As you approach retirement, you may be considering rolling over your 401(k) into a new account or investment option. While it may seem like a straightforward process, it’s important to understand the tax implications that may come along with it. This can help you make informed decisions about your retirement savings and avoid any potential pitfalls.

What is a 401(k) rollover?

A 401(k) rollover is the process of moving your retirement savings from a 401(k) plan to another investment option. This can be done for a variety of reasons, such as consolidating your retirement accounts or finding better investment options.

When you leave your employer, you have three options for your 401(k) plan, but be sure to consider the tax implications before making any decisions as different tax rules pertain to each option.

Option 1: Cash Out

Cashing out your 401(k) may seem like an easy way to access your retirement savings, but it comes with a hefty price tag. When you withdraw money from your 401(k) before the age of 59 1/2, you’ll be hit with a 10% early withdrawal penalty on top of any taxes you owe.

In addition, the money you withdraw will be taxable as ordinary income, which means you’ll be paying federal and state income taxes on the amount you withdraw. This can add up quickly, especially if you withdraw a large sum of money.

It’s important to consider all of the tax implications and alternatives before cashing out your 401(k). 

Option 2: Leave It Alone

Another option is to leave your 401(k) with your former employer. This may be a good option if you’re happy with your current investment choices and don’t want to deal with the hassle of rolling over your account.

However, it’s important to note that you may be subject to different fees and investment options than current employees. You won’t be able to contribute as well to your account or take out loans from your 401(k) once you’ve left your employer.

Option 3: Roll It Over

The most common option is to roll over your 401(k) into a new account or investment option. This can be done either into an Individual Retirement account (IRA) or into another employer’s 401(k) plan.

One of the main benefits of rolling over your 401(k) is that you’ll have more control over your investments since you’ll be able to choose from a wider range of investment options and potentially lower your investment fees.

However, there may be tax implications associated with a 401(k) rollover implications. Depending on the type of account you’re rolling your money into, you may be subject to different tax rules.


There are certain exceptions that allow you to withdraw money from your 401(k) penalty-free before the age of 59 1/2. These factors include Disability, Medical Expenses, and Separation of Service.

While these exceptions may allow you to withdraw money from your 401(k) penalty-free, keep in mind that you’ll still be subject to income taxes on the amount you withdraw.

The NUA Rule

Another tax strategy to consider when rolling over your 401(k) is the Net Unrealized Appreciation (NUA) rule. This rule applies if you own company stock in your 401(k) and are rolling over your account.

Under the NUA rule, you’ll be able to withdraw your company stock and pay taxes on the cost basis of the stock, which is typically much lower than the current market value. This can result in significant tax savings, especially if you’ve held the stock for a long time and it has appreciated in value.

However, this only applies to company stock and may not be the best strategy for everyone. 

It’s always a good idea to consult with a financial advisor before making any decisions.

Contact us to learn more about 401(k) rollovers!