All About Rollover IRAs

Quick Summary

  • A 401k to IRA rollover is when you move the money from a 401(k) run by your employer to an IRA at a bank or brokerage that you control yourself. A rollover usually doesn’t trigger taxes.
  • Most rollovers happen when people retire or move jobs. But you usually also have the option to leave your money in the 401k with the company where you worked.
  • You should consider a rollover if it makes it easier for you to manage your money, helps you save on fees or get access to better, lower-cost investment options.


When you leave a job or retire, you have a choice about the money you’ve saved in your 401k. You usually have three main choices:

  1. Leave it where it is
  2. Roll it to a 401k at your next job
  3. Roll it into an IRA. If you roll it into an IRA, that process is called an IRA rollover.

For most people, it makes sense to do a rollover of your 401k money into an IRA, so that you can save money on fees and get access to better investments. Here are more details:

The Difference Between 401ks and IRAs

First, it’s important to understand the difference between a 401k and an IRA. With a 401k, your company’s administrator runs the plan, choosing what mutual funds and investments are available, and setting rules about withdrawals. If you have an IRA you are in charge. You can have an IRA at a bank, a brokerage, like Merrill Lynch or Fidelity, or an online advisor, like Betterment.

The big advantage of a 401k is the company match, if you have one, or the automatic withdrawals from your paycheck. If you’re no longer employed with a company, those advantages disappear. So your decision should come down to which kind of plan helps you keep and grow your investments over time, and how easy it is manage your money.

Plans Set ByEmployerIndividual
Employer MatchOftenNone
Investment Options27 (on average)15,000+
FeesVariable, but set by administratorVariable, but controlled by investor
Tax treatmentUpfront tax breakUpfront tax break

1The BrightScope/ICI Defined Contribution Plan Profile: December 2015

What Is A 401k to IRA Rollover?

An IRA Rollover is when you move money from a 401(k) (or similar plan) to an IRA. When you do a direct rollover, there are no taxes that need to be paid. You money just moves from one type of account to another and you keep all of your tax benefits.

Should You Rollover?

There are three things to consider when you are deciding whether to do a rollover. Consider:

  1. Fees
  2. The range and quality of investments in your 401k compared with an IRA
  3. The rules of the 401k plans at your old or new job

It’s important to make a deliberate decision about a rollover. Don’t let inertia make the decision for you. Leaving your money in your old 401k could cost you tens of thousand of retirement dollars, or even more. On the other hand, if you have an unusually high quality 401k plan, it can be smart to keep your money where it is.

1. IRA/401(k) Fees

IRAs from most big brokerages usually have no annual fees to have an account. However, most 401ks charge a percentage of assets, some as high as 2% a year but most much lower. You can find out more about how much your 401k charges by asking your plan administrator or checking Brightscope.com.

The mutual funds inside your 401k or your IRA come with their own price tags, too. Ask your 401k plan administrator to break out the fees for you and compare them to what you would pay on the funds you buy in your IRA. Large companies sometimes get better deals on certain funds that you can get as an individual investor, but it is highly dependent on your provider.

Low-cost lifecycle funds built on index funds and ETFs are frequently your best investments. Check to see if your 401k offers funds like these. Fidelity Freedom Funds, for example, have very low fees from 0.19% to 0.24% that are frequently less expensive than what you may be charged in your company 401k.

If you want more active advice on your investments, your options will change. Some 401k plans include advisory services which can save you money versus doing it on your own. Many brokerages have advisors that you can call, but if you want more complete financial advice, you may need to hire a financial advisor. Brokers and advisors usually charge an advisory fee, which could be as much as 1% of your assets but could also be a flat fee. Starting in 2017, rules from the Department of Labor help make sure that anyone advising your on retirement investments must watch out for your best interests.

2. The Quality of Investments

Unless you work for a company with a very high-quality 401k plan, you will probably find there are more kinds of investments available to you through an IRA. Usually, larger companies have the best 401ks.

For instance, you can often buy an annuity through an IRA. Annuities can give you an income stream during retirement in exchange for a lump sum, though you need to be careful to consider fees and the question of what happens if you need a lump sum of money for an emergency.

The variety of investments is a significant factor for retirees, who might be looking for investments that offer an income stream.

3. The Rules Of The 401k

Most 401k plans go by these rules:

  • If you have less than $1,000 in your 401k, an employer is allowed to cash it out and give it to you. It will be subject to taxes.
  • If you have between $1,000 and  $5,000 in a 401k, your employer is allowed to automatically put it in an IRA.
  • If you have more than $5,000 in a 401k, you must decide whether to leave it in the 401k, do a rollover to your next employer or do a rollover to an IRA.

Other rules may be more specific to your plan. For instance, some 401ks set limits on how easily you can withdraw money, and how large a sum you can withdraw at once. Ask your 401k plan administrator for your plan’s rules. If you are changing jobs, ask at both the new company and the old company before you decided what to do.

Two advantages of an IRA

If you chose the IRA route, you can keep making contributions to your IRA, receiving a tax deduction up to $5,000, in years when you are unemployed or self-employed.

If you need your retirement money in an emergency before you are 59 1/2, it is also usually easier and faster to withdraw it from an IRA than a 401k.

Two advantages of a 401k

Some plans allow you to borrow against the money in your plan. In an emergency, you could borrow instead of taking a taxable distribution. But, you should check on what the specific rules say in your 401k.

Some 401ks also have higher protections against creditors if you declare bankruptcy. Check with your plan administrator and your state’s laws.

Setting A Rollover Strategy In Your Working Years

If you are younger, you should consider setting a rollover strategy. Americans change jobs about 11 times over their careers. If you’re smart, you started a 401k at every job, especially if your employer matched your contributions. You get a tax deduction up to $18,000 on your 401k contributions, plus the match.

If you change jobs a few times, consolidating your savings by rolling them over into a single IRA will make it much easier for you to manage

If You Are Retiring: One Rule Of Thumb

One good rule of thumb that can help simplify the decision about whether to do a rollover when you are retiring is that the larger your company and 401k plan, the cheaper and better it probably is. If you work for a large company, you can see where your plan ranks at www.brightscope.com.

If you are retiring now, have one large 401k, work for a company with a good plan, and don’t mind managing your own finances, give serious consideration to leaving the money where it is.

The Bottom Line

Whether you leave your money in your 401k, or do a 401k to IRA rollover, you won’t owe taxes on the money. If you decide you want to do a rollover, your next decision is where to put the money, with a bank, brokerage or online financial advisor. The mechanics of doing a 401k to IRA rollover are easy: Your plan administrator will have paperwork for you to fill out. Once you have opened your IRA then will handle the transfer.

The one thing you almost certainly don’t want to do, whether you are still in your working years, or retiring, is cash out. You’ll owe taxes and  you’ll be robbing your future self of the money you need to live on in retirement.

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