Leaving a job, or consolidating old plans, often means moving a 401(k) at Fidelity, Vanguard, Empower, or Alight into an IRA at Schwab, Fidelity, or Vanguard. Done as a direct (trustee-to-trustee) rollover, the move is usually nontaxable. An indirect rollover (check payable to you) can trigger mandatory withholding and a 60-day clock that people miss.
Account map first: Roth IRA vs 401(k) starter, Employer match on 401(k), Employer match vesting. Job-exit cash flow: Sudden job loss.
Before you touch the money
- Confirm vested balance only moves; unvested match may be forfeited (Vesting).
- Decide traditional → traditional IRA (usually nontaxable) vs Roth 401(k) → Roth IRA vs a taxable Roth conversion of pre-tax dollars (Roth conversions basics).
- Open the destination IRA before initiating the rollover so the custodian has an account number.
- Ask the plan whether it will send a direct rollover check payable to the new custodian (“FBO your name”) or force a distribution to you.
- Check outstanding 401(k) loans; separation can make the loan balance taxable if not repaid under plan rules.
Investing after the cash lands is a separate decision: Investing basics for beginners.
Direct vs indirect
| Path | What happens | Main risk |
|---|---|---|
| Direct / trustee-to-trustee | Plan sends assets to the IRA custodian; you never pocket the check | Low tax drama when coded as rollover |
| Indirect | Plan pays you; you must deposit the full amount into an IRA within 60 days | Often 20% federal withholding on eligible rollovers; you must replace withheld dollars from other cash to roll 100%, or the withheld slice is a taxable distribution (possible 10% penalty before 59½). Withholding still counts as tax paid on your return either way. |
Prefer direct. If payroll already cut a check to you, call both custodians the same day and track the 60-day deadline in writing.
Worked example: the 20% withholding trap
Casey leaves a job with a $40,000 vested traditional 401(k). Casey requests a rollover but the plan mails a check payable to Casey for $32,000 after 20% ($8,000) withholding.
To complete a nontaxable rollover of the full $40,000 within 60 days, Casey must deposit $40,000 into a traditional IRA, meaning find $8,000 elsewhere to top up the $32,000 check. If Casey deposits only $32,000, the missing $8,000 is generally a taxable distribution (and possibly a 10% early-withdrawal penalty before 59½). The $8,000 already withheld still counts as federal income tax paid (a credit on the return) whether or not Casey tops up the rollover; it is not “lost” solely because the rollover was incomplete (Pub 575). Completing the full rollover is what keeps that $8,000 from also being taxable income.
Casey instead calls the plan and re-issues as a direct rollover to Fidelity “FBO Casey” whenever the plan allows, avoiding the cash-in-hand path.
Job-change menu (leave, IRA, new plan, cash-out) before the IRA paperwork: How to roll over a 401(k) when you change jobs. School/hospital 403(b) moves (annuity surrender fees, vendor forms): How to roll a 403(b) into an IRA checklist.
Checklist (print this)
- Verify vested balance, loan status, and Roth vs pre-tax buckets in the plan.
- Open the destination traditional and/or Roth IRA.
- Request direct rollover to the new custodian; avoid checks payable to you.
- If funds hit your bank, deposit the full pre-withholding amount into the IRA within 60 days.
- Keep the 1099-R and IRA Form 5498 / custodian rollover letter with your tax PDFs.
- Re-select investments and beneficiaries on the new IRA after assets post.
- Do not cash out to “think about it”; that is a distribution, not a rollover.
Common mistakes
- Rolling into a new employer’s plan without comparing fees and fund menus (sometimes fine; sometimes an IRA is cleaner).
- Mixing a rollover with a same-year Roth conversion without planning the tax bill.
- Missing company stock / NUA special rules (specialized; ask a tax pro before a large block sale).
- Letting an indirect check sit in checking past day 60.
Educational only. Not tax, investment, or legal advice. Rollover and withholding rules are detailed and change; confirm with the plan administrator, IRS Publications 575/590-A, and a qualified professional.