Reasons to Roll Over Your 401(k) To an IRA

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on August 14, 2023

Are You Retirement Ready?

A 401(k) Rollover to IRA is when you take the money out of your 401(k) plan and put it into an Individual Retirement Account (IRA).

It's very easy to roll over a 401(k) to an IRA.

There are many reasons why you'd want or need to transfer money from one account or investment vehicle into another, including:

  • You've changed jobs and the new employer doesn't offer a 401(k) plan.
  • Your investment choices in your current 401(k) are limited, or you can't invest as much as you want to.
  • The fees on your current 401(k) plan are too high for the services received - either because it is a 401(k) plan offered through an employer, or because the investment options are high-cost mutual funds.
  • You want to diversify your retirement savings into more than one account.
  • You're approaching retirement age and want to start taking distributions from your 401(k) account.
  • You need to take a distribution from your 401(k) account, but you don't want to pay the early withdrawal penalty.
  • You're moving to a new state and want to rollover your 401(k) into an IRA in order to continue to use it as your retirement savings account.

Need help with a Roth 401(k) rollover? Click here.

Reasons to Roll Over Your 401(k) To an IRA

401(k) rollovers can be a great way to save for retirement.

When you roll over your 401(k) into an IRA, you get to keep all of the money in the account and you don’t have to pay any taxes on it.

You also get to choose your own investments, which gives you a lot more flexibility than you would have if you left your money in a 401(k).

How Rollover Works

There are two ways to roll over a 401(k) into an IRA - you can either do a direct rollover or an indirect rollover.

Direct Rollover

This is when the money from your 401(k) plan goes directly to your new IRA account, without going through your own hands first.

This is the best way to rollover a 401(k) because it ensures that you receive the money immediately.

If you take possession of the check for your 401(k) distribution, then it becomes taxable that year - even if you deposit it into your IRA rather than spend it!

Indirect Rollover

You can also rollover a 401(k) by doing an indirect rollover through what's called a 60-day rollover.

This is when you withdraw the money from your current 401(k) plan and wait at least 60 days before rolling it over into either another 401(k) or an IRA.

If you don't wait the required time period, then the IRS considers this a taxable distribution, and you'll have to pay taxes on the money as well as a 10% early withdrawal penalty if you're under age 59½.

Best Option for You

The direct rollover is generally the best option when rolling over a 401(k) into an IRA, because it's simpler and faster.

However, not everyone is able to do a direct rollover - if your 401(k) is held with the old employer, then they may be unwilling to release the money to the new provider.

In this case, you'll have to do an indirect rollover. Just be sure to follow all of the rules so that you don't get hit with any penalties from the IRS.

Benefits of Rolling Over Your 401(k)

The benefits of rolling over your 401(k) into an IRA include:

  • You choose the type and amount of investments that your IRA holds.
  • You can keep your existing 401(k) or change to a lower-cost provider or investment options with higher returns, which may save you money in the long run.
  • You're able to save a substantial amount of money for your retirement needs, with a variety of tax advantages including:

a.) Contributing to an IRA is tax-deductible, which can help reduce your taxable income and lower your current year's taxes if you qualify.

b.) You can set up a Simplified Employee Pension, or SEP-IRA - a traditional IRA that allows you to contribute as much as 25% of your income from self-employment for retirement purposes.

  • If you have multiple 401(k) accounts from prior employers, then rolling them all into one IRA can simplify your financial situation and make it easier to manage all of your retirement savings in one place.
  • You can always move your IRA money back into a 401(k) plan when you change jobs, retire, leave an employer, or switch employers - but if you stay with the same provider and put your IRA money there instead, then it's harder to get it back out again.

Disadvantages of Rolling Over Your 401(k)

The disadvantages of rolling over a 401(k) may include:

  • You lose the ability to take loans against your 401(k) account.
  • You may have to pay administrative fees if you rollover your 401(k) into an IRA with a different provider.
  • If the fees are higher, then this could reduce your returns.
  • You may have to deal with minimum balance requirements if you want an IRA through the same provider that holds your 401(k) account(s).
  • If you were to rollover your 401(k) into an IRA, then you would lose the opportunity to do a Roth conversion.
Advantages & Disadvantages of Rolling Over Your 401(k)

Things to Consider Before Making the Switch

Before you decide to rollover a 401(k) into an IRA, there are a few things you should consider:

  • How much money do you have in your 401(k) account?
  • What is the current balance of your 401(k) account?
  • What type of investments does your 401(k) account hold?
  • What type of investments does your IRA account hold?
  • Are you happy with the investment choices available through your 401(k) plan?
  • Are you happy with the administrative fees charged by your 401(k) provider?
  • Are you happy with the investment fees charged by your IRA provider?
  • Do you have to meet any minimum balance requirements to keep your IRA account with your current provider?
  • Are you comfortable with the idea of losing the ability to take loans against your 401(k) account?
  • Would you be willing to pay administrative fees in order to have a 401(k) account with your current provider?

401(k) Rollover to IRA FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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