Roth IRA, while pre-tax money rolls into a traditional IRA. If your account has both, the rollover may need to be split. Rules about how long a Roth account has been open can affect whether earnings are tax-free when withdrawn, and the clock for a Roth IRA may differ from the clock in the employer plan. Review these details before moving Roth balances.
After-tax contributions in a 401(k), which are different from Roth contributions, can sometimes be rolled to a Roth IRA while the earnings go to a traditional IRA. This is related to strategies discussed in our article on the mega backdoor Roth.
Company Stock and Net Unrealized Appreciation
If your 401(k) holds shares of your employer's stock, rolling everything into an IRA may forfeit a potential tax opportunity. Under the net unrealized appreciation rules, some people take company stock out of the plan in kind, pay ordinary income tax on the cost basis, and later pay capital gains rates on the appreciation when the shares are sold. The rules are specific and require a lump-sum distribution of the entire account in one year. Our guide to net unrealized appreciation covers the details.
Rollovers and Future Roth Planning
Rolling pre-tax money into a traditional IRA can affect future backdoor Roth contributions because of the pro-rata rule, which considers all traditional IRA balances when calculating the tax on a conversion. Some people who plan to use the backdoor Roth strategy roll pre-tax money into their new employer's plan instead. Our article on the backdoor Roth IRA explains why.
Cashing Out: Understanding the Cost
Cashing out an old 401(k) can feel tempting, especially after a job loss. But the distribution generally adds to taxable income for the year, may trigger an additional early withdrawal tax, and removes money from tax-advantaged growth. If you need cash, it may help to compare the cost of a distribution with other sources such as an emergency fund, before deciding.
Wisconsin Considerations
Wisconsin generally taxes 401(k) and IRA distributions as income, with certain subtractions available for some retirees based on age and income. A properly completed direct rollover is generally not taxable for federal or Wisconsin purposes. If you are moving out of state in retirement, the timing of rollovers and later withdrawals can affect which state taxes them.
Keeping Track of Old Accounts
It is common for people to accumulate several retirement accounts over a career, and older accounts are easy to lose track of after a move or a change in email address. Keeping an up-to-date list of every plan and IRA, along with login information stored securely, the plan administrator's contact information, and current beneficiaries, can prevent problems later. Beneficiary designations deserve special attention, since they generally control who receives the account regardless of what a will says, and an old designation may no longer reflect your wishes after a marriage, divorce, or birth.
Consolidating accounts through rollovers can make this easier, but even people who keep money in several plans may benefit from a single summary. That summary is also useful for required minimum distribution planning later in life, and for family members who may need to locate accounts. Our estate planning checklist covers beneficiary reviews in more detail.
Next Steps
Whether you just left a job in Madison, retired from a company in Waunakee, or have several old plans from employers across Wisconsin, organizing your retirement accounts can simplify your financial life. The right rollover decision fits your investments, taxes, and future plans.
To compare your options, request a complimentary, no-obligation wealth and tax review. Our wealth management team can help you review these options in the context of your broader plan.
Frequently Asked Questions
What should I do with my old 401(k)?
Common options include leaving it in the old plan, rolling it to a new employer plan, rolling it to an IRA, or cashing it out. Each has different costs and tax effects.
Is a 401k rollover taxable?
A properly completed direct rollover from a pre-tax 401(k) to a traditional IRA or plan is generally not taxable.
What is the difference between a direct and indirect rollover?
A direct rollover moves money straight to the new account. An indirect rollover pays you first, with withholding and a deadline to redeposit the funds.
Can I roll a Roth 401(k) into a Roth IRA?
Generally yes. Roth 401(k) money typically rolls into a Roth IRA, though holding period rules may differ.
Should I roll over company stock?
If your plan holds appreciated employer stock, review net unrealized appreciation rules before rolling everything into an IRA.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Investing involves risk, including possible loss of principal. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
Information may be generalized or subject to change. Please contact our team for the most current and accurate information.
About Compound Wealth
Many financial decisions involve more than one area of expertise. Compound Wealth provides integrated tax planning, wealth management, accounting, and business transition services so clients can evaluate financial decisions within a broader planning framework. This collaborative approach supports thoughtful conversations across multiple areas of financial life.
