Should You Roll Your 401k to an IRA?

Quick Summary:

  • When you leave a job, you can leave your retirement money in your old employer’s 401k or “rollover” to an IRA at a bank or brokerage.
  • IRAs usually offer more investment choices than 401ks, but you have to manage your IRA on your own.
  • IRAs and 401ks have different rules that determine how easy it is to withdraw your money in an emergency


You face a key decision when you leave your job, whether you are retiring or moving to a new job. Whether you leave your money in your old employer’s 401k plan or rollover to an IRA depends on a few factors.

What Is A 401(K) to IRA Rollover?

If you are leaving your job, you have probably gotten paperwork giving you a choice to roll your 401k into an IRA. A roll over is when you move your money from an employers’ retirement plan, usually a 401k, into an IRA. You pay no taxes when you shift the money.

You can also decide to leave the money in your 401k until you retire, or turn 70 1/2, whichever happens sooner. There are pros and cons to either choice. If you want to consolidate your retirement accounts into one account, an IRA is a good choice. If you want someone else to help you manage the money, leaving it in your 401k may be the best decision. There are other differences between the two kinds of accounts that should factor into your decision, too, such as the number of investment choices, fees and rules on withdrawing the money.

You Should Always Pay Attention To Fees in Your 401(k)

If you leave your money in your 401k, you will pay administrative fees on the account, plus fees on the underlying investments. Ask your human resources department for more information on the total fees you are paying.

If you decide to roll over your money, you can probably find a bank or brokerage that offers free IRAs, but you will still pay fees on the underlying investments.

What Kinds Of Investment Choices Do You Want In Your IRA Rollover?

You will have more investment choices in an IRA. A big brokerage, like Schwab, Fidelity or eTrade, will offer choices of thousands of funds. The typical 401k offers many fewer: In most cases, a few dozen, at most. But those choices might be all that you need.

Even if you’re no longer working with the company, your 401k at work may give you access to the help of an investment adviser. With an IRA, you are making all the investment choices on your own, though you can expect some help from the customer service department at the brokerage.

Which is More Convenient For You?

If your employer offers guidance to those in its 401k plan, you may also find that benefit valuable. You will no longer have access to it if you roll your money to an IRA.

But there are other ways an IRA is more convenient than a 401k. Some people who decide not to roll over their 401ks end up with several plans at previous employers. It’s harder to make sure that you are saving enough for retirement and that your investment mix has the right level of risk for your age and life, if you have to keep track of several accounts.

It can be simpler to take required minimum distributions once you hit age 70.5  if you roll your money into an IRA, as long as you combine all of your accounts into one. Your minimum distribution is based on the total amount of money in all of your IRA accounts. If you also have a 401k, will have to calculate the required minimum distribution separately and take the money from that account, too.

Access To The Money Is A Factor

If you withdraw money from a 401k or an IRA early, before age 59.5, you will owe the tax on the amount withdrawn, at your usual tax rate. You will probably also owe an additional 10% penalty. But there are exceptions.

But 401ks offer some situations where you can withdraw money without penalty. For instance, if you retire or lose your job between ages 55 and 59.5, you are allowed to make withdrawals from your 401k with no penalty.

You can find more about the taxes and penalties on early withdrawals from 401ks here. And here is information on taxes and penalties on early withdrawals from IRAs.

It is easier to take money out of an IRA if you need it early than it is to withdraw it from a 401k, though you will still owe the taxes and penalty. A 401k plan will typically have rules about when you can take the money out.

Different Rules In Bankruptcy

A 401k has some legal protections IRAs plans don’t have. You will have protection against bankruptcy and lawsuits with a 401k; in other words, if you declare bankruptcy or someone sues you and wins, they cannot touch the money in your retirement plan. With IRAs, only up to $1.245 million of assets are protected in a bankruptcy.

How Do You Do An IRA Rollover?

Once you have gotten a 401k distribution, you have 60 days to roll it over to another retirement plan or IRA before you are subject to taxes on the money. There are three ways to accomplish the rollover you’re planning. Each one has different implications.

  • In a direct rollover, you ask your plan administrator, usually your human resources department at work, to help you transfer money to another plan. The plan could be another 401k at your next job, or an IRA at a bank or brokerage. The administrator may issue you a check made out to your new plan. Your rollover won’t be taxed in this scenario.
  • In a trustee-to-trustee transfer, the money moves directly between accounts. Your rollover won’t be taxed in this scenario, either.
  • In a 60-day rollover, the money from your retirement plan is paid to you. Taxes are automatically withheld. You can deposit all or a portion in an IRA or retirement plan. You must make the deposit within 60 days. If you want to maintain the level of retirement savings in your new account, you’ll have to use other funds to make up for the amount of taxes that were withheld.

Unsure What to Do With Your 401(k)?

If you are not sure of what you would like to do with your money, it may make sense to leave it in your 401k until you are. You can make unlimited rollovers to an IRA in a year, but once the money is in the IRA, it can’t be rolled over for another 12 months.

Ultimately, it is a personal decision whether to roll your 401k into an IRA. Knowing the pros and cons of each scenario will help you make the right choice for you.

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