Rolling over a 401(k) is one of those financial decisions that seems simple on the surface—move your retirement savings from one account to another—but it can have long-term implications for your taxes, investment flexibility, fees, and even asset protection. Whether you’ve left a job, changed careers, or are simply trying to consolidate your retirement savings, understanding the ins and outs of a 401(k) rollover is essential.
In this guide, we’ll walk through the main reasons people choose to roll over a 401(k), the pros and cons of doing so, tax traps to avoid, and the key issues you should consider before making the move.
Why Consider Rolling Over a 401(k)?
There are several situations where rolling over your 401(k) makes good sense:
- You’ve left your job and want to consolidate your retirement savings.
- You’re starting a new job and prefer to have all your retirement assets under one roof.
- You want more investment choices than your current plan allows.
- You’re seeking lower fees or better-performing funds.
- You want to work with a financial advisor who can manage your IRA.
But not all rollovers are created equal—and they aren’t always the right move. Let’s explore the full picture.
Rollover Options: Where Can You Move the Money?
There are typically three main options when rolling over a 401(k):
- Roll into an IRA
- Pros:
- More investment options (ETFs, mutual funds, stocks, bonds).
- Potential for lower fees (especially with low-cost providers).
- Greater flexibility in estate planning and beneficiary designations.
- Cons:
- Less creditor protection than a 401(k) in some states.
- Loss of early withdrawal benefits tied to 401(k) plans (such as penalty-free access at age 55).
- Pros:
- Roll into a New Employer’s 401(k)
- Pros:
- Keeps your savings consolidated.
- Maintains strong federal creditor protection.
- May allow you to delay Required Minimum Distributions (RMDs) past age 73 if you’re still working.
- Cons:
- Limited investment options depending on the plan.
- Potentially higher fees than an IRA.
- Pros:
- Leave It in Your Old Employer’s Plan
- Pros:
- Easy (do nothing).
- Maintains protections and existing investment options.
- Cons:
- Can be forgotten or ignored.
- Harder to manage multiple old accounts.
- Might have higher fees or fewer investment choices.
- Pros:
Key Issues to Consider Before Rolling Over
Before initiating a rollover, take a moment to review these critical issues:
Fees and Investment Options
Many 401(k) plans have limited investment choices and may carry higher administrative fees. Rolling into an IRA could reduce fees and give you access to a wider investment universe. But some large 401(k) plans offer access to institutional-class funds with lower costs than you’d find in an IRA.
Compare:
- Expense ratios
- Fund selection
- Account maintenance or advisory fees
Creditor Protection
401(k)s are protected under federal law (ERISA), offering strong protection from lawsuits and creditors. IRAs, while still protected, rely on state laws, which vary. If you’re in a high-risk profession or have legal exposure, this can be a deciding factor.
Required Minimum Distributions (RMDs)
At age 73, you must start taking RMDs from most retirement accounts. However:
- If you’re still working and have money in your current employer’s 401(k), you may be able to delay RMDs from that account.
- IRAs don’t offer that exception.
This makes keeping money in a 401(k) attractive for those still working in their 70s.
Roth 401(k) vs. Roth IRA
If you have Roth 401(k) money, rolling it into a Roth IRA allows you to avoid RMDs altogether. This is a major benefit in retirement. But be aware of the 5-year rule on Roth IRAs, which can affect tax treatment of withdrawals even if you’re over 59½.
Employer Stock – Net Unrealized Appreciation (NUA)
If your 401(k) includes employer stock, a special strategy called Net Unrealized Appreciation (NUA) might save you big on taxes. Instead of rolling that stock into an IRA, you could take it into a taxable brokerage account and pay long-term capital gains on the appreciation instead of ordinary income taxes.
This is a niche but powerful strategy that can be lost if you do a straight rollover.
Loans and Early Access
401(k)s may allow you to take a loan while working—a feature IRAs do not offer. Also:
- If you separate from your employer in or after the year you turn 55, you can take penalty-free withdrawals from your 401(k).
- IRAs require you to wait until 59½ for penalty-free access (except for certain exceptions).
If you’re between 55 and 59½, that 401(k) might offer better early-access flexibility.
Simplicity and Consolidation
Having multiple 401(k)s scattered across former employers can make it harder to track your retirement progress. A rollover can simplify your life—but don’t roll over just for simplicity if there are good reasons to keep the account where it is.
Tax Traps to Avoid
The most common mistake is doing an indirect rollover—taking the check yourself. This can trigger:
- 20% mandatory withholding by the plan administrator.
- Potential penalties and taxes if you don’t re-deposit the full amount within 60 days.
Instead, opt for a direct rollover (trustee-to-trustee), which moves your funds from one institution to another without triggering tax consequences.
Hidden Costs and Conflicts
Be aware: some financial advisors push rollovers simply because they earn fees on IRA accounts. Always ask:
- Is this in my best interest?
- What are the fees and commissions involved?
- Are you acting as a fiduciary?
Working with an independent fiduciary can help ensure you’re getting advice that aligns with your goals, not someone else’s compensation.
Final Thoughts: When a Rollover Makes Sense
A 401(k) Rollover Might Be Right If:
- You want more investment options and flexibility.
- You’re leaving your job and want to consolidate retirement accounts.
- You’re working with a fiduciary advisor who manages IRAs.
- Your current plan has high fees or poor fund choices.
It Might Make Sense to Stay Put or Roll into a 401(k) If:
- You’re at risk of lawsuits or need maximum creditor protection.
- You want to delay RMDs while still working.
- You’re between 55–59½ and might need early access.
- Your plan has great institutional investment options.
Final Tip: Know Before You Go
Rolling over a 401(k) can be a smart step toward better control of your retirement savings—but it’s worth taking a close look before you act. The best move depends on your age, goals, job situation, investment preferences, and tax outlook.
If you’re unsure, consider working with a fee-only fiduciary advisor who can help you weigh the pros and cons based on your full financial picture.
