Your old 401(k) has four exits. Only some are good.

Direct transfer versus the 60-day rule

There are two legal ways to move retirement money, and only one of them is safe. A direct rollover, sometimes called a trustee-to-trustee transfer, sends the money straight from the old custodian to the new one. The IRS confirms no taxes are withheld on such a transfer, and a check made payable to the receiving plan or IRA is not subject to withholding even if it is mailed to you.

An indirect rollover puts the money in your hands first. You then have 60 days from the date you receive it to deposit all or part of it into another plan or IRA. Two penalties attach. First, the plan must withhold 20% for federal income tax, and if you want to roll over the entire distribution you must add that 20% back from other funds. Second, if you miss the deadline, the amount is generally taxable and may carry the 10% additional tax on early distributions unless you qualify for an exception or an IRS waiver.

One more limit applies only to IRA-to-IRA rollovers: you may make just one in any 12-month period across all of your IRAs, aggregated together. The IRS notes that conversions, trustee-to-trustee transfers, and plan-to-IRA or IRA-to-plan rollovers are not subject to that limit. Exceeding it can make the amount taxable and treat the redeposit as an excess contribution taxed at 6% per year while it remains.

Company stock: the NUA decision you only get to make once

If your 401(k) holds employer securities that have appreciated substantially, stop before you roll anything. IRS Publication 575 describes net unrealized appreciation as the increase in the securities' value while held in the plan trust, and explains that in a qualifying lump-sum distribution, tax on all of the NUA is deferred until you sell, with that gain treated as long-term capital gain. The amount is reported in box 6 of your Form 1099-R.

Mechanically, you distribute the shares in kind to a taxable brokerage account as part of a lump-sum distribution, pay ordinary income tax on the plan's cost basis in those shares now, and hold the appreciation for capital gains treatment later. A qualifying lump-sum distribution requires that your entire balance from all plans of that kind be distributed in a single tax year, and be triggered by separation from service, reaching age 59.5, death, or total disability.

The math favors NUA when the basis is low relative to current value. If you contributed shares at an average cost of $40,000 that are now worth $250,000, you pay ordinary income tax on $40,000 today and long-term capital gains on the $210,000 of appreciation when you sell, potentially at 0%, 15% or 20% depending on your taxable income. Roll the same shares into an IRA and every dollar becomes ordinary income on withdrawal. Note that the ordinary income on basis may carry the 10% early distribution tax if you are under 59.5 and no exception applies.

Rule of 55, creditor protection, and other quiet differences

The age-55 exception is the most commonly overlooked reason to leave money in an employer plan. IRS Topic 558 lists among the exceptions to the 10% additional tax distributions made to you after you separated from service with your employer after attaining age 55, with an earlier threshold of age 50 or 25 years of service for qualified public safety employees. This applies to the plan of the employer you separated from, not to an IRA. Roll that money to an IRA at 56 and you have traded away penalty-free access for three and a half years.

Creditor protection also differs. Assets in an ERISA-covered employer plan generally enjoy strong federal protection from creditors. IRA protection depends heavily on state statute and, in bankruptcy, on federal exemption rules that treat rollover IRAs differently from contributory IRAs. If you work in a high-liability profession or have exposure to litigation, that difference can outweigh a modest fee saving. This is a question for an attorney licensed in your state, not a rule of thumb.

Two smaller points. Employer plans often let you defer required distributions past age 73 on that plan's balance while you are still working there, which an IRA never allows. And keeping pre-tax dollars out of your IRAs preserves clean back-door Roth contributions, because the pro-rata rule looks at all your traditional, SEP and SIMPLE IRA balances on December 31.

The step-by-step process

Done in this order, a rollover takes two or three phone calls and about three weeks to settle.

• 1. Inventory the account. Get a current statement showing pre-tax, Roth and after-tax balances separately, plus any employer securities and any outstanding plan loan.
• 2. Compare fees honestly. Pull the plan fee disclosure and note the expense ratio of each fund you use plus any per-participant recordkeeping charge, then compare with the destination.
• 3. Decide on NUA before anything else. If you hold appreciated company stock, resolve that question first, because a rollover forecloses it.
• 4. Open the destination account. A rollover IRA, or confirm your new plan accepts incoming rollovers and whether it accepts Roth 401(k) money too.
• 5. Request a direct rollover. Ask specifically for a trustee-to-trustee transfer with the check payable to the new custodian for your benefit. Never to you personally.
• 6. Keep Roth and pre-tax separate. Roth 401(k) money goes to a Roth IRA, pre-tax to a traditional or rollover IRA. Mixing them creates a reporting mess.
• 7. Handle any plan loan. An outstanding loan usually becomes a taxable deemed distribution if not repaid, so know the deadline before you initiate.
• 8. Invest the cash. Rollovers often land in a money market fund. Money sitting uninvested for months is the most common post-rollover mistake.
• 9. Check your Form 1099-R. A direct rollover should show distribution code G and $0 taxable. Report the rollover on your return even though nothing is owed.

Plan provisions, state tax treatment and creditor statutes vary, so verify the specifics that apply to you. Advisory services are offered through a registered investment adviser, and this page is educational only, not individualized advice.