Four Reasons to Roll Over Your 401(k) into an IRA (And Four Reasons Not To)
Learn when transferring your 401(k) to an IRA is worthwhile — and when it’s best to leave it untouched.
Kathryn Pomroy
When you leave a job and walk out the door for the last time, you might pack up your photos, the spare pair of dress shoes stashed under your desk, your “I Love My Corgi” coffee mug and all your other personal items.
But what do you do with your 401(k) plan?
Most people roll the money over to an IRA because they gain access to more investment options and have more control over the account. Some brokerage firms sweeten the deal with cash incentives.
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For example, Charles Schwab offers competitive incentives for 401(k) rollovers and IRA transfers, often through referral programs or targeted promotions. You can get up to $1,000, depending on the deposit amount and eligibility. Citi Personal Wealth Management and Merrill Edge, a Bank of America company, also offer incentives for 401(k) rollovers and IRA transfers.
Plus, moving your money to an IRA could help you streamline your investments and grow your wealth. Amy Thomas, a 43-year-old clinical trial coordinator in Lakewood, Colo., has rolled over 401(k) plans from three former employers into one place, which “makes everything a lot easier,” she says. Now she doesn’t worry that she’ll lose track of an account that might have been left behind.
Move it, leave it alone or take a lump sum?
But a rollover isn’t always the right move, and sometimes it’s best to simply leave your money where it is. With millions of dollars to invest, large 401(k) plans have access to institutional-class funds that charge lower fees than their retail counterparts.
That means you could end up paying less to invest in the 401(k). That said, there are other perils to a rollover: If you’re not careful, you could end up with a portfolio of high-cost investments with subpar returns.
What about cashing out the account when you leave your job and take a lump sum? Unless your financial situation is dire, that’s never a good idea. You’ll owe taxes on the entire amount in the year you receive it, plus a 10% early-withdrawal penalty if you’re younger than 59-½.
Reasons to roll over
Rolling over the money from your 401(k) to an IRA is still the best move in many cases.
1. Your plan has high-cost investments.
Many large 401(k) plans offer low-cost options that have been carefully vetted by the plan’s administrators, but other 401(k)s are hobbled by under-performing funds and high costs. And even low-cost plans may charge former employees higher administrative fees if they choose to keep their 401(k).
Some plans offered by small and midsize companies are loaded with insurance products that charge “egregious” fees, says Mitch Tuchman, managing director of Rebalance 360, which provides advice and low-cost investment portfolios for IRA investors. Rebalance invests clients’ money in exchange-traded funds (ETFs) to keep costs down.
Companies are required by law to disclose the fees they take out of your account to pay for administrative costs. Companies are also required to provide an annual rundown of the plan’s investment costs, expressed as a percentage of assets, or an expense ratio. You can use this information to see how your retirement plan’s mutual fund expenses compare with the expense ratios of similar funds.
Average expense ratios for retirement plans have continued to decline, due to the widespread acceptance of low-cost index funds and ETFs. According to the Investment Company Institute (ICI) 2024 report (pdf), published in July 2025, the average expense ratio paid by 401(k) participants is 0.26% for equity funds — down significantly from earlier decades.
2. You have a trail of 401(k) accounts.
Data from the Bureau of Labor Statistics BLS, released in late 2024/early 2025, shows a median tenure of 3.9 years with a current employer. So, if you’ve followed the crowd and changed jobs frequently, then leaving your 401(k) plan behind could result in a mishmash of overlapping funds that may not suit your age and tolerance for risk. If that's the case, it can make sense to consolidate all of your old 401(k) plans into an IRA.
Another option is to roll 401(k) accounts from former employers into your current employer’s plan, assuming that’s permitted.
3. You need more bond funds.
Although most 401(k) plans have a solid lineup of stock funds, they’re often much weaker when it comes to fixed-income options, says Melissa Brennan, a certified financial planner in Dallas. "In many cases," says Brennan, "choices are limited to a money market fund, a bond index fund and an actively managed bond fund."
