Seven Reasons to Roll Over Your 401(k) To An IRA

Many benefits come with rolling over your 401k into an IRA account

There are generally four options available to you when you move jobs. A 401(k), rollover to an individual retirement accounts (IRA) is one of the best options. Other options include cashing out and paying taxes and a withdrawal penalty. You can also transfer it to your new employer's plan (if one is available) or transfer it into your 401(k).

Most people prefer rolling over to a 401k (or its 403(b) for those working in the nonprofit or public sector). This is the best option. This article will explain why and how you can do it.  We do not have any affiliation with these companies and this article is educational and informational makes sure you do your due diligence. 


  • You have many options when you move jobs.
  • Many people find rolling their 401k account balance into an IRA the best option.
  • You can avoid paying immediate taxes by rolling your 401k money into an IRA. Your retirement savings will also grow tax-deferred.
  • An IRA can offer more investment options and greater control than your old 401k plan.

1. More investment options

You have limited investment options in your 401(k). You will likely only have one choice for mutual fund. An IRA allows you to invest anywhere. You'll also have more investment options than just mutual funds. This includes individual stocks, bonds and exchange traded fund (ETFs).

You can also sell or buy holdings at any time. Most 401(k), as it is known, limit the number of times you can rebalance or sell your portfolio .

2. Better Communication

You might be considered a second-class citizen if you close your account with your former employer. It might be more difficult to obtain communications about the plan (most news is sent through company email), or to contact an administrator or advisor. In the unlikely event that something happens at your workplace, having access to all information is even more important.

Most 401(k), plan rules say that if your account has less than $1,000, your employer can cash it out and give it back to you (minus 20% tax). Your employer can move your account into an IRA if you have $1,000 to $5,000.

3. Lower fees and costs

Rolling your money into an IRA can reduce administrative and management fees, which can impact your investment returns. Although the 401(k), plan offers funds that are more expensive than what is required for the asset type, they may still be worth it. The overall fee charged by the financial institution that manages the plan is also an annual fee.

Larger 401(k), with millions of dollars to invest, have access to institution-class funds which charge lower fees than their retail counterparts. Your IRA will not be free from fees. You'll still have options and control over where and how much you invest.

4. The option to convert to a Roth

A rollover to an IRA opens up the possibility of moving to a Roth bank account. A Roth IRA is the best option if you have one of the more common Roth 401Ks. Roth IRAs are tax-free. You pay taxes when you make contributions, but no tax when you withdraw the money. This is in contrast to a traditional IRA. You don't have to take required minimal distributions (RMDs), if you are under 72, or ever from a Roth IRA.

Switching to a Roth, and taking the tax hit right away, might be in your best interests if you think you will be in a lower tax bracket or will need your IRA money more frequently.

The Build Back Better Infrastructure bill, which was passed by the House of Representatives but is currently being considered by the Senate, includes provisions that would reduce or eliminate Roth conversions for wealthy taxpayers. These provisions will be effective from January 2022.

  1. Employees who have 401(k), plans that allow after tax contributions up to $58,000, would not be allowed to convert these to tax-free Roth accounts.
  2. As described below, backdoor Roth contributions to traditional IRAs would also be prohibited.

Additional restrictions would be in effect in 2029/2032. These include a ban on high-income taxpayers whose aggregate retirement account balances exceed $10 million, and a prohibition on Roth conversions for those taxpayers.

It's easier to withdraw funds from a Roth Roth IRA if you are under the age of 60 1/2 than it is from a traditional one.

Rollovers to a traditional IRA may not be allowed by your 401(k). plan rules. You'll need to convert your traditional IRA into a Roth first. There are many strategies that you can use to minimize your tax burden when converting your traditional IRA into a Roth. If the market experiences a significant downturn it is possible to convert a traditional IRA with a 20% or greater decline to a Roth. This will reduce your tax liability at the time of conversion. This strategy could be attractive if you intend to keep the investments in place until they recover.

