401(k) Rollover Guide: IRA vs Keep vs Roth Conversion | What to Choose
You’ve spent years building your 401(k). When you retire, you face a decision on what to do with the old 401(k).
In most cases, you’ll choose one of four paths:
Roll it to an IRA
Keep it in your employer’s 401(k)
Convert some or all to a Roth IRA
Cash it out
Below is a practical framework to help you decide.
A Simple Decision Checklist
Keeping the 401(k) often makes sense if:
You separate from service in or after the year you turn 55, certain workplace plans (like TSP) can allow penalty-free distributions—IRAs generally do not. If you retire early and need access before 59½, you may want to keep the 401(k) (at least temporarily).
You’re still working and using (or planning to use) backdoor Roth contributions, holding significant pre-tax money in a traditional IRA can introduce pro-rata complications.
Your plan has excellent, low-cost investments (often institutional share classes or stable value funds).
Creditor protection is a high priority (401(k)s generally have strong federal protections, while IRA protections can vary by situation and state).
Rolling to an IRA often makes sense if:
You want more investment choices. That can matter more in retirement, when you’re shifting from “accumulation” to “income and risk management.”
You have multiple old 401(k)s, rolling them into one IRA can make rebalancing, beneficiary updates, RMD and long-term planning simpler.
Your 401(k) has higher all-in costs or limited fund options.
Roth conversion may be worth modeling if:
You have “gap years” with temporarily lower income (often early retirement before Social Security/RMDs).
You want to reduce future taxable required distributions and create tax-free assets (with careful tax planning).
Cashing out is usually a last resort because it can trigger ordinary income taxes and, if you’re under 59½, a 10% additional tax in many cases.
Special Case: You Have Company Stock in Your 401(k) (NUA)
If a significant portion of your 401(k) is employer stock, you may want to explore Net Unrealized Appreciation (NUA). In the right scenario, NUA can allow the stock’s appreciation to be taxed at long-term capital gains rates rather than ordinary income rates.
NUA rules are technical and timing matters. Qualification often involves a lump-sum distribution in a single tax year and specific triggering events. This is an area where coordinating with a tax professional before executing is essential.
Disclaimer: This article is for educational purposes only and is not individualized investment, tax, or legal advice. Rules and limits can change, and the best decision depends on your specific plan, age, tax bracket, state of residence, and cash-flow needs. Please consult your tax and legal professionals before acting.
