Why Rollover a 401(k) to an IRA?

by Mark Kennan ; Updated July 27, 2017

Many employers help their workers save for retirement by sponsoring 401k plans. When you leave the company, you may consider moving the money to an IRA through a rollover. Rolling over your 401k plan money to an IRA has benefits, but it may not be the right move for everyone.

Fees

Depending on your 401k plan and the IRA that will receive the rollover money, you may save on account management fees by moving the money from a 401k plan to an IRA. According to a 2008 U.S. News report by Emily Brandon, this is most often the case when you work for a small company. However, if you work for a large company, the company may have negotiated lower account fees, and you might be moving to a more expensive account by moving founds to an IRA.

Diversity

When you keep your money in your 401k plan, you can only select from the employer-provided plans at the particular financial institution the company uses. However, when you roll the money to an IRA, you can select any financial institution as well as any investment that institution offers. For example, if you like a particular mutual fund offered by financial institution B, but your company uses financial institution A, you would be able to invest in the mutual fund if you rolled your 401k plan over to an IRA at financial institution B.

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Consolidation

If you have worked for several companies, you may have a difficult time keeping track of your retirement assets, because you have several plans. When you open an IRA, you can roll the money from each of those plans into a single account, which may make it easier to manage your retirement investments and keep track of how those investments are performing.

Easier Access

With a 401k plan, you cannot withdraw the money before you reach age 59 1/2, except in cases of permanent disability, leaving your job or severe financial hardship. Even if you have a severe financial hardship that qualifies you for an early distribution, you still have to pay a 10 percent early withdrawal penalty. However, if you roll your 401k to an IRA, you can take distributions even without a severe financial hardship and pay the 10 percent penalty. In addition, IRAs allow the early withdrawal penalty to be waived in more circumstances, such as withdrawing up to $10,000 to buy a first home or any amount to pay for higher education costs for you, your spouse or a dependent.

About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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