Should I roll over my 401(k) to an IRA?
In one paragraph
For most people who leave an employer, rolling the 401(k) balance into an IRA makes sense — it expands investment choices, often reduces fees, and consolidates retirement accounts. The main exceptions are workers who want creditor protection stronger than an IRA offers, or those planning to take early withdrawals under the Rule of 55.
What this actually means
When a worker changes jobs or retires, the old 401(k) balance can stay in the former employer's plan, roll over to the new employer's plan, roll into an IRA, or — almost always the wrong move — be cashed out. The IRA rollover is the most popular choice, and for good reason.
The primary benefit is investment latitude. Most 401(k) plans offer 15 to 30 fund choices, many of them proprietary options with expense ratios above what's available in the open market. An IRA opened at a major custodian (Vanguard, Fidelity, Schwab) provides access to thousands of funds, ETFs, individual stocks, and bonds. Investors who want a simple three-fund index portfolio or something more complex can build it precisely.
Fee comparison is the first concrete step. Running a direct expense-ratio comparison between the old plan's available funds and the equivalent ETFs available in an IRA often reveals meaningful annual savings, particularly for large balances where even 0.20% matters.
There are situations where leaving assets in a 401(k) is better. Federal law gives 401(k) assets unlimited protection in bankruptcy proceedings; IRA protection varies by state and has a federal cap (currently around $1.5 million) for most types. Workers in high-liability professions may prioritize this. The Rule of 55 is another consideration: employees who separate from service at age 55 or older can take penalty-free withdrawals from that employer's 401(k), a benefit that does not transfer to an IRA.
Mechanics matter. A direct rollover — where the check is made out to the new custodian, not the individual — avoids any mandatory withholding and keeps the transaction clean for tax purposes. An indirect rollover (check made out to the worker) requires redepositing the full original amount within 60 days, including the 20% the plan withheld; missing the deadline converts the distribution to a taxable event.
Workers with employer stock in their 401(k) should examine Net Unrealized Appreciation (NUA) rules before rolling over, as there is sometimes a tax advantage to distributing that stock in-kind.