10 important factors to consider during 401(k) to IRA rollover

Barring a few who can opt for an in-service rollover, most Americans consider 401(k) to IRA rollover only when they retire, get laid off or change their jobs. While many employers prefer to continue their former employees in their plan, it probably makes sense in most cases to roll the money from old 401(k) account to an IRA.

If you are considering rolling over your 401(k) savings to a traditional IRA, you should weigh the pros and cons and consider the following ten factors before making this important decision.

Investment choices

The biggest advantage of IRA is the wide range of investment choices as against pre-designed plan menu of 401(k). Many IRAs allow you to select from stocks, bonds, certificate of deposits (CD), mutual funds, annuities, exchange traded funds (ETFs) etc. Further, you can choose to invest directly in unusual and lesser known investment choices such as precious metals or coins, hedge funds, derivatives and rental property through your IRA. More choices may confuse you but you should consider your age, retirement goals and risk tolerance while investing. Before you open an IRA account, check with the custodian of IRA about the availability of investment options that suit your requirement.

On the other hand, 401(k) plans are limited by the investment options chosen by the plan administrator. On an average, 401(k) plans offer 8 to 12 investment options, and these options generally include mutual funds, company stock, variable annuities etc. Also, your plan may not allow switching your money among these investment options frequently. For example, some plans may allow changes only once in 90 days or so.

Thus, with IRA you have more options and therefore, more control over your investments. But with 401(k), your options are limited by the plan menu.

Stable value fund

Stable value fund is a popular investment option that’s available with most 401(k) plans but not IRA. Stable value funds are conservative and are considered one of the lowest risk investment options offered in 401(k) plans. As it is not available in individual retirement accounts, you lose this opportunity if you rollover your money to IRA. Stable value funds have outperformed money markets for two decades and is a good choice if you are nearing retirement because it helps capital preservation and provides predictable, steady returns. According to Aon Hewitt, despite strong returns of stocks, stable value funds is a major asset class which has a substantial share of 401(k) participant balances.

Fees and charges

Despite 401(k) fee disclosure rules, many participants are still unaware of the fees they are paying for their plan. To make matters worse, they don’t understand how this affects their retirement nest egg in the long run.

Rollover from your former 401(k) to IRA is a good choice only if your IRA institution charges less fees than your old (or new) 401(k) plan provider. If you were working for a small business, you were probably paying high fees for your old 401(k) plan, which you can reduce by rolling over into an IRA. On the other hand, big organizations have an advantage of institutional negotiation and therefore, they can persuade the plan provider to reduce the fees. If the fees is less with your former employer’s plan for your preferred investment products, then it is good to leave your money there; else its better to rollover the money to IRA.

Ease and convenience

If you rollover your 401(k) into IRA (or if you rollover into your new employer’s plan) you will have one consolidated retirement account that is easy to manage. All your retirement money under one umbrella results in less paperwork and more efficiency. If you have the habit of frequently changing your jobs, then it is better to take your money along with you; otherwise you may end up having several 401(k) accounts with different employers and you may lose track of your hard earned money. Mergers (or change of names) and bankruptcy of your former employer(s) can also make it difficult for you to trace your money.

Penalty-free withdrawals

Your present age and time to retirement also is a major factor that should be considered during rollover. If you sever ties with your employer after 55 you can withdraw from your 401(k) account without incurring any penalty; whereas, IRA distributions will have to wait till you reach the age of 59 ½.  So, if you are already above 50 and plan to retire in the near future (between 55 and 59 ½), then leaving the money in 401(k) may be a better choice.

On the other hand, IRA allows penalty free withdrawals for first time home purchase and paying college expenses.

Protection from creditors

The federal law protects the money you have in 401(k) from creditors. So, if you face any hard times and file for bankruptcy, your creditors cannot touch your 401(k) money. On the other hand, IRA is not fully protected from creditors; IRAs are protected by state laws and it varies from state to state. Check your state’s IRA protection and its rules before rolling over.

Naming beneficiaries

As far as estate planning is concerned, there is more flexibility with IRA. Most 401(k) plans force heirs to cash out your 401(k) soon after you die and pay a hefty tax.

Federal law requires spouse’s consent to name non-spouse beneficiaries for 401(k) and such beneficiaries have many restrictions on what they can do with the money in the inherited 401(k). IRAs allow naming non-spouse beneficiaries without consent from spouse (in some states) and typically give more freedom to your heir to take required minimum distributions.


Dipping your hand into your retirement corpus in not a good move. But life is full of uncertainties and when there is emergency, you can take a loan from your 401(k). Although, it has its own demerits, your money is available to you at the time of need. However, you cannot borrow money from your IRA. The only way you can get early access to IRA is by paying taxes and the penalty.

Control over RMDs

When you become 70 ½ years old, you should start taking required minimum distribution (RMD) from your IRA. But if your money is in 401(k) plan and you are still working, you can leave your money there until you stop working.

Company stock

If your 401(k) includes company stock and its price has increased significantly after your purchase, it is wise to transfer it to a brokerage account to avoid ordinary income taxes (instead of lower capital gains tax rate) on the stock’s net unrealized appreciation (NUA) during distribution. The NUA is the difference between the value of the company stock at the time of distribution and the time of purchase. The money spent on purchasing the stock is, however, taxable at your ordinary income tax rate.

Bottom Line

An individual is required to do a regular and thorough evaluation / scrutiny of his retirement plan to ensure success. Choosing the right investment vehicle (401k, IRA, Roth IRA etc.) is as important as choosing the right investment products (Mutual funds, bonds, stock etc.) in this regard. Although the above points apply to rolling over from 401(k) to traditional IRA, many of them apply to Roth IRA as well (although there are tax consequences). Listing the advantages and differences of Roth IRA vs. traditional IRA is beyond the scope of this article. Do the due diligence while handling IRA rollover and consult a professional financial planner before making the final decision.

One Comment on "10 important factors to consider during 401(k) to IRA rollover"

  1. Wande says:

    Great article .

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