Rolling Your 401(k) to an IRA: A Step-by-Step Guide for Dayton Retirees

You worked thirty years at GE Aviation, or Wright-Patt, or a shop in Vandalia, and now there is a 401(k) statement on your kitchen table with a number on it that took a lifetime to build. The letter from the plan administrator asks what you want to do with it.

Most people roll it into an IRA. That is usually the right move, but not always — and the way you do it matters more than most folks realize. Get one detail wrong and the IRS treats your entire retirement account as taxable income in a single year. We have seen it happen, and it is not fixable after the fact.

Here is how a rollover actually works, in plain terms.

First, Should You Roll It Over at All?

You have four choices when you leave a job or retire, and rolling to an IRA is only one of them.

1. Leave it in the old 401(k)

If your balance is over $7,000, the plan generally has to let you stay. Sometimes that is the better deal. Big employer plans — the kind Wright-Patterson civilians and large Dayton-area manufacturers have — often carry institutional-class funds with expense ratios lower than anything you can buy retail. If your plan has a stable value fund paying a decent rate, you cannot replicate that in an IRA.

There is also a legal wrinkle worth knowing: 401(k) assets get unlimited protection from creditors under federal ERISA law. IRAs are protected under state law, and Ohio protection is good but not identical. If you are in a profession with liability exposure, that is worth a conversation.

2. Roll it to your new employer plan

Useful if you are still working past 65. Money in your current employer plan is exempt from required minimum distributions while you are still on the job (as long as you do not own 5% or more of the company). Money in an IRA is not. Consolidating into a new plan can push RMDs down the road.

3. Roll it to a traditional IRA

The most common choice, and usually the right one for someone actually retiring. You get every investment option in the market instead of the fifteen funds your plan menu offered, you can consolidate multiple old accounts into one, and you get far more control over how and when you withdraw.

4. Cash it out

Almost never a good idea. The whole balance becomes ordinary income in one year, which can push you into a much higher bracket, trigger Medicare IRMAA surcharges two years later, and make more of your Social Security taxable. If you are under 59 and a half, add a 10% penalty on top.

Direct Rollover vs. the 60-Day Trap

This is the part where people get hurt, so read it twice.

A direct rollover (sometimes called a trustee-to-trustee transfer) means the money moves from your 401(k) to your IRA without ever passing through your hands. If a check is cut, it is made out to the receiving custodian for your benefit — not to you. There is no withholding, no 60-day clock, no limit on how often you can do it.

An indirect rollover means the plan sends the money to you, and you have 60 calendar days to get it into an IRA. Two things go wrong here.

First, the plan is required by law to withhold 20% for federal taxes. On a $400,000 balance, you receive $320,000. But to complete a full rollover, you have to deposit the entire $400,000 — meaning you need to come up with $80,000 from your own pocket to replace the withholding. You get that $80,000 back at tax time, but that is a long time to float it. If you only deposit the $320,000 you received, the missing $80,000 is treated as a taxable distribution.

Second, 60 days is 60 days. Not two months, not “about.” Miss it — because of a hospital stay, a slow mail carrier, a bank hold — and the whole amount is taxable. There is an IRS waiver process, but you do not want to be in it.

Always ask for a direct rollover. If someone at the plan asks how you want it processed, that is the answer. Every time.

The Rollover, Step by Step

1. Open the receiving IRA first. Have the account open and the account number in hand before you call the old plan. Nothing stalls a rollover like discovering you have nowhere to send it.
2. Call the old plan administrator — not HR, the recordkeeper on your statement. Tell them you want a direct rollover to an IRA. Ask what paperwork they need and whether they require a medallion signature guarantee (some do; your bank or credit union can provide one).
3. Ask about in-kind vs. liquidation. Most plans sell your holdings and send cash. That means you are out of the market for however many days the transfer takes — usually 3 to 15 business days. Some plans can transfer holdings in kind if the receiving custodian offers the same funds. Ask.
4. Confirm the check instructions. The check should be payable to the custodian, FBO (for benefit of) your name, with your new account number. If a check ever arrives made out to you personally, do not cash it — call immediately.
5. Track it. Rollovers get lost more often than they should. Follow up at the two-week mark if nothing has landed.
6. Watch for the 1099-R in January. A properly executed direct rollover shows a distribution code of “G” in Box 7 and $0 in the taxable amount box. You still report it on your return, but it is not taxed. If the form looks wrong, get it corrected right away.

One more thing worth saying plainly: rolling money in does not use up your annual IRA contribution limit. That limit is $7,000 in 2026, or $8,000 if you are 50 or older, and it applies to new contributions only. You can roll over $800,000 and still make a full contribution the same year if you have earned income.

Pre-Tax, Roth, and After-Tax Dollars

Look at your statement. A lot of 401(k)s hold more than one kind of money, and each type has its own destination.

• Pre-tax (traditional) balance goes to a traditional IRA. No tax due at rollover.
• Roth 401(k) balance goes to a Roth IRA. Also no tax due. Important detail: your Roth 401(k) holding period does not carry over to the Roth IRA. If this is your first Roth IRA, a new 5-year clock starts for earnings to come out tax-free. If you have had any Roth IRA open for 5 years already, you are fine.
• After-tax (non-Roth) contributions — less common, but some older plans have them. These can often be split off and moved directly to a Roth IRA while the earnings on them go to a traditional IRA. Done right, that converts a chunk of money to Roth at zero tax cost. Done wrong, you pay tax you did not owe. Get help on this one.

