There is a lot to think about before deciding to rollover your 401(k) into an IRA. Often times an IRA is a better choice, but there are some strong reasons to stick with your 401(k).

When you leave your job, you’ll have to make a decision about your retirement savings. According to conventional wisdom, you should rollover your 401(k) into an IRA. But, this may not be the best decision in some cases.

For most people, a rollover from a 401(k0 to an IRA represents their most important financial decision. This is because they are transferring their life savings from one account to another.

But, many questions should be answered before making this decision. Are there penalties for such a move? Will tax be imposed? Are there any surrender penalties or higher fees involved?

In this article, I’ll help you determine how to know when it’s time to rollover your 401(k) into an IRA.

Why you should rollover your 401(k) to an IRA

There are different types of 401(k) plans you can choose from. Certain 401(k) plans offer more advantages and returns than others.

Therefore, it makes sense to research programs and invest in the right one. Also, a rollover may be warranted in some instances.

Greater control

A 401(k) rollover into an IRA will give you greater control over your retirement plan. Since a 401(k) is an employer-sponsored plan, an administrator is in charge of making decisions. Therefore, it’s not easy to make changes to your retirement plan with a 401(k).

Many 401(k) plans restrict the number of times you can rebalance your portfolio in a single year. You may also be limited to making changes to your portfolio at certain times during the year.

With an IRA, you can enjoy greater access to your retirement funds. It will also be easier for you to make your own decisions with an IRA.

An IRA account will let you purchase and sell your investments whenever you want. E*TRADE, for example, is one of our favorite brokers for self-directed investing.

Wider investment options

With most 401(k) plans, you’ll have limited options for investment. Many of them provide limited options for mutual funds, too.

You may also have access to relatively few equity funds under a 401(k). Under most 401(k)s, you can’t opt for risk management, for instance, investing in options.

If you want more choices and wish to invest in other sectors or individual stocks, then an IRA account is much better for you. An IRA will open up a large pool of investment opportunities.

With an IRA, you have access to exchange-traded funds (ETFs), bond funds, bonds, and individual stocks, just to name a few. 

Unsatisfactory 401(k) investment performance

A rollover may be a better idea in case your company 401(k) plan is not performing well. For instance, if the market rises by 40 percent over a few years, while your 401(k) rises by just half that amount over the same time interval, then a rollover is worth considering.

Although IRAs provide the opportunity to match market performance, there is no guarantee that you can actually perform better than the market.

One thing I did with my 401(k) was moved it to a robo-advisor (right now I am using Wealthfront, which I LOVE). If funds are underperforming, it will auto-correct and rebalance for me. 

Wealthfront also allows me to create the investment portfolio that works for me. Whether that’s by editing one of its existing investment portfolios or creating my own from scratch with ETFs that I am passionate about be it healthcare, clean energy, or tech.

Avoid certain problems

Since 401(k) plans are employer-sponsored plans, things can go wrong if you change your job or if the company faces financial trouble.

For instance, many people complain that it’s harder to get in touch with their former employer or administrator after they have left the company. It is also more challenging to get information about the plans.

Options for Roth investment

With an IRA rollover, you can also open up a Roth account. Roth IRAs offer many advantages, which why they are highly sought-after plans.

Roth IRAs are a valuable addition to any retirement portfolio as they are tax-free (on meeting specific requirements).

Under a Roth IRA, your contributions will be taxed and not your withdrawals. This is the exact opposite of the tax treatment for Traditional IRAs.

Unlike Traditional IRAs, the required minimum distributions when you are 70 ½ years old are not necessary. In fact, you’ll not need to make a mandatory distribution.

You can make contributions to your Roth IRA according to your discretion. You can decide when and how much to invest in your account.

You can also enjoy benefits if you withdraw money from a Roth IRA when you are under 59. In most cases, individuals do not have to endure penalties for early withdrawals from a Roth IRA. This is unlike Traditional IRAs.

Under some 401(k) plans, you’ll only be allowed to rollover to a Traditional IRA. So, you’ll first have to rollover to a Traditional IRA. If you want, you can then rollover to a Roth IRA.

Account consolidation

If you decide to keep multiple retirement accounts, you’ll have to pay the fees for various plans as well. Creating an optimal investment strategy is more complicated with numerous accounts. You can, therefore, consolidate your accounts with a “Super IRA” for lower costs and greater efficiency.

