When you hear the word ‘roll’ over, your mind might drift to warm dinner rolls or a perfectly wrapped sushi roll. But in the retirement world, it means something entirely different. A rollover is the process of moving money from your 401(k) into an IRA.
Now, let’s clear the basics:
- A 401(k) is a retirement plan sponsored by your employer.
- An Individual Retirement Account (IRA) is a self-sponsored retirement account that you open on your own.
They both serve the same purpose, which is to help you save for retirement. But they also operate very differently. With a rollover, you get to shift your nest egg from a company-sponsored account into one you can manage independently.
But just because you can roll over your 401(k) into an IRA, does it mean you should?
Well, now that is a question that requires some pondering and evaluation.
Let’s break down the pros and cons of rolling over a 401(k) into an IRA and determine when a rollover makes sense and when it doesn't.
What really is a rollover?
A rollover is simply the process of moving money from one retirement account to another. It is most commonly done from a former employer’s 401(k) into an IRA. The key point to note here is that when you roll over funds, you are not actually cashing them out. You do not retain the money or use it to purchase other assets. These funds are merely transferred from an old account to an IRA. And they continue to grow on a tax-deferred basis.
Rollovers are not limited to 401(k)s. They can also apply to other employer-sponsored plans such as 403(b)s or profit-sharing plans. In some cases, you can also opt for an IRA-to-IRA transfer. However, in this article, let’s just stick to what happens when you consider converting a 401(k) to an IRA.
Should I move my 401(k) to an IRA?
While you can transfer your 401(k) funds to an IRA, the decision of whether to do so is a matter of debate. A rollover has its pros and cons, both of which you should evaluate properly.
Advantages of rolling over a 401(k) to an IRA
1. Tax savings
When you roll over your 401(k) directly into an IRA, you do not have a tax liability right away. The money moves from your employer plan straight into your new IRA account through a trustee-to-trustee transfer. Because you never fully withdraw the money or touch it, this is not a taxable event.
Your savings continue to grow on a tax-deferred basis if you choose a traditional IRA. So, you do not owe anything on the gains until you eventually take withdrawals, which for most people is in retirement.
However, if you are thinking long-term and expect tax rates to rise in the future, you might prefer rolling into a Roth IRA. So, you may have a taxable event in this case. The key difference is that while you will pay ordinary income tax on the amount you convert now, once the money is inside the Roth account, any future growth and withdrawals in retirement will be tax-free.
Additionally, unlike traditional accounts, Roth IRAs do not require Required Minimum Distributions (RMDs). So, you can let your money remain in the account and will not be forced to start withdrawing money at age 73. This way, your investments will continue to grow.
But there is something you need to watch out for:
If you take the distribution check made out to you instead of going the direct rollover route, taxes will usually be withheld automatically. You still have 60 days to deposit the money into an IRA to avoid income taxes, but you will need to make up the withheld amount yourself if you want the full rollover to count.
Otherwise, that chunk will be treated as income, and if you are younger than 59½, you will also face a 10% early withdrawal penalty. That is why most financial professionals recommend skipping the check route altogether and sticking with a direct rollover. This can be cleaner and simpler, helping you avoid unnecessary tax headaches.
Another perk of rolling your 401(k) into an IRA is the ability to keep contributing. With a traditional IRA, you can add more money each year (subject to contribution limits), and those contributions can reduce your taxable income if you qualify. If you go with a Roth IRA, contributions will not lower your taxes today, but you will be building a pot of money you can access tax-free down the road. Either way, you are giving yourself more control over your retirement savings, rather than letting an old 401(k) sit untouched.
2. Customizable, simplified financial planning, and better access to your money
An IRA allows penalty-free withdrawals for specific life events such as a first-time home purchase, higher education expenses, or the birth of a child. This offers flexibility. Additionally, if you have worked at multiple employers and hold several 401(k) accounts, consolidating them into a single IRA can simplify your financial life. This makes tracking your investments easier.
IRAs also offer unique options, such as charitable IRA rollovers or Qualified Charitable Distributions (QCDs). These allow donors aged 70½ or older to transfer IRA assets directly to public charities. Such transfers not only count toward RMDs but can also be excluded from taxable income. This can be particularly beneficial if you are retired and seeking to give back while managing your taxes efficiently.
3. Wider range of investment options
In the 401(k) vs IRA debate, the investment options can make a real difference. Rolling over into an IRA opens the door to a broader universe of investments compared to most employer-sponsored 401(k) plans. While 401(k)s typically limit you to a set list of mutual funds and stock options chosen by the employer, IRAs offer a better buffet. You can invest in Exchange-Traded Funds (ETFs), stocks, bonds, and mutual funds. IRAs may also offer advanced tools, research resources, and personalized guidance, which can help you make more informed decisions. This can give you better control over your money.
However, it is essential to note that not all IRAs are automatically better than 401(k)s. The comparison is subjective and depends on the specific features of the 401(k) you already have and the IRA you are considering. Before making the switch, carefully weigh factors such as fees, investment options, employer matching, and the services offered. And remember, only roll over your funds if you find an IRA that truly is better than your existing 401(k).
