Most employers in the US offer a 401(k) or similar retirement plan and many employees end up switching jobs every 3 to 4 years. With employees seeking new opportunities so often, many wonder if they should move or “roll” their 401(k) into an IRA (Individual Retirement Account).

Although it may not seem too pressing an issue, if you switch jobs often enough, you could end up with several 401(k)s from past employers which can complicate keeping track of where your money is.

The purpose of this article is to help you determine if you should move (aka roll) your old 401(k) into an IRA.

We’ll do this by reviewing some similarities and differences between 401(k)s and IRAs, the primary pros and cons of both, and then conclude by addressing the reasons you might want to leave your money in your 401(k) instead of moving it all into an IRA.

Similarities Between 401(k)s and IRAs

Even though they have very different names, 401(k)s and IRAs share many similarities.

1. 401(k)s and IRAs are both investment accounts people use to save and invest for retirement.

2. Both can have contributions classified as “Pre-tax.” (This means that money goes in untaxed but is then taxed upon withdrawal.)

3. Both can have contributions classified as “Roth.” (This means that money has already been taxed and that taxes never have to be paid again assuming certain conditions are met.)

4. They have an age requirement of 59.5 before you can withdraw without a potential penalty.

Differences Between 401(k)s and IRAs

Now that we’ve looked at some of the similarities, let's take a look at some of the differences between 401(k)s and IRAs to help you figure out whether you should roll your 401(k) into an IRA.

1. 401(k)s are offered by employers/companies. IRAs must be opened by the individual.

2. You can contribute more to a 401(k) than an IRA.

3. Investment choices within the 401(k) are limited to your company’s specific plan, whereas IRAs typically allow for broader investment choices.

4. Roth 401(k)s have an age requirement of 59.5 before anything can be pulled from the account, whereas Roth IRAs allow for withdrawals of your contributions at any point.

5. Companies offering a 401(k) usually offer a match on the amount employees put in. This is not the case with IRAs.

Primary Pros and Cons of 401(k) Plans

There are few topics that have the power to make eyelids as heavy as long discussions of 401k(s) do. Although notoriously boring to talk about, there are a number of fantastic things about them that make them pretty exciting (at least to us).  

Pros of 401(k) Plans

• They have large contribution limits. Employees can contribute $23,000 and employers can contribute additional funds up to a $69,000 annual total.

• 98% of companies that offer 401k plans also offer a match of some kind for participants. (Yes, you read that statistic correctly; a full 98%!)  It’s free money that the vast majority of companies offer employees.

• Employees are often allowed to make what are called “after-tax” contributions above the $23,000 max, and those after-tax contributions can be automatically converted to Roth. (Which can result in massive tax savings down the road.)

• A 401(k) savings plan is a truly automated method of investing for the future. Not having to think about it every month is a nice perk. 

• No matter how much money you make at your company, you’ll likely be eligible to contribute to your 401(k) plan.

• Depending on your state’s specific laws, your 401(k) may be more protected from creditors than other assets.

Cons of 401(k) Plans

• 401(k) plans vary by provider. The fees that are charged, the investments that are offered, and vesting schedules on the employer match can all vary widely from company to company.

• You’re limited to the funds being offered by the 401(k) plan itself. 

• You can’t control the administrator fees or the fees of the funds you’re allowed to invest in.

• Old 401(k)s from past employers may also charge additional maintenance fees compared to those in which you’re an active employee/participant.

Primary Pros and Cons of IRAs

Now that we’ve discussed the pros and cons of 401(k)s, let's quickly examine the pros and cons of IRAs.

Pros of IRAs

• You can contribute to your IRA for a given year all the way up until the tax deadline of that tax year. (For example, you can make 2024 contributions until the tax deadline in April 2025.)

• You have essentially unlimited investment options.

• Doing Roth conversions allows you to put money from your pre-tax bucket of dollars into your Roth bucket of dollars.

• Allows for advisors to manage your investments (if that’s something you want).

Cons of IRAs

• Contribution limits are small ($7k for 2024).

• Since advisors can manage them, advisors often exaggerate the benefits of IRAs compared to 401(k)s.

• If you have a “Traditional IRA” it hurts your ability to easily complete backdoor Roth conversions seamlessly.

To help consolidate the similarities, differences, pros, and cons, we’ve constructed the following table to illustrate most of what we’ve discussed:

Now that you’ve read this far, let’s talk about the reasons you should (or shouldn’t) roll your 401k into an IRA.

When Should You Roll a 401(k) into an IRA?

1. You no longer work for the company from which your 401(k) originated. If you have an orphaned 401(k) plan, it’s very likely racking up extra charges and would be cheaper to move that 401(k) to an IRA. Having IRA accounts at Schwab, Fidelity, or Vanguard doesn’t cost anything. Note: If you’re starting at a new employer, there’s a good chance you can move the 401(k) to the new one.

2. You lack investment options and want better ones. If your old 401(k) doesn’t have good investment options, moving to your own IRA will provide you with better investment options. 

3. You want to consolidate accounts. If you’ve changed employers often over the years, it’s a lot easier to coordinate your investment strategy if all your money is in one place.

4. You don’t complete backdoor Roth conversions. If you don’t complete backdoor Roth conversions within an IRA, then having money in an IRA won’t affect you.

5. You want professional management. If you want someone to take over the wheel, there are professional investment managers who will do it for you.

When Should You Leave Money in Your 401(k)?

1. You’re still working and contributing actively to a 401(k) plan. If you’re still working, there’s usually no need to roll money from your active 401(k) into an IRA. On rare occasions, it may make sense if you’re trying to optimize a mega backdoor Roth conversion. However, it’s generally easier just to leave it in a 401(k).

2. If you’re wanting to consolidate other IRAs or 401(k) into a good plan. If you currently have a good 401(k) plan, it can make a lot of sense to roll old 401(k)s and even IRAs into it. 

3. If you want the full ability to do backdoor Roth conversions. By keeping all of your pre-tax money in your 401(k) you don’t at all limit your ability to complete Roth conversions.

4. You don’t want to pay asset management fees. Advisors provide a lot of value, but oftentimes they don’t provide enough value to warrant their asset management fees. iF you’re concerned about paying management fees, you should learn more about Advice-only Advisors. They bill flat, fixed fees that can be put on a credit card - often creating a much better option for people.

Final Thoughts on Rolling 401(k) to IRA

As you’ve (hopefully) come to realize, the decision to roll your 401(k) into an IRA isn’t always clear-cut and requires some individual-level analysis to determine what’s best. Unfortunately, as we’ve noted above, many advisors only recommend moving funds to an IRA because it’s what’s best for the advisor.

• If you want to be able to do Roth conversions, keeping pre-tax money in 401(k)s is extremely helpful.

• If your old 401(k) is bad or expensive, an IRA will allow you better investment options and will be free. And if your new 401(k) is good, you can roll the old/bad one into the good one.

• If you want professional management to do everything for you for a cost, then going the IRA route will be what the investment advisor wants.

If you want help reviewing whether or not you should roll your 401(k) to an IRA, we’re happy to help. We don’t charge based on assets because guess what, we don’t manage any. We only provide advice on what we think is best and help you implement!