Cash bonuses

To encourage investors to contribute money to their company, brokers offer plenty of cash incentives. Other brokers also offer free trades as part of the bonus package if they do not offer cash bonuses.

More simplicity

Understanding the 401(k) plan of your company isn’t easy, as companies have a lot of freedom when it comes to establishing plans. The 401(k) plan of your company may be different from and perhaps more complicated than similar programs of other companies.

However, IRAs are subjected to standard regulations formulated by the IRS. Therefore, one broker’s IRA will follow most regulations as the IRA of another broker. Having standardized rules help simplify the lives of investors.

Estate planning benefits

There is a strong possibility that, in case of your death, your plan will directly pay the full amount of your 401(k) to your beneficiaries as a lump sum amount. This is less than ideal because it can possibly lead to inheritance and income taxes.

How payment is made will vary according to different plans. However, most companies prefer to pay out the amount as quickly as possible. This may be much more convenient for them, but it may not be beneficial for you as far as taxes are concerned.

Lower costs and fees

Rolling over a 401(k) into an IRA  can save you a lot of money in the long run. You can avoid fund expense ratios, administrative fees, and management fees.

TD Ameritrade, for example, offers commission-free ETFs and no-transaction fee mutual funds. Plus your TD Ameritrade IRA is NOT subject to an annual account maintenance fee.

These may appear to be small costs, but they can build up over time. As a result, the funds in an asset class of a 401(k) may be more expensive than usual. There is also the annual fee, which you must pay to the plan administrator.

Also, you’ll have to pay fees on your IRA. It’s not free. But since you can decide how much, where, and when you’ll invest with an IRA, you can reduce your fees by making smart choices.

Conditions under which you should NOT rollover

On the one hand, it may seem that a rollover is the best option. But there are a few instances where such a financial maneuver is not advisable.

Here are the four situations under which you should retain your 401(k), (or your 457 or 403(b) plan if you are a nonprofit or public employee:

More purchasing power

With company 401(k) plans, you can buy funds at institutional rates. These rates are usually not available with IRAs. This can be considered a type of corporate discount.

401(k)s offer lower rates because they provide more considerable sums of money than individual retirement accounts. With a 401(k), you can also save significantly more on fees. This will leave you with more money, which can appreciate in your account.  

To make sure you’re buying the right funds at the right cost, you can use a service like blooom, which will advise you on how to establish your portfolio in the most optimal way.

Legal benefits

According to federal law, 401(k) funds are protected against most creditor judgments (except tax liens and perhaps child support or spousal orders), including bankruptcy.

On the other hand, IRAs are protected by state laws, which can have significant differences. Due to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, up to $1,000,000 of Roth and traditional IRA funds are protected against bankruptcy.

However, protection from other kinds of judgments depends on state law. This protection also depends on whether your IRA is a Traditional or Roth type.

If you have concerns about judgments, collections, or creditors, then the 401(k) may be the safest place for your savings.

Benefits for early retirement

If you ever need to withdraw your funds before reaching 59, then you should keep your money in the 401(k) plan. This is one of the key reasons not to rollover 401(k) to an IRA. With a 401(k) plan, you can access your funds at the age of 55. For early withdrawal on an IRA, you’ll have to pay a 10 percent penalty.

You may also be allowed to make withdrawals from your 401(k) several times annually after you leave your company. Note that the employer may make rules about the number of times that individuals within this age group can make withdrawals.

However, if you rollover 401(k) into an IRA, you’ll not be able to enjoy this privilege. To access your funds without incurring an early withdrawal penalty, you’ll have to wait until 59 ½ years of age.  

Stable value funds

Company 401(k) plans provide access to the stable value fund. This is a particular type of fund, which is not offered in the individual market.

These funds are like money market funds, but they have a critical relative advantage. They provide a better interest rate than money market funds.

If your 401(k) plan offers these low-risk vehicles, then you can take advantage of these funds by remaining with your 401(k) plan. Make sure that you check your company rules.  


As you can see, there is a lot to consider before deciding to rollover your 401(k) into an IRA. Overall, we feel that an IRA is a better long-term value, but there are still reasons why you might want to leave your money where it’s at after you leave a job.

If you’re unsure of what to do, I recommend you contact an investment professional to help you make the most sound decision for you and your family.

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Chris Muller picture
Total Articles: 281
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter.