Should I Roll Over My 401(k) to an IRA?

When you leave an employer, you must decide what to do with the money in your 401(k) account. This choice will influence the fees you pay, the investments you can access, and the rules that govern your savings. Understanding your options is the first step toward making a decision that aligns with your financial goals.

Analyzing Your 401(k) and IRA Options

Investment Choices

A primary distinction between a 401(k) and an Individual Retirement Arrangement (IRA) is the breadth of investment options. Employer-sponsored 401(k) plans provide a curated menu of investments, usually a selection of mutual funds. This limited selection simplifies decisions but restricts your ability to customize a portfolio.

An IRA opens the door to a much wider universe of investments. Through a brokerage firm, you can invest in individual stocks, bonds, certificates of deposit (CDs), exchange-traded funds (ETFs), and a vast array of mutual funds. This flexibility allows for greater control and the ability to build a highly personalized investment strategy.

Fees and Expenses

The fee structures for 401(k)s and IRAs can impact your long-term returns. A 401(k) often involves multiple layers of fees, including plan administration, record-keeping, and individual service fees. Each investment fund within the 401(k) also has its own operating expense ratio.

IRA fees are often more straightforward. Many institutions offer IRAs with no annual maintenance fees, especially for accounts with higher balances. The primary costs are trading commissions and the expense ratios of the mutual funds or ETFs you choose, and competition among providers makes it possible to find very low-cost options.

Withdrawal Rules and Flexibility

The IRS imposes a 10% additional tax on withdrawals from either account type before age 59½, though both offer exceptions. A 401(k) has a unique provision known as the “age 55 rule.” If you leave your job in the calendar year you turn 55 or later, you can take penalty-free distributions from that specific 401(k).

IRAs do not have an equivalent rule but offer certain penalty-free withdrawal options not always available in a 401(k), such as for first-time home purchases and qualified higher education expenses. Recent legislation also introduced penalty-free withdrawals from both account types for certain personal emergencies and for victims of domestic abuse.

Loan Provisions

The ability to borrow from your retirement savings is a feature exclusive to 401(k) plans. Plans may offer loans of up to 50% of your vested account balance, with a maximum of $50,000. These loans must be repaid with interest, usually over five years. By law, IRAs are prohibited from offering loans.

Creditor Protection

The protection your retirement assets receive from creditors varies between account types. Funds in a 401(k) are governed by the Employee Retirement Income Security Act, a federal law that provides comprehensive protection from creditors in lawsuits.

Under federal bankruptcy law, IRA assets are protected up to a limit of $1,711,975 as of April 2025. This cap does not apply to funds rolled over from a 401(k), which retain unlimited protection in bankruptcy. Outside of bankruptcy, the protection for IRA assets is determined by individual state laws.

Required Minimum Distributions (RMDs)

Both traditional 401(k)s and traditional IRAs require you to start taking withdrawals, known as Required Minimum Distributions (RMDs), once you reach a certain age. The age to begin RMDs is currently 73. However, 401(k)s offer an exception for those who continue to work.

If you are still employed by the company sponsoring your 401(k), you can delay taking RMDs from that plan until you retire. This “still-working” exception does not apply to IRAs. It is also important to note that Roth 401(k)s are no longer subject to RMDs during the original owner’s lifetime, aligning them with Roth IRAs.

Information and Decisions Needed for a Rollover

Gathering Your 401(k) Information

Before initiating a rollover, you must collect key information from your former employer’s plan. Locate your most recent 401(k) account statement to find your account number, vested balance, and investment details. You will then need to contact the plan administrator to understand its specific rules and procedures for rollovers.

Choosing an IRA Provider

Selecting the right institution to hold your new IRA is an important step. You can open an IRA at various financial institutions, including brokerage firms, robo-advisors, and banks. When comparing providers, consider the following factors:

• Account maintenance fees and trading commissions
• The range of available investments
• The quality of customer service and online tools
• The availability of research and educational resources

Deciding on the IRA Type (Traditional vs. Roth)

A key decision is choosing between a Traditional IRA and a Roth IRA. If you are rolling over assets from a traditional, pre-tax 401(k), moving them to a Traditional IRA is a non-taxable event. The funds remain tax-deferred, and you will pay income tax on withdrawals in retirement.

Alternatively, you can roll a traditional 401(k) into a Roth IRA in a process known as a Roth conversion. This is a taxable event, and you must pay income tax on the entire amount you convert. The benefit is that qualified withdrawals from the Roth IRA in retirement will be tax-free.

Completing the Required Paperwork

Once you have made your decisions, you must complete the necessary forms from both your old 401(k) administrator and your new IRA provider. These forms will require your personal information and the account numbers for both accounts. You will need to specify the amount to roll over and indicate that you are executing a direct rollover.

The Rollover Process

Direct Rollover (Trustee-to-Trustee)

The most common and recommended method is the direct rollover. In this process, the 401(k) plan administrator sends the money directly to your new IRA custodian. This method is simple and avoids potential tax complications because you never take possession of the funds.

To initiate a direct rollover, you first open your new IRA. You then complete the rollover paperwork from your 401(k) administrator, providing the details of your new IRA. The 401(k) plan will then liquidate your investments and send the funds to the new IRA provider.

Indirect Rollover (60-Day Rollover)

An alternative is the indirect rollover, where your 401(k) administrator sends a check made payable to you. This method has significant risks, as the plan administrator is required to withhold 20% of the total amount for federal income taxes.

You have 60 days from receiving the funds to deposit the full amount of the original distribution into a new IRA. This means you must use other funds to make up for the 20% that was withheld. If you fail to deposit the full amount within 60 days, the entire distribution is considered a taxable event and may be subject to the 10% early withdrawal penalty.

Alternative Paths for Your Old 401(k)

Leave the Money in the Old 401(k) Plan

You can often leave your savings in your former employer’s 401(k) plan if your vested balance is over $7,000. If your balance is between $1,000 and $7,000, your former employer can force a rollover into a default IRA. This can be a reasonable choice if the plan has unique investments or particularly low fees.

Roll Funds into a New Employer’s 401(k) Plan

If your new employer’s 401(k) plan allows it, you may be able to move your old account balance into your new one. This action consolidates your retirement assets into a single account, which can simplify management. Before choosing this path, compare the new plan’s investment options and fee structure to your other options.

Cash Out the Account

Cashing out your 401(k) is an option but comes with serious financial consequences. The entire distribution will be taxed as ordinary income, and your plan administrator must withhold 20% for federal taxes. If you are younger than 59½, you will likely be subject to an additional 10% early withdrawal penalty. This action also permanently removes the money from a tax-advantaged account, forfeiting all future growth potential.