This can be complicated, so it's a good idea to speak with a financial advisor to help you weigh your options.

5. Cash and other incentives

Financial institutions want your business. They may offer cash to entice your retirement savings. TD Ameritrade offered bonuses up to $2,500 for transferring your 401(k), into an IRA. 6 Some companies also offer free stock trades.

6. There are fewer rules (and they are clearer)

It can be difficult to understand your 401(k), as employers have much leeway in setting up plans. The Internal Revenue Service (IRS) standardizes IRA regulations. A IRA at one financial institution follows substantially identical rules to one at another.

The IRS tax rules on distributions are a key difference between a 401k and an IRA. 1 The IRS rules regarding taxes on distributions are a significant difference between a 401k and an IRA.

It is better to have some tax withheld than end up with a large tax bill at the close of the year, and possibly owing penalties and interest for underpayment. You can adjust the amount to be withheld so that it accurately reflects what you owe. This is a benefit because you aren't depleting your retirement fund faster than necessary and the money can continue compounding on a tax–deferred basis.

7. Estate Planning Advantages

There is a good chance your 401(k), if you die, will be paid out in one lump sum to your beneficiary. This could lead to income tax and inheritance tax problems. Although the rules vary according to the plan, most companies prefer to pay the cash quickly to avoid having to keep the account of an employee who has left. While inheriting an IRA can have tax implications, IRAs offer greater payout options.

How to roll over your 401(k), to an IRA

A direct rollover is the best and most secure way to transfer your 401k to an IRA. This is done by the financial institution that managed your 401k to the one that will hold your IRA. There are three main types of rollovers that can be made from a 401k to an IRA.

  1. Transferring a traditional 401k to a traditional IRA. You won't owe any taxes as the taxes are deferred.
  2. You can rollover from a Roth 401k to a Roth IRA. You won't have to pay taxes.
  3. Transferring from a traditional 401k to a Roth IRA. This is where you will pay taxes on the rolled-over amount.

The plan administrator will be able to guide you through the process. The financial institution where your money is being deposited will also be able to help. Your plan administrator may give you a check to deposit at your new IRA custodian. Open your new IRA first and then contract the plan administrator of your former employer.

Indirect Rollover

You can also have the check made payable to you and take ownership of the money yourself. However, this is a riskier option. You typically have 60 days to transfer the money into an IRA if you do this. You have 60 days from the date you received it to roll it over into an IRA. If you miss that deadline, you will be subject to income tax and possible penalties. 

An additional problem when you receive the distribution yourself is that your employer will have to withhold 20% for taxes. You will need to have the remaining balance to be deposited into an IRA. 

Can an IRA be rolled over into a 401(k).

If your 401k plan allows it, you may roll over a traditional IRA, but not a Roth IRA, into it. 9 Sometimes this is called a reverse-rollover.

What happens if I cash out my 401(k).

You'll owe income taxes if you cash out your 401k account. If you are under the age of 59 1/2, you will be subject to a 10% early withdrawal penalty. However, you can avoid the penalty if your eligibility for one of the exemptions listed by the IRS on its website. These include qualified education expenses and up to $10,000 for the purchase of a first home.

Why would you roll a 401k into an IRA?

You have the additional benefit of more investment options when you roll over your 401k to an IRA. After you leave the company you cannot make any contributions to a 401k. However, you can if it is rolled over to an IRA.

The Result

Rolling over your 401(k) to an IRA is a great option for most people who are changing jobs. You should shop around for an IRA provider that charges low fees. This can make a huge difference in the amount of money you have available when you retire.

This is our disclosure:  This summary is for informational purposes only. This summary is not intended to be a recommendation for or give advice for any company or individual.

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Nicole Jolie

Nicole Jolie brings you updated information on retirement including where to travel, health, investment trends and planning.  Whether you're a GenX'er, Baby Boomer or about to retire this site is for you.


This is our disclosure:  This summary is for informational purposes only. This summary is not intended to be a recommendation for or give advice for any company or individual.

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