Short answer: rolling a 401(k) into an IRA at retirement often makes sense for wider investment choice and simpler withdrawals, but check four things first — whether you retire between 55 and 59½, whether you hold company stock, what each option costs, and whether you plan backdoor Roth contributions.
Your three main options
- Leave it in the plan. Many plans let you stay. Some have very low-cost institutional funds.
- Roll it to an IRA. More investment choices, one place to manage withdrawals, and easier coordination with other accounts.
- Move it to a new employer's plan, if you are still working somewhere that accepts rollovers.
Four reasons to pause before rolling over
- The rule of 55. If you leave your job in or after the year you turn 55, withdrawals from that employer's 401(k) avoid the 10% early-withdrawal penalty. Money moved to an IRA generally loses that until 59½.
- Company stock. Rolling employer stock into an IRA can forfeit the net unrealized appreciation tax break. Read our NUA guide first.
- Cost. Compare the plan's fund expenses with what you would pay in an IRA, including any advisory fee.
- Backdoor Roth. Pre-tax IRA balances bring the pro rata rule into play. See our backdoor Roth guide.
If you do roll over, do it directly
Ask for a direct (trustee-to-trustee) rollover. If the plan sends a check to you, it generally must withhold 20% for taxes, and you have 60 days to deposit the full amount — including the withheld part — to avoid tax on it. Roth 401(k) money should go to a Roth IRA, and after-tax contributions can sometimes be split to a Roth.
A rollover is also a natural moment to set up the withdrawal order, Roth conversion plan, and required distributions. That is the core of our retirement income planning.
Schedule a complimentary consultation with Ben Loughery.
This article is for educational purposes only and is not individualized tax, legal, or investment advice. Examples are hypothetical illustrations, not actual clients, and do not guarantee any result. Lock Wealth Management is a registered investment adviser; registration does not imply a particular level of skill or training.
Frequently asked questions
- Do I have to roll over my 401(k) when I retire?
- No. Many plans let you leave the money where it is. Rolling over is a choice, not a requirement.
- Is a 401(k) rollover taxable?
- A direct rollover from a pre-tax 401(k) to a traditional IRA, or a Roth 401(k) to a Roth IRA, is generally not taxable. Rolling pre-tax money into a Roth IRA is a conversion and is taxable.
- What is the rule of 55?
- If you leave your employer in or after the year you turn 55, you can take penalty-free withdrawals from that employer's plan. The exception does not carry over to an IRA.
- What is the difference between a direct and indirect rollover?
- A direct rollover moves money between institutions. An indirect rollover sends you a check, usually with 20% withheld, and you have 60 days to redeposit the full amount.
- Should I roll over company stock?
- Not before checking net unrealized appreciation, which may let the stock's growth be taxed at capital gains rates instead of ordinary income.
