Advertiser Disclosure

When Should I Roll Over My 401(k) to an IRA?

Oct. 1, 2014
Brokers, Investing
At NerdWallet, we strive to help you make financial decisions with confidence. To do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations. Our opinions are our own.

If you recently switched jobs, it can be difficult to figure out when to roll over your old 401(k) to an Individual Retirement Account. While it might seem like an attractive way to consolidate your accounts and simplify your finances, the change can also affect your investment earnings, retirement income and taxes.

Trying to decide whether to make the move? Here are some signs you should roll over your 401(k) to an IRA:

If you can’t roll over your old 401(k) into your new one

If your new job offers a 401(k) with good investment options, it could be a good idea to roll over your old 401(k) to the new one, but that’s not always an option. Some 401(k) plans will not accept rollovers, and the ones that do may require a lot of paperwork and lengthy waiting periods. If combining your old 401(k) with your new one is too much of a headache, rolling over to an IRA instead is a good option.

If you don’t like your investment options

When you’re managing your own 401(k), you might have a limited number of options for investing that money. While having fewer choices can make it easier for some people to make investment decisions, the restrictions could be frustrating for others.

If all your 401(k) investment options include costly fees or don’t give you enough flexibility, it could be a good time for a change. Rolling your account over into an IRA will give you more freedom to invest as you see fit.


Check out our favorite IRA providers >

More considerations

Saving money isn’t the only thing you should consider when rolling your 401(k) into an IRA. Here are some obstacles you might run into:

You could end up paying more in taxes.

If you want a Roth IRA but have a traditional 401(k), you can do a Roth conversion after rolling your 401(k) into an IRA. With this method, pay attention to how much of your IRA contributions are non-deductible and deductible. Because of the pro-rata rule, supposing you already have deductible contributions in IRAs, you could end up paying taxes on a higher percentage than you would if you kept the money separate in the company-sponsored 401(k). That’s because Roth conversions are taxed proportionally based on what percent of all your existing IRA assets are deductible and non-deductible.

You might lose some protections.

Typically, companies provide for legal protections for 401(k) accounts. That means if you get sued or file for bankruptcy, those assets won’t end up in someone else’s hands. For these reasons, keeping your 401(k) could give you greater peace of mind.

You might receive less guidance.

Many companies offer educational programs or resources to help their employees invest their 401(k)s wisely. When you roll over to an IRA, though, you no longer have access to that free help.

To ensure you’re still making wise investment decisions, consider using a low-cost online service. Automated investment management services, such as FutureAdvisor, SigFig, Betterment or Wealthfront, can help to keep your accounts balanced for low monthly fees. For a more personal approach, services like Rebalance IRA also are affordable alternatives. Your online brokerage may also provide free educational material on their website.

How to roll over your 401(k) to an IRA

  1. Find your brokerage’s rollover options. Ask them how to open a Rollover IRA.
  2. Provide your brokerage with information about your existing 401(k), your investment goals and identification. After putting in the request for a rollover IRA, your brokerage will take care of the rest.
  3. After the rollover is complete, the balance from your old 401(k) will be transferred to your IRA. Remember to invest it, though; if you don’t, it will just sit in your account.

Nest egg illustration via Shutterstock.