Should You Roll Your 401(k) Into an IRA?

Why It Matters:

  • For many people, an IRA can make more sense than a 401(k).
  • When you're leaving a job, it's a great time to consider whether you should roll your existing 401(k) into an IRA.
  • IRAs have several benefits over 401(k)s, primarily their flexibility.

Tom Nawrocki tkc.profilePicture Written by: Tom Nawrocki | Transamerica
Dec. 17, 2019

2-3 Min readClock Icon

Our workforce has become highly transient: Baby Boomers born between 1957 and 1964 held an average of 12.3 jobs from ages 18 to 52, according to a study by the Bureau of Labor Statistics.1 When you leave a job with a 401(k), it’s tempting to simply roll those retirement assets into the 401(k) plan at your next employer. But there’s also another option: roll that money into an IRA.

Here are some of the reasons an IRA might make more sense than another 401(k):

Reasons to Roll to an IRA

You have more than one retirement account. Many people in today’s job market end up trailing a series of 401(k) plans behind them. Consolidating accounts allows you to manage your retirement assets in one place. That allows not just a greater ease of recordkeeping but a more consistent approach to investing. Rather than constantly checking and rebalancing a wide range of investing options, locating them in a single IRA can make it easier to choose (or change) the investments you want.

Your plan doesn’t offer enough investment options. Many 401(k) plans have a limited selection of stock funds. They often have an even more limited number of bond funds, which can be critical as you near retirement and seek safer havens for your money. IRA investors typically have more leeway to choose where to put their assets. More adventurous investors can invest in exchange-traded funds, options, and real estate through an IRA.

Your 401(k) does not offer a retirement income program. Whereas 401(k) plans are limited to the options offered by the investment plan, IRAs are more flexible. Options with an IRA include annuities that can provide lifetime income that’s guaranteed, based on the claims-paying ability of the issuing insurance company. If that’s the kind of security you’re looking for in retirement, an IRA can make sense.

Your 401(k) has high fees. Fees matter. In fact, you can expect to pay $467 this year in fees alone if your 401(k) balance is $103,700, the average balance among Americans.2 If you don’t know how much yours charges, ask your employer for a benefits booklet or a prospectus. Some low-cost plans may charge former employees higher administrative fees if they choose to keep their 401(k) after leaving the company. With an IRA, you'll likely pay fees to the funds you invest in, but you could have more control than with a 401(k)’s fees.

Your plan has limited beneficiary planning options. IRAs can offer flexibility in how the assets in your account are distributed to beneficiaries. You can “stretch” any required minimum distributions over the beneficiary’s life expectancy or restrict a beneficiary’s access to the inherited assets.

You may need or want to access your retirement assets prior to age 59 1/2. There’s usually a 10% federal tax on withdrawals from most retirement plans, but IRAs offer exceptions to the rule. Unlike a 401(k), you can tap into an IRA without penalty for things like health insurance premiums while unemployed, qualified higher education expenses, and first-time home purchases.

You inherited an IRA. If you inherit a traditional IRA from your spouse, you can roll the funds into your own IRA, or you can designate yourself as the account owner and have it become your IRA. Alternatively, you can declare yourself the beneficiary. If you inherit a traditional IRA from someone other than a spouse, you cannot roll it over; you have to withdraw the assets within a specified period of time.

You inherit company stock. It may be tempting to move stock that you’ve been granted at a job to an IRA when you leave that company. And some institutions require the funds go to your IRA as cash instead of as shares. But be careful. When you do take that money, even in retirement, you could be taxed not only on the distribution but any capital gains as well.

You don’t have access to another 401(k). Maybe your new job doesn’t offer it, or maybe you’re sitting out of the workforce for a while. Don’t fret: An IRA can usually fit the bill.

For more information on when IRA rollovers make sense, check out this handy guide from Transamerica’s Advanced Markets Group.

Leaving a job often gives you an opportunity to make these types of changes, which means it’s also a good time to reassess how well you’ve been progressing toward your retirement goals. Before you make any moves with your 401(k), call your financial professional to help determine the option that’s best for you.

Neither Transamerica nor its agents or representatives may provide tax, investment, or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.

Things to Consider:

  • It may not be a good idea to trail around several 401(k) plans from previous jobs.
  • If you’re switching jobs, consider whether an IRA suits you better than another 401(k).
  • There can be more flexibility — and more you'll have to manage — with an IRA.

1 “Number of Jobs, Labor Market Experience, and Earnings Growth: Results From A National Longitudinal Survey,” Bureau of Labor Statistics, August 2019

2 “Here’s What the Average American Typically Pays in 401(k) Fees,” CNBC, July 2019



Join the Discussion

Tags in this article

Financial Goals Retirement

More Longevity



Thanks for subscribing!

Your subscription wasn't successful. Please try again later.

Please enter a valid email address.

Please enter a valid first name.

Please enter a valid last name.