Reasons To Convert a 401k into an IRA

Wednesday, June 12th 2024

A 401(k) is typically a workplace sponsored retirement program that allows you to save money with tax being differed. Some employers even contribute to these plans with matching your contributions. However, because these plans are tied to your employment, if you quit your job or retire, you lose the ability to contribute to your 401k. When this happens, you aren’t stuck without options.

One of the best options is to roll over your 401k into a self directed IRA account. These accounts move from being a workplace retirement account to being a personal retirement account. Why would you convert your 401k to an IRA? Let’s take a look at some of the top reasons.

Continuing To Contribute

Being able to continue to contribute to your retirement is important to living well after your career. You may move onto a job that doesn’t have a retirement plan, or even after retirement, you may continue to work a part-time or less official job. With this in mind, you will want to be able to continue to contribute to your retirement savings without having to worry about tax and while still building upon what you invest in your retirement.

Rollover Options such as ROTH or Precious Metals IRA

There are a variety of different options available to you when it comes to rolling over your 401k retirement plan. You can rollover into a traditional retirement plan or you can rollover into other plans such as a precious metals IRA (also known as a gold IRA). Further, you have the choice of rolling over into an account with the same firm or with a different firm.

Rollover Tax Deferment

Some of the options you have when it comes to managing a 401k from a company that you no longer work for can have some big penalties. For example, cashing out can end up costing you over 20% of your retirement, depending on your state and specific circumstances. 20% is a lot of money.

The thing about performing a rollover is that it keeps your money safe. You don’t pay a penalty for early withdrawal. You also don’t have any immediate taxes. A rollover carries the tax deferred nature of a 401(k) with the money to the new plan.

Change of Employment

When you move from one employer to another you are still working but you can’t use your previous company’s retirement account. Depending on what kind of retirement plan your new company has, you may be able to roll your 401k over into your new employer’s retirement plan. While it is easier, this is true even if it is between two different plan managers.

Some self-employed individuals can also create a self-employed 401k and rollover their previous plan. When it comes to self-employment, taxes, insurance, and retirement can be complicated, we recommend talking with a professional in order to have the most accurate information possible.

This is an ideal option for many people as it allows you to take what you already have and continue to build off that. With a bigger account, you are building interest off a higher amount.

Communication Problems

Employer-sponsored retirement plans have a plan administrator and/or advisor that are assigned to that business. Often times that person, or persons, meet with employees at the place of business and other communication about plans happens via email. If you leave your company, you may not be as informed about your own plan.

For this reason alone, a rollover could be something that you want to consider. However, many retirement plans have an online portal that allows you to review your plan, get help, make changes, etc. If you are computer savvy and willing to put in a little bit of extra effort you can do most of the work through your online portal.

Diversify Your Investment

Diversification is an important part of saving for retirement, it is the idea that you should have investments in multiple platforms to protect your future. Not every 401k plan is built the same. That means that you may or may not have options in how your 401k is invested. Should you want to change up your investments to diversify your holdings, then you will need to rollover your account into a new investment option.

Diversification is a good idea whether you rollover or not. Having all of your eggs in one basket can be dangerous if something happens. Diversification can help you to have a savings for retirement, if one of your plans crashes, the economy changes, or something else happens, you still have some money.

Simplifying Your Investments

One reason that some people rollover their retirement account is to make their retirement simple. If you move from job to job, especially early on in your career, it can be difficult managing various retirement plans. To make life simpler, some people decide to rollover their retirement plan so they don’t have to worry about continuing to rollover.

However, if you find a job that you like and plan to be there a while, it can be a good idea to rollover into their plan or to invest in their plan. Many workplaces have matching contributions and that can mean a lot for your retirement plan.

Services Offered

Depending on your employer-sponsored 401k plan, you may have a variety of services available to you. With that in mind though, not every plan is built equally. You may want to roll your 401k into a new retirement plan because you don’t have the services you need, such as easy access to advice, good educational material, or the easy ability to plan for retirement.

Keep in mind to review the services available for any new plan you are looking at and compare it to your currently available services. Be sure that you have all of the services you want and that previous customers have benefited from the services.

Cons of Rolling Over a 401k:

Rolling a 401k over into a new retirement plan isn’t always the best option. Besides rolling a plan into a new employer-sponsored plan or a personally directed retirement plan, you can leave the plan as it is or cash out the plan. Depending on your situation one of these options might be better for your situation. However, whichever option you choose, you should make sure that you have done your research first.

Let’s take a look at a few of the reasons that you might not want to convert your plan into a rollover.

You Plan To Retire Early

After rolling over a 401k you will no longer be able to retire the year you turn 55. Instead, you will have to wait until you are 59.5 years old. So, if you are planning to retire early you might want to keep your 401k where it is. Leaving it where it is isn’t necessarily bad though as there are several ways you can withdraw money early penalty-free and you may be able to use that for your planning.

You Plan To Retire Late

Whether you don’t have the money to retire on time or simply like what you are doing, a 401k is probably one of the investment options you want. For example, if you have an IRA (the most common rollover account) you will have to take a minimum amount every month after the age of 70. On the other hand, a 401k can stay intact until you actually retire.

You Make Too Much for Other Accounts

Some retirement accounts have a maximum income amount. For example, a Roth IRA has a limit of $122,000 in 2019 if you are looking to make full investments. Rolling over your 401k might interfere with your ability to open one of these accounts so make sure to complete all of your retirement planning before you take any action.

401k Lawsuit Protection

If you ever get sued, you have to worry about your assets. Well, most of your assets. A 401k, along with some other employer-sponsored retirement plans are shielded from personal injury lawsuits, creditors, and depending on your state, may be shielded from bankruptcy.


Every situation is different. You need to take a look at your finances, your future plan, and how well your 401k is performing in order to determine if a rollover is right for you. If it is, you should continue your research to have a solid plan before you start the rollover process.

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