401(k) Rollover to IRA: Taxes, Fees, and When Not to Move the Money

When a 401(k) rollover to an IRA can be the wrong move

An IRA is one place an old 401(k) can go, not the default answer. You can also leave the money in the former employer plan or move it to a new employer plan that accepts rollovers. Cashing out is a separate choice because it can create current tax and may also trigger the extra tax on an early payout.

Start with one question: Where can the money go without giving up a feature you still need? Then compare cost. A lower fee matters only after you know the other choices are open and workable.

A new employer plan does not have to accept a rollover. Ask the plan team whether it will take this money and what types it accepts, as explained in the IRS rollover guidance.

Check the three issues that can reverse an IRA choice

A cheaper IRA can still be the wrong choice. Three issues can outweigh a modest fee gap: early access from the old plan, the rules that protect the money from creditors, and the effect of a new IRA balance on later tax math.

1. The Rule of 55 belongs to qualified plans, not IRAs. The federal exception can apply if you leave the employer during or after the year you reach age 55. The timing, the type of plan, and the plan’s own payout rules still matter. IRAs do not get the same separation-from-service exception. If you may need the money before age 59½, check the rule before moving the balance in the IRS early-distribution exceptions.

2. Creditor protection is not one rule. An ERISA-covered 401(k) plan must include a rule that bars assignment and alienation under section 1056(d) of Title 29 of the U.S. Code. Federal bankruptcy law has a separate set of protections for qualifying retirement funds, including special treatment for some rollover money. So an IRA rollover does not, by itself, erase federal bankruptcy protection. Outside bankruptcy, the protection for an IRA can depend on the law that applies and the facts. See 29 U.S. Code §1056(d) and 11 U.S. Code §522.

3. A rollover IRA can change later Form 8606 math. The 2025 Form 8606 instructions were the latest full tax-year instructions available when this update was reviewed. Line 6 uses the December 31 value of all traditional IRAs, plus certain rollovers still in transit. A large rollover IRA can change how much of a later Roth conversion is taxable when after-tax IRA basis is involved. If that strategy matters to you, read the backdoor Roth IRA rules and the IRS Form 8606 instructions before creating the new IRA balance.

Use real documents, then put the fee gap in dollars

Pull the former plan’s summary plan description, fee notices, and account statement. Get the IRA’s full fee schedule and the new plan’s fee and rollover rules too. Compare the plan or account charges with the costs of the funds you would actually use. An expense ratio by itself is not the full cost.

The Department of Labor says to use plan documents and account statements when you review 401(k) fees. Investor.gov also notes that fees at both the account and fund level reduce returns over time. Use the DOL plan-fee guide and the Investor.gov fee guide to check the charges you may be paying.

A simple model can show how large a fee gap may become. It starts with $100,000, adds no new money, earns a fixed 7% gross return, and uses the same annual cost each year. The table compounds once per year.

Ending value = $100,000 × (1 + 0.07 − annual cost)^years, with the annual cost entered as a decimal (for example, 0.25% = 0.0025).

This is a fee-drag example, not a forecast. It leaves out new contributions, taxes, trading costs, changing returns, changing fees, service quality, and account-specific legal or tax effects. If a fee is a flat dollar charge, keep it in dollars rather than forcing it into this percentage model.

Stop for mixed-tax money, employer stock, loans, or an RMD

The normal rollover path gets harder when the account mixes tax types, holds employer stock, has a loan issue, or is subject to a required minimum distribution (RMD). Find those items before you ask the plan to move the money. Fixing the route after a payout can be much harder.

Keep ordinary after-tax money separate from designated Roth money. A plan may let you send pretax money to a traditional IRA or another plan while sending ordinary after-tax money to a Roth IRA. The exact route depends on the plan’s records and what each new account will accept; see the IRS after-tax rollover guidance. Designated Roth money follows a different rule. An eligible payout from that account can go to another designated Roth account or a Roth IRA, but not to a traditional IRA, as shown in the IRS designated Roth guidance.

Employer stock needs an NUA check before a blanket IRA rollover. Net unrealized appreciation (NUA) is the growth in employer stock while it was held in the plan. If the legal conditions are met, that growth can stay untaxed until the stock is sold and can then get long-term capital-gain treatment. Roll the stock into a traditional IRA, and later IRA payouts follow the normal IRA tax rules. The IRS also says the special lump-sum tax rules cannot be used after a rollover. NUA is not always better, but employer stock is a reason to pause; see IRS Topic 412 and IRS Publication 575.

A plan loan needs the exact event status. A loan treated as a deemed distribution cannot be rolled over. An eligible plan loan offset can follow a different rollover rule and deadline. Check what the plan actually reported before assuming the usual 60-day route in the IRS plan-loan FAQ.

An RMD cannot be rolled over. If an RMD is due for the year, do not include it in the amount sent to the new IRA or plan. Confirm the year’s payout and rollover order with the plan team, using IRS Topic 413 as the federal rule check.

Make the rollover direct and keep the proof

For withholding, focus on who the check is payable to, not who gets the envelope. A direct rollover sends the eligible amount to the new plan or IRA. The old plan may even mail the check to you. If the check is payable to the new plan or IRA, the IRS says the mandatory 20% withholding does not apply. That 20% rule usually applies when the eligible rollover amount is paid to you instead. See the IRS rollover guidance.

1. Confirm the new account first. Make sure the IRA or new plan is open, accepts this rollover, and gives you the exact payee and mailing instructions.
2. Request the direct rollover. Keep any unresolved after-tax, Roth, employer-stock, loan, or RMD amount out of the general request until you know its route.
3. Keep the paperwork. Save the payout statement, proof that the new account received the money, the fee documents you compared, and any special-case records.

If the eligible rollover amount is paid to you instead, 20% withholding usually applies to the taxable part and the 60-day deadline starts to matter. The IRS has relief paths for some missed deadlines, including an automatic waiver, a private letter ruling, and self-certification. Those are backup rules, not a reason to plan an indirect rollover. The IRS 60-day waiver guidance explains the main routes.

Keep one dated record of the plans and IRA you compared, their current costs, any access or protection issue, the account’s tax mix, and proof of the transfer. Check the choice again when fees, fund menus, plan options, access needs, or your IRA tax strategy changes.

The useful rule is simple: move the money only after the new account is better on the factors that matter to you. Do not roll it to an IRA just because that sounds like the standard next step.