Should You Do a 401(k) Rollover?

By Net Worth Advisory Group

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Over the past few years, millions of people resigned from their jobs, opening the door to new opportunities but often leaving old 401(k)s behind in the process. It’s more common than you might think to have retirement savings scattered across accounts, sitting untouched and out of sight.

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If you’ve ever wondered whether those accounts are still working for you, or if you’re missing an opportunity to simplify and strengthen your plan, you’re not alone. A 401(k) rollover can offer a fresh start, but with multiple options and trade-offs, it’s not always clear what to do next.

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In this article, we walk through the key considerations so you can evaluate your options with confidence and decide what makes the most sense for your situation.

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What Is a 401(k) Rollover?

A 401(k) rollover is an option you have when you leave a company and want to transfer your investments into an individual retirement account (IRA). Normally people do this if they are leaving a company, switching to a new company, or retiring, but you can also do a 401(k) rollover into another 401(k) with a new employer.

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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 and bonds 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)

Tax-deferred retirement plans 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, that 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.

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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 who 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.

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Early Withdrawals

Both IRAs and 401(k)s include a 10% penalty if you withdraw money before the age of 59½. The 10% penalty is in addition to taxes that you will owe on the money no matter what. There is one exception for 401(k) plans, known as the Rule of 55; if you retire at 55 or later, you can take penalty-free withdrawals from your current 401(k) sponsored retirement plan. The Rule of 55 does not apply to IRAs, nor does it apply to 401(k) plans still housed in a prior employer’s account.

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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 getting money from one point to the next, and you do not have to worry about how or when to deposit funds. 

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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 your personal funds or another source. If you fail to deposit the funds to a tax-deferred account within 60 days, the transfer will be treated as an early withdrawal and the entire amount will be subject to an additional 10% penalty.

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Should You Consider a 401(k) Rollover?

A 401(k) rollover can be a smart move, but for many people it also brings a lot of uncertainty. With multiple options and fine-print decisions, it’s easy to feel unsure about what’s best or worry about making a costly mistake. And since your financial situation is unique, a generic answer won’t give you the clarity you need.

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At Net Worth Advisory Group, we take the time to understand your full picture and help you evaluate whether a 401(k) rollover supports your long-term goals. From there, we map out a clear path forward so your retirement savings stay on track and keep working for you.

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Our goal is to simplify the complexity and give you confidence in your decisions so you can move forward without second-guessing. To get started, call us at 801-566-6639 or schedule a complimentary, no-obligation consultation to see if we are a good fit to help you pursue your goals.

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To learn more, visit our website.

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About Net Worth Advisory Group

Founded in 2003, Net Worth Advisory Group is a Salt Lake City-based, fee-only firm specializing in helping individuals transition smoothly into retirement without fear of outliving their assets. As a NAPFA-registered practice, the firm’s team of CFP® professionals operates under a strict fiduciary standard, offering objective, personalized wealth management free from product-commission conflicts. Through comprehensive financial mapping and disciplined semi-annual reviews, Net Worth Advisory Group is dedicated to bringing clients lasting financial confidence and the freedom to live the lives they have imagined.