Most plan trustees are focused on encouraging participants to accumulate as much as they can, which typically involves investing in stocks. As you get close to retirement, though, you’ll probably want to shift to a less-aggressive mix of investments.
Rolling your money into an IRA will provide you with a smorgasbord of fixed-income options, from international bond funds to certificates of deposit (CDs).
4. You want flexibility for withdrawals.
The most current data available shows that about two-thirds of large 401(k) plans allow retired plan participants to take withdrawals in regularly scheduled installments — monthly or quarterly, for example — and about the same percentage allow retirees to take withdrawals whenever they want, according to the Plan Sponsor Council of America (PSCA)'s 67th Annual Survey of Profit Sharing and 401(k) Plans as reported on BenefitsLink.
But other plans still have an “all or nothing” requirement: You either leave your money in the plan or withdraw the entire amount. In that case, rolling your money into an IRA will enable you to manage your withdrawals and the taxes you’ll pay on them.
Even if your 401(k) plan allows regular withdrawals, an IRA could offer more flexibility. "Many 401(k) plan administrators don’t let you specify which investments to sell; instead, they take an equal amount out of each of your investments", says Kristin Sullivan, a certified financial planner in Denver. "With an IRA, you can direct the provider to take the entire amount out of a specific fund and leave the rest of your money to continue to grow".
Stick with the 401(k)?
In addition to lower costs, many 401(k) plans offer stable-value funds, a low-risk option you can’t get outside of an employer-sponsored plan. With recent yields averaging 2.8% to 3.3%, stable-value funds remain a competitive low-risk option, although money market funds currently offer higher yields of 3.5% to 4.0%. And unlike bond funds, they won’t get pulverized if interest rates rise.
Other good reasons to leave your money behind:
1. You plan to retire early…or late.
In general, you must pay a 10% early-withdrawal penalty if you take money out of your IRA or 401(k) before you’re 59-½. There is, however, an important exception for 401(k) plans: Workers who leave their jobs in the calendar year they turn 55 or later can take penalty-free withdrawals from that employer’s 401(k) plan.
But if you roll that money into an IRA, you’ll have to wait until you’re 59-½ to avoid the penalty unless you qualify for one of a handful of exceptions. Keep in mind that you’ll still have to pay taxes on the withdrawals.
Another wrinkle in the law applies to people who continue to work past age 73 (or 75, depending on your birth year), which is increasingly common. Due to changes by the SECURE ACT 2.0, you must take required minimum distributions (RMDs) from your IRAs and 401(k) plans starting in the year you turn 73, for those born 1951–1959, or 75, for those born 1960 or later. These distributions are based on the value of your accounts at the previous year’s end and on a life-expectancy factor found in IRS tables.
But if you’re still working at age 73 (or 75), you don’t have to take RMDs from your current employer's 401(k) plan. And if your plan allows you to roll over money from a former employer’s plan into your current 401(k), you can also protect those assets from RMDs until you stop working.
2. You want to invest in a Roth IRA, but you earn too much to contribute.
Rolling over your former employer’s 401(k) to an IRA could make it more expensive to take advantage of a strategy to move money into a Roth IRA.
You must pay taxes on your contributions to a Roth IRA, but withdrawals will be tax-free when you retire. In 2026, if you’re single with a modified adjusted gross income (MAGI) of more than $168,000 or married filing jointly with a MAGI of more than $252,000, you can’t contribute directly to a Roth IRA. There’s no income limit, however, on Roth conversions, which is why the “backdoor” Roth IRA remains a powerful strategy for high earners.
You can make after-tax contributions to a nondeductible traditional IRA. In 2026, the maximum contribution is $7,500 or $8,600 if you’re 50 or older, and then convert the money to a Roth.
Because the contributions to the nondeductible IRA are after-tax, there is usually no tax on the conversion (assuming you have no pre-tax money in any traditional, SEP, or SIMPLE IRAs).
However, if you already have money in a deductible IRA, which is very common if you’ve rolled over a former employer’s 401(k) into an IRA, the pro-rata rule applies. In that case, your tax bill on the conversion is based on the percentage of pre-tax versus after-tax assets across all of your IRAs combined, even if you only convert a portion of one IRA.
