Should You Roll Over a 401k into an IRA?

by Ryan Guina

Changing jobs is always a busy time. You need to tie up loose ends at your old job, learn the ropes at your new position, maintain your professional network, and a host of other activities. One thing you shouldn’t stress about is deciding what to do with your 401k plan. Basically, it boils down to 3 primary options: (1) cash it out, (2) leave your funds in your old 401k plan if able, (3) roll it over into an IRA or other tax deferred plan.

Should you roll your 401k into an IRA?

Should you roll your 401k into an IRA?

The first option is rarely a good idea as you will have to pay taxes and possibly early withdrawal penalties. The second option can be a decent idea if you are happy with your old plan and your former company allows you to maintain your assets in their 401k plan (keep in mind some plans charge former employees for the administration costs once they are no longer employed with the parent company, so you may be better off moving your investments).

Finally, the third option allows you to keep your investments in a tax deferred plan and avoid taxes and early withdrawal penalties. You can transfer your old 401k plan into a new 401k plan at your new company, move it into an annuity, or you can roll your 401k plan assets into an IRA. Rolling your 401k into an IRA is often the best option as it allows you total control over where you invest your money, the fees you will pay, etc. Let’s take a look at your options.

Should you roll over a 401k into an IRA?

We are going to make the assumption that you won’t cash out your plan, which leaves us with the choices of rolling your 401k into an IRA, leaving it with your former employer, or rolling it into your new 401k plan. Because your assets stay in a tax deferred retirement plan, the tax rules are essentially the same for all three choices. The main differences boil down to the rules and investment choices of the plan you choose.

Rolling over your 401k into an IRA

Rolling your 401k into an IRA is usually the best option because you have total control over how and where your money is invested.


  • Total investment flexibility; you decide where and how to invest. (learn more about Roth IRA contribution limits)
  • Account consolidation (easier to maintain record keeping and balance assets).
  • Option of moving your assets to a future employer’s plan.


  • You can’t borrow from your assets.
  • Some investment options in a 401(k), such as company stock purchasing plans, may not be available in an IRA.

Where to open a Rollover IRA: Rolling over an IRA is very easy to do, and most providers will help you with the paperwork. Here are some of our recommended places to open an IRA.

Leave assets in former employer-sponsored plan

This is usually the easiest option because it takes no effort on your part. Simply pack your bags and move on to your next place of employment. But just because it is easy doesn’t always mean it is the best decision.


  • You may have investment options in the plan that are not available to you outside the plan.


  • Limited investment choices.
  • Most likely cannot make future contributions.
  • Usually need assets totaling $5,000 or more to remain in former employer’s plan.
  • May have to cover some or all of the administration fees.

Transfer to your new employer-sponsored plan

Most employer sponsored plans will give you the option of transferring your assets from your former employer sponsored plan when you enroll. You only have to fill out a form and the plan administrators will take care of the rest.


  • Account consolidation (easier to maintain record keeping and balance assets).
  • Ability to borrow from your 401k.


  • Limited investment choices.
  • May have to wait before you are eligible for the plan at your new company.

Keep retirement funds in a tax deferred retirement plan!

Whichever option you choose, try to keep your retirement funds in a retirement plan. Cashing out early will subject you to instant tax obligations and early withdrawal fees if you are under the minimum withdrawal age. The taxes and fees can easily destroy more than a third of your hard earned investments. In addition to taxes and fees, you will set yourself back in your retirement planning. Unless it is an emergency, leave it alone!

Published or updated September 14, 2016.
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{ 11 comments… read them below or add one }

1 Miranda

Great overview of the rollover possibility. I already have an IRA, so no need there. But when my husband finds employment, we’re hoping to open a Roth 401k. And probably another IRA for him.


2 Craig

This is something I am thinking of doing when my account is eligible to do so in a few months. Would rather keep things in one place.


3 John DeFlumeri Jr

It’s a scary enough time as it is changing jobs, so it feels better no to do anything for a while.


4 Ryan

Inaction could be a good thing if your old plan is a good one, but it could be an expensive lesson if your old plan doesn’t have good investment options or if it has high fees. It’s easy enough to do a 401k rollover, so it’s worth the effort if it is your best option.


5 Miss M

I’ve taken the lazy route and left it, but I’m starting to think I should move the money for simplicity’s sake. Otherwise I’ll end up with a million little accounts in a few years! Interestingly enough the $5k rule must only apply at the time you leave a company, last year’s market freefall took my old 401k below that threshold and I’ve never received any notice that I need to move the money.


6 Ryan

Miss M, I’m not sure if the $5,000 rule is a hard and fast rule, or a standard that many companies follow. That was the number with my old plan and a number I have seen around the web.

And I agree about consolidating accounts. It makes it easier to keep track of everything, which in turn gives you a better financial picture and makes it easier to balance your assets.


7 Curious Cat Investing Blog

I agree, the most important thing is to keep the funds in tax advantaged retirement accounts. I think most often you are better off switching to a IRA with the additional options you gain for managing your money. 401(k) plans are great for retirement planning but many companies have very limited investment choices and often much higher expenses on the fund choices than should be paid (as do most mutual funds). A few funds are run for the benefit of investors instead of the fund owners and those have much lower fees – you can chose those funds in your IRA.


8 Cheapskate Sandy

I agree with Curious Cat, most company 401K’s are pretty limited in choices. Really, I just use it to avoid paying tax on money that I want to save. As long as I don’t lose money to inflation, I’m okay with it.

The 401K is not the be all and end all of retirement planning. Personally, I’m not hanging my hat on it or and IRA.


9 Ryan

I agree, Sandy – a 401k or an IRA by itself may not be enough for retirement planning. One should run the numbers to try and determine how much they can and should set aside, and if the numbers are different, try to find a way to save more.


10 Sree

IRA: Total investment flexibility; you decide where and how to invest.

Is it really an advantage? I have seen people investing their IRA funds in options and other risky investments. One of my friend invested almost all his IRA monies in “.com” or network companies (like Lucent and Nortel) during late 1990s. IRAs are great flexible retirement accounts but needs some home work from the investor.

People, please remember Retirement accounts, Life insurance and Primary residence are conservative investments. Please treat them like that.


11 Ryan Guina

Sree, the phrase, “with great power comes great responsibility” comes to mind. Total investment flexibility is wonderful if you have the knowledge and discipline to use it to your advantage. But it can cause problems if you don’t know how to use it. The same concept applies to things like credit cards, guns, prescription medication, driving, or anything else that has an element of risk attached to it.

For someone who is a responsible and conservative investor, having total control can help them better shape their investment portfolio to their risk tolerance level and better control fees and expenses.


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