If you’re approaching retirement, you may think you already know what to do with your 401(k): roll it over into an IRA. It’s a common move—but it’s not always the right one.
As financial advisors, we regularly meet with clients weighing this exact decision, and the truth is: there’s no one-size-fits-all answer. Your choice could potentially save—or cost—you tens of thousands of dollars over time, so it’s worth getting it right.
In this article, we’ll walk you through the key factors to consider before you roll over your 401(k), and how to decide what’s best for your situation.
When Not to Roll Over Your 401(k)
1. You’re retiring at 55 or older, but not yet 59½
If you retire from the company where your 401(k) is held in the year you turn 55 or later, you can take penalty-free withdrawals directly from that 401(k. This is known as the “Rule of 55.” But if you roll it into an IRA, that window closes—you’d need to wait until age 59½ to avoid the 10% early withdrawal penalty (barring a few exceptions).
Planning tip: If you have older 401(k)s from previous employers, consider rolling them into your current employer’s plan before retiring. That way, more of your funds could qualify for penalty-free access if you leave at 55 or later.
2. You’re doing backdoor Roth contributions
Backdoor Roths involve making non-deductible IRA contributions and then converting those to a Roth IRA. The IRS “aggregation rule” treats all pre-tax IRA assets as one big bucket when determining taxes on the conversion—which can result in unexpected tax bills.
But 401(k) assets aren’t included in that aggregation. Keeping pre-tax funds in your 401(k) can keep your backdoor Roth strategy clean and tax-efficient.
When an IRA Might Be a Better Fit
If the two situations above don’t apply to you, rolling your 401(k) into an IRA could offer some real advantages. Here’s what to weigh:
1. Cost Transparency
Some 401(k)s—especially from smaller employers—carry hidden fees that can eat into your returns. Large employers tend to offer lower-cost plans, but it’s worth comparing:
- What’s the total cost of your 401(k), including fund fees?
- How does that compare to the cost of managing an IRA?
A self-directed IRA often offers lower-cost investment options—but don’t assume that’s always the case.
2. Investment Control
IRAs typically offer a wider range of investment options and make it easier to:
- Adjust your portfolio
- Execute Roth conversions
- Schedule distributions on your timeline
If you value hands-on flexibility, an IRA may be the better choice.
3. Investment Options
401(k)s often limit you to a preselected menu of funds. In some cases, that’s a good thing—it can prevent poor choices. But if you’re looking to fully customize your portfolio or access specific strategies, an IRA opens more doors.
4. Consolidation & Organization
Many people retire with several old 401(k)s scattered across past employers. This makes managing your portfolio—and your plan—harder. Consolidating accounts into one IRA can simplify your financial life.
5. Ease of Use
Because 401(k)s are group plans, they’re often tied up with third-party administrators, recordkeepers, and outdated interfaces. A well-run IRA with a trusted custodian often provides a better user experience and faster access to your money.
6. Account Coordination
For those with multiple accounts—traditional IRA, Roth IRA, brokerage, etc.—having them in one place makes it easier to manage tax-efficient asset allocation. You can more easily decide which assets belong where based on tax treatment.
Tax Details Matter—Here’s What to Watch For Next
When you roll over a 401(k), the IRS doesn’t see it as a single pot. Instead, different parts of your account may be taxed or treated differently depending on their origin:
- Pre-tax contributions & employer matches → Roll to a traditional IRA
- Roth 401(k) contributions & their growth → Roll to a Roth IRA
- After-tax contributions → Can be rolled to a Roth IRA (tax-free)
- Growth on after-tax contributions → Rolls to a traditional IRA (taxable)
Pro tip: If your plan allows for in-plan Roth conversions, convert after-tax contributions before they grow. That way, any future growth becomes tax-free.
Special Case: Company Stock in Your 401(k)
If your 401(k) includes company stock, you may be eligible for net unrealized appreciation (NUA) treatment. This allows you to pay ordinary income tax only on the cost basis of the stock, while the gains are taxed at long-term capital gains rates—often much lower.
But there’s a catch: this strategy has strict rules and immediate tax consequences. Work closely with a financial advisor or CPA before using it.
The Bottom Line: Which Is Right for You?
Use your current 401(k) if:
- You plan to retire between 55 and 59½ and want penalty-free access
- You’re doing backdoor Roth contributions
- The plan has low costs and strong investment options
Consider rolling over to an IRA if:
- You want broader investment choices and more control
- Your 401(k) has high fees or limited flexibility
- You want to consolidate accounts and simplify your finances
Need help making the call?
There’s no universal answer—but there is a right answer for you. If you’d like a second set of eyes on your plan, we’re here for that.
Schedule a call when you’re ready.
The information presented is for educational and informational purposes only and should not be construed as personalized investment or financial advice. The content discusses general retirement planning strategies and is not intended to recommend any specific course of action for any individual.
Examples provided are hypothetical and for illustrative purposes only. They do not reflect any specific client situation and should not be relied upon for investment decision-making. Past performance of investments is not indicative of future results. All investing involves risk, including the potential loss of principal.
Root Financial Partners, LLC provides tax planning as part of its financial planning services. However, we do not provide tax preparation services, represent clients before the IRS, or offer legal advice.
Clients should consult their CPA or attorney before implementing any tax or legal strategies discussed. Nothing in this content should be interpreted as a recommendation to take a specific tax position or legal action.
This content may include discussions around advanced financial planning strategies such as Roth conversions, backdoor Roth IRAs, tax loss harvesting, charitable giving, estate planning tactics, or 401(k) rollover strategies. These concepts are general in nature and are not personalized advice. Actions related to these strategies may trigger tax consequences or legal implications. Always consult with your CPA or attorney to assess suitability based on your personal financial circumstances.
Suitability for these strategies depends on your individual tax situation, income, age, investment profile, estate plan, and other factors. Actions related to these strategies may trigger tax consequences or legal implications. Always consult with your CPA or attorney to assess suitability based on your personal financial circumstances.