4. Potentially better fees
When you roll your old 401(k) into an IRA, one of the first things you might notice is the difference in fees. Large company retirement plans typically have competitive fee structures because they can offer lower costs to their participants. But if you worked at a smaller company, there is a good chance the fees were on the higher side.
An IRA can give you access to lower-cost funds and more transparent fee options, which, in turn, can help you save more. Keep in mind that fees are typically expressed as percentages. At first glance, these percentages might look small. You might even shrug and think that won't change much. But the truth is, it does. Once you factor in the actual size of your retirement account and how long your money sits and grows, these tiny percentages can compound into thousands of dollars lost or saved.
5. Simplified retirement planning
If you have switched jobs a few times, you probably have more than one 401(k) account sitting around. The more 401(k)s you have, the more logins you need to remember. The more accounts you need to keep track of, manage, rebalance, and whatnot!
Rolling everything into a single IRA clears away that clutter. It gives you one account to manage, one statement to read, and one place to track your progress. It makes retirement planning easy and streamlined. Plus, when it is time to take RMDs, having just one account makes the process far simpler.
Now that you have gone through the benefits of rolling a 401(k) to an IRA, you must also know about whether the grass is greener on the other side.
Reasons to stick to your 401(k)
1. Better fees and possibly stable returns
As discussed above, if you are part of a large employer’s 401(k) plan, chances are the fees are lower than what you might pay with an IRA. So, you could save up money by not opting for the rollover.
401(k)s may also offer better returns.
How?
Did you know that 401(k) plans offer stable value funds, something that you would not find in an IRA?
These funds work somewhat like money market funds. They offer potentially steady returns while maintaining low risk. They also usually provide a higher interest rate than money market funds.
However, some IRAs can provide access to even lower-cost funds or investments that better align with your goals. The only way to know for sure is to compare your 401(k) directly to the IRA you are considering.
2. Better protection and benefits
A 401(k) comes with fiduciary oversight. Your employer has a legal obligation to make sure the investment options in the plan are in your best interest. This is not the case with an IRA. With an IRA, you are responsible for everything.
Legal protection is another significant factor to consider. Money inside a 401(k) is shielded under federal law from most types of creditor judgments. So, if you ever face a lawsuit or file for bankruptcy, your retirement savings in a 401(k) are much harder to touch. There are a few exceptions, like Internal Revenue Service (IRS) tax liens or court-ordered spousal and child support. But overall, 401(k) funds are very well protected.
IRAs do not come with the same type of protection. Federal law protects up to approximately $1 million in IRA assets if you file for bankruptcy, as outlined in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. However, outside of bankruptcy, whether your IRA is safe from creditors depends heavily on your state's laws. Some states fully protect IRAs, while others do not. You can consult a financial advisor to understand the prevailing laws in your state.
There is also the question of access. Typically, withdrawing money from a retirement account before age 59½ would result in a 10% penalty. But 401(k) plans have a special rule. If you leave your job in or after the year you turn 55, you can start taking money out of that 401(k) without paying the early withdrawal penalty. This can be a lifesaver for early retirees. Once you roll the money into an IRA, though, you will lose the privilege. With an IRA, penalties usually apply for early withdrawals.
There is another tax perk you might miss if you move your money to an IRA. You can qualify for special treatment for company stock in your 401(k), known as Net Unrealized Appreciation (NUA). In plain terms, you could pay less tax on the growth of your company stock when you sell it later. If you roll everything into an IRA, you may lose this opportunity and potentially pay more in taxes.
3. Lower contribution limit
The ceiling for contributions is significantly lower for IRAs than for 401(k)s. This can be a limiting factor and come in the way of building your retirement savings, especially if you fall in a high-income bracket.
For 2025, the limits look like this:
- 401(k): You can contribute up to $23,500 per year. If you are between the ages of 60 and 63, you are eligible for special catch-up contributions of $11,250, bringing the total to $ 46,000. For those 50 and older, the combined limit is $31,000.
- IRA (Traditional or Roth): The annual contribution cap is $7,000. If you are 50 or older, you can add a catch-up contribution, which raises your total limit to $8,000. Additionally, if you opt for a Roth IRA rollover, your contributions will also be subject to income limits. Depending on your Adjusted Gross Income (AGI), your allowed contribution may be reduced or phased out altogether. A 401(k) does not come with this restriction, which makes it more accessible for higher-income earners.
Should I move my 401(k) to an IRA – Here’s the final verdict!
If tax advantages are your top priority, a Roth IRA may be the better choice. If you are looking for wider investment options and greater flexibility, IRAs typically offer better benefits. Additionally, if you have multiple old 401(k)s from past employers, consolidating them into a single IRA can make your life much easier.
On the other hand, if strong legal protections matter to you, staying with a 401(k) may be smarter. Plus, if you want the ability to contribute more each year, the 401(k) has a higher contribution limit than IRAs.
Ultimately, the right choice comes down to your unique goals. Consulting with a financial advisor can help you assess your situation and make informed decisions. Tools like our free advisor match tool can connect you with 2 to 3 seasoned advisors who have expertise in retirement planning, so you can get personalized guidance before making the move.