The Advantages of Rolling a 401(k) Into an IRA

A rollover from 401(k) to IRA maintains your money's tax-sheltered status.
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The Internal Revenue Service allows you to move money from a 401(k) plan to an IRA to preserve the tax-sheltered growth of your retirement assets, and rolling over the assets from a 401(k) to an IRA has certain advantages. However, you can roll over 401(k) plan assets to an IRA only in limited circumstances, such as if you've left employment, your employer terminates the 401(k) plan, you're 59 1/2 or older, or you suffered a permanent disability. You can't roll over required minimum distributions or hardship distributions.

More Investment Options

With a 401(k), you're stuck selecting from the menu of options that your 401(k) plan offers. This might not be a big deal if your company offers lots of options or you happen to like a particular option offered, but if your 401(k) has just a few options, none of which are particularly appealing, it's a bigger issue. When you move the money into an IRA, you can choose which financial institution to use and how to invest the money. In addition, you may be able to choose a financial institution that charges lower fees than your 401(k) plan.

Ease of Access

When you have money in a 401(k) plan, you can only take distributions after leaving the company or after you turn 59 1/2 years old. If your 401(k) plan allows hardship distributions, certain severe financial needs might allow you to access your money. If you roll the money into an IRA, you can take distributions any time, for any reason. However, just because you can access the money doesn't mean you should: distributions from IRAs taken before age 59 1/2 are subject to a 10 percent additional tax unless an exception applies.

Different Penalty Exceptions

IRAs offer a few exceptions to the 10 percent additional tax on early withdrawals which 401(k) plans do not, including an exception for early withdrawals used for higher education expenses and an exception for up to $10,000 used to purchase a first home. For example, if you have a son who is starting college, if you took a 401(k) plan distribution and used it to pay tuition, you'd owe the 10 percent additional tax. However, if you rolled the money from the 401(k) plan into an IRA and then took the distribution, you'd avoid the penalty. However, unlike 401(k) plans, IRAs do not offer an exception to the 10 percent additional tax on early withdrawals if you retire after age 55.


If you have a plethora of retirement accounts from various jobs, consolidating them in an IRA can make them much easier to manage. By having all of your retirement investments in one place, you can better balance your portfolio to minimize risk and you can track your investments more easily.

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