401k after leaving job

[altheaf]

I'm deciding what to do with my 401k after leaving my job. I'm currently unemployed so I won't have the option of moving it to another employer's plan so I have a few questions on what will happen if I were to move it to an IRA or leave it alone.

If I were to leave the 401k as is:

• Are there any tax implications that I need to be aware of if I leave the 401k alone? I don't plan on taking any distributions
  
  

If I were to move the 401k to an IRA:

• This year, I contributed to a traditional IRA and converted those funds to my Roth IRA (backdoor Roth IRA).
  • What would be tax implications if I were to move the 401k to a traditional IRA? Would the pro-rata rule apply?
  • Would it be better to move the 401k to a traditional IRA next year? I'm planning to directly contribute to my Roth IRA for next year since my income won't be high
  • Would I need to report anything when filing taxes if I decide to move my 401k to a traditional IRA? For example, would I need to report any gains? Would I report that I moved my 401k? (similar to reporting that I did a roth conversion from traditional IRA)

[Opus 17]

If I were to leave the 401k as is:

No tax issues.  If you are under age 55, then any withdrawals you make before age 59-1/2 will be subject to income tax plus a penalty.  Some employers might kick you out of their plan especially if you have a low balance, you have to ask them.  If they don't kick you out, you can leave it there indefinitely.

If I were to move the 401k to an IRA:

If you rollover your 401k to a traditional IRA, then the pro-rata rule would apply to any future Roth conversions -- it would make a true backdoor Roth IRA contribution impossible.  That won't matter if your income allows direct Roth contributions, but might cause a problem if your income rises again.

The rollover is non-taxable.  There is no difference between contributions and earnings since none were ever taxed, so there is no tax on a rollover.  If you do a direct rollover from trustee to trustee, you might not have to report it at all (I forget this point) but even if you do get a 1099-R, you just report that fact and tell your tax software that it was a 100% rollover.

Some additional points to consider:

1. You should evaluate your investment choices.  A 401k may offer limited investment options, but they may have lower expense ratios than buying the same fund through a private IRA.  But an IRA may have more investment options.

2. Certain types of emergency withdrawals can be made from an IRA but not a 401k.  But you can still leave the money in the 401k, and only rollover part of the funds that you need.  (For example, I did a qualified HSA funding distribution this year to put $5000 into my HSA.  That can only be done from an IRA, so first I rolled over $5K from my 403b to an IRA then rolled it over again from the IRA to the HSA.  I left the rest of my money in the 401k because I am satisfied with the investment choices.)

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...

[dmertz]

If you roll over the 401(k) to a traditional IRA in 2025, the Roth IRA conversion that you already did earlier in 2025 will become mostly taxable because the pro rata calculation must be done using your year-end balance in traditional IRAs (which will include the funds rolled over from the 401(k)).  The relative timing of these transactions in 2025 is irrelevant.  To avoid the 2025 conversion becoming largely taxable, you'll need to wait until 2026 to do a rollover of the 401(k) to a traditional IRA.

Moving the 401(k) to a traditional IRA is a reportable rollover that must be reflected on Form 1040 lines 5a and 5b.  Such a rollover is nontaxable, so it would not be included on line 5b.