For example, if you have $5,000 in a nondeductible IRA and $95,000 in a deductible IRA and convert $50,000 to a Roth, then only 5% of the converted amount, or $2,500, will be tax-free; you’ll owe tax on the rest ($47,500). If your employer offers a Roth 401(k), you can avoid this rigmarole because there are no income limits on contributions.
3. You worry about the loss of Net Unrealized Appreciation (NUA).
If your 401(k) contains employer stock, you can use a tax-saving strategy called net unrealized appreciation (NUA) if the stock is distributed as part of a lump-sum distribution.
How does this work? Let's say your company is doing very well. As a consequence, the value of its stock has skyrocketed. Because you hold that company stock in an employer-sponsored retirement plan, here's how NUA would be beneficial. At the time of distribution, rather than pay ordinary income tax on the entire value of the stock, you only pay income tax on the original purchase price or cost basis. The appreciation is taxed at a significantly better long-term capital gains rate when it's sold. By contrast, NUA doesn't apply to assets held in an IRA.
4. You’re worried about lawsuits.
The federal Employment Retirement Income Security Act (ERISA) shields 401(k) and other types of employer-sponsored retirement plans from creditors. If someone wins a judgment against you in a personal injury lawsuit, they can’t touch your 401(k) plan.
However, IRAs don’t offer the same level of creditor protection as 401(k)s. They are fully protected in federal bankruptcy (up to $1,711,975 per person, adjusted for inflation, but state laws govern non-bankruptcy claims — and protections vary widely. This amount applies to all bankruptcy cases filed from April 1, 2025, through March 31, 2028
California, for example, exempts the amount reasonably necessary for your support and that of your dependents in retirement — a flexible, needs-based standard rather than a dollar cap.
For physicians (and other high-liability professionals), protecting retirement savings from malpractice or other lawsuits “is a very big issue,” says Daniel Galli, a certified financial planner.
Protect your assets
Concerns about brokers pushing high-cost, commission-driven investments for 401(k) rollovers remain valid, but the U.S. Department of Labor’s 2024 Retirement Security Rule, which would have required all rollover advice to follow a strict fiduciary standard, was blocked by federal lawsuits and never took effect. It was subsequently vacated and removed by the DOL in March 2026. The Department has restored the long-standing 1975 “five-part test” for determining fiduciary investment advice status.
As a result, most securities brokers and insurance reps still operate under the weaker suitability standard, meaning recommendations must simply be appropriate for your age and risk tolerance, not necessarily the lowest-cost or best option.
As a consequence, you, as an investor, should ask advisors directly if they are fiduciaries and consider fee-only or RIA advisors to avoid conflicts. The original DOL proposal aimed to close this gap, but for now, the status quo persists — rollover advice is still a high-risk area for hidden fees and biased recommendations.
Don’t let anyone steamroll you into rolling over your 401(k) to an IRA. “It seems like everybody and their brother is interested in rolling money out of your 401(k),” says Galli. "There’s no downside to leaving your money in your former employer’s plan while you consider your options."
Should I roll over my 401(k) into an IRA?
There are reasons for and against rolling a 401(k) into an IRA. Rolling a 401(k) into an IRA offers much greater investment flexibility, with access to thousands of low-cost ETFs and index funds, compared to the limited 20 to 30 options typically available in most 401(k)s. You also gain complete control over withdrawals, including the ability to use backdoor Roth conversions for high earners, while consolidating accounts simplifies management. IRAs also provide strong bankruptcy protection and RMDs are eliminated for Roths.
However, the rollover comes with trade-offs. You lose penalty-free access before 59-½ if you leave your job at 55 or older. The pro-rata rule can also trigger unexpected taxes on backdoor Roth conversions if you have any pre-tax IRA balances, and creditor protection is weakened outside bankruptcy. Plus, RMDs begin at age 73 or 75 for all IRAs regardless of work status.
In short, roll over for flexibility and cost savings, but keep funds in-plan if early access, strong creditor protection or delayed RMDs matter most to you.
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