If you’ve recently left a job—or are thinking about it—you’re probably wondering what to do with your old 401(k). Should you leave it where it is? Move it into your new employer’s plan? Cash it out (hint: probably not a great idea)?
One of the best moves you can make is rolling those retirement funds into an IRA (Individual Retirement Account). Why? Because when it comes to investment options, 401(k) plans are like a limited cafeteria menu, while an IRA is a full-blown supermarket—offering way more choices, often with lower costs.
Let’s break it down.
1. Investment Freedom: A 401(k) is a Fixed Menu—An IRA is the Whole Store
An IRA, on the other hand, gives you access to nearly every type of investment available:
✅ Stocks – Want to invest in individual companies like Apple, Tesla, or Amazon? You can.
✅ Bonds & Treasuries – Prefer stability and income? IRAs allow you to build a custom fixed-income portfolio.
✅ ETFs – Lower fees, greater flexibility, and a vast range of asset classes.
✅ REITs – Get into real estate investing without buying physical property.
✅ Alternative Investments – Some IRAs even allow commodities, options trading, and more sophisticated strategies.
With an IRA, you’re not stuck picking from whatever limited, high-fee funds your employer’s 401(k) plan offers. You take full control over how your money is invested.
2. Lower Fees = More Money in Your Pocket
Here’s something most people don’t realize: 401(k) plans often come with high expense ratios and hidden fees. The average mutual fund expense ratio in a 401(k) is around 0.50% to 1.00% per year—and some actively managed funds charge even more.
In an IRA, you can choose low-cost index funds and ETFs with expense ratios as low as 0.03%, dramatically reducing the amount of your returns eaten up by fees.
Let’s put that into real dollars:
- A 1% fee on a $100,000 401(k) balance = $1,000 per year in fees.
- A 0.03% fee on a similar IRA investment = just $30 per year.
That difference compounds over time, potentially leaving you with tens of thousands more in retirement savings.
3. More Control Over Your Retirement Strategy
401(k) plans are built for group benefits, not for personal customization. This means:
- You can’t tailor your portfolio as precisely as you’d like.
- You’re subject to the plan’s default provider (which might not be the best option).
- Your investment choices are limited to what your employer has negotiated with providers.
With an IRA, you have full control:
- Want to adjust your allocation based on market conditions? You can.
- Want to invest in high-dividend stocks for passive income? No problem.
- Want to avoid high-fee funds? Easy—you make the call.
4. Potential Tax Benefits
If you roll your 401(k) into a traditional IRA, you keep the tax advantages—your money continues growing tax-deferred.
But if you roll it into a Roth IRA, you’ll pay taxes upfront but enjoy tax-free withdrawals in retirement. This can be a game-changer if you expect your tax rate to be higher down the road.
5. When a Rollover Might NOT Be the Right Move
While an IRA rollover is a great option for many, there are a few things to consider:
⏳ Vesting Schedules – If your employer matched contributions, you may not own all of those funds yet. Some companies require you to stay for a certain period before the employer contributions fully vest. If you leave too soon, you could lose part of that money.
🚫 Early Withdrawal Restrictions – If you retire early (before age 59½) and need access to funds, 401(k) plans allow penalty-free withdrawals in certain cases (like Rule of 55). IRAs don’t offer this same flexibility.
📊 Company Stock Considerations – If you hold company stock in your 401(k), special tax treatment (Net Unrealized Appreciation) might apply. Rolling it into an IRA could remove that advantage, so it’s worth consulting a financial professional first.
How to Roll Over Your 401(k) into an IRA (Without Tax Headaches)
If an IRA rollover sounds like the right move for you, the process is pretty straightforward:
1️⃣ Open an IRA – Choose a reputable brokerage or financial institution.
2️⃣ Request a Direct Rollover – Contact your 401(k) provider and ask them to transfer funds directly to your new IRA (this avoids tax withholding).
3️⃣ Choose Your Investments – Once your money arrives in your IRA, customize your investment strategy to fit your financial goals.
Final Thoughts: Take Control of Your Financial Future
Leaving your old 401(k) behind is like abandoning a half-finished project—it’s still there, but you’re not making the most of it. Rolling it into an IRA puts you in control, giving you more investment choices, lower fees, and a strategy that actually aligns with your future.
At Palmer Financial Wellness, we help professionals, startup founders, and business owners make smart moves with their retirement savings—ensuring you don’t leave money on the table.
Thinking about rolling over your 401(k)? Let’s build a smarter retirement strategy together.