Also worth knowing: as of 2024, Roth 401(k) accounts no longer have required minimum distributions during your lifetime. That removed one of the old reasons to roll a Roth 401(k) out.

If You Hold Company Stock, Stop and Read This

This applies to a real number of people around here, because Dayton has a long history of employees accumulating employer stock in their retirement plans.

There is a tax provision called Net Unrealized Appreciation, or NUA. If you have highly appreciated employer stock inside your 401(k), you may be able to move those shares into a regular taxable brokerage account instead of an IRA. You pay ordinary income tax only on the original cost basis of the shares, and the appreciation gets taxed at long-term capital gains rates when you eventually sell.

An example. Say you have company stock with a cost basis of $40,000 that is now worth $300,000. Roll it into an IRA and every dollar comes out as ordinary income someday — potentially at 22%, 24%, or higher. Use NUA instead and you pay ordinary rates on $40,000 now, and capital gains rates (0%, 15%, or 20%) on the $260,000 of appreciation later.

The catch: NUA requires a lump-sum distribution of the entire plan balance within one tax year, triggered by a qualifying event. Roll the stock into an IRA first and the opportunity is permanently gone. There is no undo.

If there is employer stock on your statement, talk to somebody before you fill out a single form.

What a Rollover Does to Your RMDs

Required minimum distributions currently start at age 73 (moving to 75 in 2033). A few things change when your money sits in an IRA instead of a 401(k):

• You can aggregate. If you have several traditional IRAs, you calculate the RMD for each but can take the total from any one of them. With multiple 401(k)s, you must take the RMD separately from each plan. Consolidating simplifies this considerably.
• The still-working exception goes away. As mentioned above, current-employer 401(k) money can be exempt from RMDs while you are still working. IRA money never is.
• Rolling over in an RMD year has an order of operations. If you are already RMD age, you must take that year RMD before rolling the rest over. An RMD is not eligible for rollover, and if it accidentally lands in the IRA it becomes an excess contribution with its own penalty.
• Qualified charitable distributions become available. At 70 and a half you can send up to $108,000 in 2026 (the cap is indexed for inflation each year) directly from an IRA to charity, and it counts toward your RMD without hitting your taxable income. You cannot do a QCD from a 401(k). For people in the Miami Valley who tithe or give regularly to local causes, this is often the single most valuable reason to move the money.

Ohio Public Employees: A Special Note

A lot of our neighbors spent their careers with a school district, a township, the city, or a state agency — which means OPERS, STRS Ohio, or the Ohio Deferred Compensation 457(b) plan rather than a private 401(k).

Governmental 457(b) plans roll to an IRA the same way a 401(k) does, but there is a feature you give up. Money in a 457(b) has no 10% early withdrawal penalty once you separate from service, regardless of your age. Roll it into an IRA before 59 and a half and that protection disappears — the normal early withdrawal penalty rules take over.

If you retired at 55 or 58 from a public job and might need that money before 59 and a half, leaving it in the 457 is often the smarter play. Same logic applies to the “rule of 55” in a private 401(k), which lets you take penalty-free withdrawals if you separated from service in or after the year you turned 55.

Mistakes We See Around the Miami Valley

• Rolling over on autopilot when the old plan was better. Compare expense ratios before you move. Sometimes the answer is to stay put.
• Forgetting to name beneficiaries on the new IRA. The old plan beneficiary form does not carry over. An IRA with no named beneficiary goes to your estate and through probate, and your heirs lose the ability to stretch distributions.
• Leaving the money in cash after it lands. A rollover deposits cash. It does not invest it. We have met people whose entire retirement sat in a money market for eighteen months because nobody told them there was a second step.
• Rolling everything at once in a high-income year. Not a problem for a straight rollover, but if you are also doing a Roth conversion, timing it in a year with severance or a big capital gain can cost you real money in bracket creep and IRMAA surcharges two years down the line.
• Losing track of an old account entirely. If you changed jobs three times, you may have three accounts. Check with former employers, and check Ohio unclaimed funds while you are at it.

A Second Set of Eyes Before You Sign

A rollover is one of those decisions that looks like paperwork and is actually a tax event. Most of the time it goes smoothly. But the pieces that go wrong — the indirect rollover, the missed NUA opportunity, the RMD that got swept up by accident — cannot be undone once the forms are processed.

If you have a 401(k), 403(b), or 457 from a job you have left, we are happy to walk through your statement with you and tell you honestly what we see. Sometimes the recommendation is to leave it exactly where it is.

Medicare & Retirement Solutions Group is in Beavercreek and serves retirees and pre-retirees throughout Dayton, Greene and Montgomery counties, and the greater Miami Valley. Call us or reach out through medretiregroup.com for a free, no-obligation conversation. No pressure, no sales pitch — just a clear read on your options.

This article is general educational information, not individualized tax or investment advice. Rollover rules and tax treatment depend on your specific situation. Please consult a qualified tax professional before acting.