The Tax Implications of Rolling Over a 401(k) to an IRA

Introduction

Rolling over your 401(k) into an IRA can give you greater control over your investments, potentially lower fees, and broader choices—but doing it wrong could trigger unintended taxes and penalties. Understanding the IRS rules around 401(k) rollovers is essential to making a tax-smart move in 2025.

This guide covers the tax implications, direct vs. indirect rollovers, Roth conversions, withdrawal rules, and IRS forms needed for a compliant rollover.

What Is a 401(k) Rollover?

A 401(k) rollover occurs when you move retirement funds from a 401(k) plan to an IRA (Traditional or Roth).

You can roll over a 401(k) when:

• You leave your job
• You retire
• Your company discontinues its 401(k) plan

Direct vs. Indirect Rollovers

2.1. Direct Rollover (No Tax Consequences)

• Funds are transferred directly from your 401(k) to your IRA.
• You never touch the money.
• No taxes withheld.
• Reported on Form 1099-R and Form 5498.

Best Option – Simple and IRS-compliant

2.2. Indirect Rollover (60-Day Rule, Riskier)

• Funds are paid to you, and you must deposit them into an IRA within 60 days.
• Your employer will withhold 20% for taxes, even if you intend to roll it over.
• If you don’t redeposit the full amount, the IRS considers it a taxable distribution + 10% penalty if under age 59½.

Example:
You receive a $100,000 401(k) distribution. Your employer withholds $20,000 for taxes.

• You must re-deposit $100,000 into an IRA (not just the $80,000 you received) within 60 days to avoid taxes.

Tax Consequences of Rolling Over to a Traditional IRA

3.1. Traditional 401(k) → Traditional IRA

• Tax-deferred rollover
• No tax owed at the time of rollover
• Continue growing your investments tax-deferred

3.2. After-Tax 401(k) Contributions

• Can be rolled into a Roth IRA (tax-free if basis is tracked correctly)
• IRS rules require pro-rata distribution of pre-tax and after-tax portions

3.3. Reporting Requirements

• Form 1099-R will show the rollover
• Code “G” in Box 7 indicates a tax-free direct rollover

Rolling Over to a Roth IRA (Roth Conversion)

4.1. Traditional 401(k) → Roth IRA

• This is a Roth conversion
• You’ll owe ordinary income tax on the pre-tax portion in the year of conversion
• Reported on Form 8606 and 1040

Example:
You roll over $50,000 from a Traditional 401(k) to a Roth IRA.

• If the entire amount is pre-tax, and you’re in the 22% bracket → you’ll owe $11,000 in taxes

4.2. Roth 401(k) → Roth IRA

• Rollovers of contributions are tax-free
• Earnings are tax-free if the Roth 401(k) was held for 5+ years and you’re over age 59½

When You Might Want to Rollover a 401(k)

• You want more investment options
• You want to consolidate multiple accounts
• You’ve changed jobs or retired
• You want to convert to a Roth IRA strategically over time
• Your former 401(k) plan has high fees or limited choices

When You Might Not Want to Rollover

• You’re age 55–59½ and might need early withdrawals: 
  • 401(k) plans allow penalty-free withdrawals at age 55 (not available for IRAs until 59½)
• You’re still working at 72+ and want to avoid RMDs: 
  • You don’t need to take RMDs from your current employer’s 401(k)
• You’re considering a backdoor Roth: 
  • Rolling into a Traditional IRA might complicate pro-rata rules for backdoor Roth conversions

IRS Forms and Compliance Steps

Common Mistakes to Avoid

• Missing the 60-day window on indirect rollovers
• Not replacing the 20% withheld on indirect rollovers
• Failing to report Roth conversions on Form 8606
• Rolling over required minimum distributions (RMDs) – this is not allowed
• Not understanding the tax bill on a Traditional-to-Roth conversion

Conclusion

Rolling over your 401(k) to an IRA can be a smart, tax-efficient move—but only if done correctly. Choosing a direct rollover, understanding tax implications, and properly reporting to the IRS will help you avoid penalties and preserve your retirement savings.

To plan your rollover the right way, schedule a consultation with Anshul Goyal, CPA EA FCA. Book an appointment here:

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant (CPA) in the United States, an Enrolled Agent (EA) admitted to practice before the IRS, and a cross-border tax expert. He specializes in retirement planning, IRS compliance, tax litigation, and advising American investors and Indian expatriates on tax-efficient rollover strategies.

Frequently Asked Questions (FAQs)

1. Is a 401(k) rollover to an IRA taxable?
Not if it’s a direct rollover from Traditional 401(k) to Traditional IRA. You’ll owe tax only if you convert to a Roth IRA.

2. What is the 60-day rule for rollovers?
You must deposit the funds into your IRA within 60 days to avoid tax and penalties.

3. Can I roll over a Roth 401(k) to a Roth IRA?
Yes, and no taxes are due if the Roth 401(k) was held for 5+ years and you’re age 59½ or older.

4. What happens if I don’t complete the rollover in time?
It’s treated as a taxable distribution, and if you’re under 59½, you may owe a 10% early withdrawal penalty.

5. Which IRS forms are involved in a rollover?
Form 1099-R, Form 5498, Form 8606, and Form 1040 for tax filing and compliance.