Retirement savings are only as effective as the way you manage them. As Wallace D. Wattles once said, “It is essential to have good tools, but it is also essential that the tools should be used in the right way.” A 401(k) is one of the most powerful tools available—but using it strategically, including knowing when a 401(k) rollover might make sense, can make all the difference.
With today’s workforce frequently on the move, most professionals change jobs a dozen times or more, and it’s important to know what happens to your 401(k) when you leave an employer. The choices you make in that moment can impact your long-term retirement success.
That’s where a 401(k) rollover comes in. Rolling over your account can help you consolidate your retirement assets, reduce unnecessary fees, and open up new investment options, all while staying aligned with your individual financial goals. Here’s what you should know.
What Is a 401(k) Rollover?
When you leave your job—whether you’re changing employers, retiring, or simply moving to a new opportunity—you have an important decision to make about your 401(k) retirement savings. A 401(k) rollover allows you to transfer your accumulated savings directly into either an Individual Retirement Account (IRA) or another employer’s 401(k) plan. This process helps you better control your investment choices, maintain your tax advantages, and potentially consolidate your retirement savings into one, easier-to-manage account.
Pros of a Rollover
The main benefits of a rollover from a 401(k) to an IRA are the following:
- More options: Most 401(k) plans have a limited selection of mutual funds to invest in. IRAs offer those plus other options, such as stocks, exchange-traded funds, and income-producing real estate.
- Lower expenses and management fees: This will vary depending on your 401(k), but usually having an IRA decreases management fees, administrative fees, and expenses related to each fund you have.
- Convert from a tax-deferred account to a Roth account: Contributions to a 401(k) plan or traditional IRA are made using pre-tax dollars, which means distributions are taxed at the time of withdrawal. Rolling money from a traditional 401(k) into a Roth IRA gives you the option of paying taxes now so that you will not have any taxes due at the time of withdrawal in the future. If this is an option you are considering, you should discuss with your advisor and your tax professional to consider current and future forecasted tax rates to see which pathway makes the most sense.
Cons of a Rollover
Some potential cons of a 401(k) rollover include:
- Creditor protection risks: Leaving your funds in a 401(k) might provide creditor and bankruptcy protections, which might not be the case with an IRA, depending on your state’s IRA rules.
- Less accessibility: Although it might be possible to get a loan from an employer-sponsored 401(k) account, you cannot from an IRA, which means the funds may be less accessible.
- Account fees: You may be hit with higher account fees compared to a 401(k), which has access to lower-cost institutional investment funds due to group buying power.
Required Minimum Distributions (RMDs)
Both 401(k)s and IRAs are tax-deferred retirement plans that are subject to required minimum distributions (RMDs). Taxes are due at the time of withdrawal. The SECURE Act changed the timeline for taking RMDs for both IRAs and 401(k) plans. For IRAs, anyone who reached age 70½ on or after January 1, 2020, will not be required to begin taking RMDs until April 1st of the year after they reach age 73. (Under the SECURE 2.0 Act, the RMD age will rise to 75 in 2033.) Failure to take RMDs at the appropriate time will result in a hefty 25% penalty on any distributions you fail to take on time.
Some 401(k) plans (but not all) allow you to leave money in the plan until you retire, effectively delaying RMDs, as long as you are still working for the employer that sponsored your 401(k) plan. If you leave any 401(k) funds in your prior employer’s account, the exception will not apply to those funds. The exception also does not apply to IRAs; if you have funds in an IRA, you must start taking RMDs when you reach the age limits, regardless of when you retire.
Early Withdrawals
If you’re under 59½, most withdrawals from a traditional IRA or 401(k) will trigger a 10% early withdrawal penalty along with regular income taxes. But not all situations are treated the same. Each type of account has carefully defined exceptions that can help you minimize penalties. Here is a summary.
As you can see, rolling your 401(k) into an IRA lets you tap the money early for things like college costs, buying your first home, or covering an extended job gap without paying penalties. However, if you leave your job or retire at age 55 or later and think you’ll need the funds before 59½, it’s often wiser to keep the money in your current 401(k); that way you can use the Rule of 55, which doesn’t apply to IRAs or old 401(k) plans.
How to Execute a Rollover
Thankfully, rollovers are pretty simple. Once you have chosen a bank, financial institution, or online investing platform, you contact your 401(k) plan administrator to let them know where you want your funds transferred. You can choose to do either a direct or indirect rollover. A direct transfer is generally recommended because it is the simplest form of transferring funds, and you do not have to worry about how or when to deposit funds.
You also have the option of doing an “indirect rollover,” where your employer cuts you a check and you are responsible for depositing the funds into a new tax-deferred investment account within 60 days. Your employer will be required to withhold 20% of the funds to pay taxes due (this 20% comes back to you in the form of a tax credit when you file your return). That means you will only receive a check for 80% of the value of your 401(k), and you will need to replace the 20% withheld amount from another source, or the amount withheld will be subject to income taxes and the 10% early withdrawal penalty. If you fail to deposit the funds into a tax-deferred account within 60 days, the transfer will be treated as an early withdrawal, and the entire amount will be subject to income taxes and an additional 10% penalty. Of course, if you are completing a rollover and are older than 59½, you don’t need to worry about the 10% penalty.
Should You Roll Over Your 401(k)?
Your 401(k) is a valuable retirement tool, but are you using it to its full potential? With several rollover options available, it can be difficult to determine the best course of action, especially when each choice carries its own set of benefits, risks, and tax implications. The right decision depends entirely on your unique financial picture and long-term goals.
At Tapparo Capital Management, we take the time to understand your circumstances before offering tailored guidance. If a 401(k) rollover aligns with your strategy, we’ll walk you through the process and help design a retirement plan that reflects your priorities.
We believe financial decisions should feel clear, not overwhelming. If you’re ready for experienced, objective guidance, contact us to see if we are a good fit for each other by calling 978-887-1121 or emailing andrew@tapparocapital.com.
About Andy
Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA, helping clients turn their savings into a retirement income that lasts. Inspired by the quote “Choose a job you love, and you will never work a day in your life,” Andy founded Tapparo Capital Management in 1997 with a passion for helping clients enjoy a truly worry-free and fulfilling retirement and experience financial freedom. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.
Andy holds a Bachelor of Science in Industrial Engineering from Rochester Institute of Technology in Rochester, New York, and a Master of Science in Finance from Bentley University in Waltham, Massachusetts. Specializing in retirement income planning, Andy completed a comprehensive financial industry education program at The American College of Financial Services and was awarded the Retirement Income Certified Professional® designation. He is frequently quoted in the media as a financial expert.
Andy and his wife, Susan, live in Topsfield, Massachusetts, and have two beautiful daughters. Outside of work, he is an automobile enthusiast, enjoys taking road trips, and loves the Outer Banks of North Carolina. In his spare time, he volunteers with the local high school varsity girl’s basketball team as the team statistician and runs the team’s website. He is passionate about supporting charities that serve our veterans and their families. To learn more about Andy, connect with him on LinkedIn.
