Should I Roll My 401(k) Into an IRA When I Retire?
For Most Retirees, I Like the Simplicity of an IRA
You retire. You have $1 million, $2 million, maybe considerably more sitting in a 401(k), and now you have a decision to make: leave it where it is or roll it into an IRA.
For most retirees I work with, I generally like the rollover. Not because there's anything inherently wrong with a 401(k). Some 401(k)s are excellent. But once you retire, the job of your money changes. You're no longer just accumulating assets every paycheck. Now those assets have to help fund your lifestyle, generate distributions, handle market volatility, and work together with everything else you own.
That's where I think consolidation becomes really valuable.
A 401(k) Was Built for Accumulation
During your working years, a 401(k) is fantastic at what it's designed to do. Money comes out of your paycheck automatically, you select investments from the plan menu, and hopefully you leave it alone for 30 or 40 years.
Retirement is different. Now you need to decide how much money comes out, where it comes from, how much cash to maintain, what to sell, when to rebalance, and how the portfolio fits with the rest of your financial life.
An IRA generally gives you a much broader investment universe. Instead of being limited to whatever menu your former employer selected, you can typically use ETFs, individual stocks, bonds, CDs, Treasuries, money-market funds and other investments. That flexibility gives you the ability to actually build the portfolio around the retiree rather than trying to build the retiree's plan around the limitations of an old employer's 401(k).
Consolidation Makes Retirement a Lot Simpler
This may be the biggest advantage.
It's not unusual for someone to retire with a 401(k) from their most recent employer, another retirement account from a job 15 years ago, an IRA somewhere else, and maybe their spouse has another two or three accounts.
You can manage retirement that way. I'm just not sure why you'd want to.
Consolidating eligible retirement accounts into an IRA can give you one portfolio, one investment strategy, one place to take distributions from, and one account to manage instead of having pieces of your retirement scattered everywhere.
It can also make required minimum distributions much easier later. If you have multiple traditional IRAs, you generally calculate the RMD for each IRA but can take the combined amount from one or more of those IRAs. RMDs from multiple 401(k)s generally have to be satisfied separately from each plan.
So instead of tracking distributions from three different old 401(k)s every year, consolidation can make the process much cleaner.
Retirement already has enough moving parts. I don't see much value in creating more of them.
The Bigger Benefit Is Actually Being Able to Plan
This is where I think the rollover conversation gets reduced too often to investment choices and fees.
Those things matter. But what I really want is coordination.
If your retirement assets are scattered across three old 401(k)s and two IRAs, each account can end up becoming its own little island. One account is invested aggressively. Another is conservative. One has cash. Another has bonds. Distributions come from whichever account happens to be easiest at the time.
That's not really a retirement strategy.
When the accounts are consolidated, you can look at the retirement portfolio as one portfolio. You can decide how much should be invested for growth, how much should be positioned more conservatively, where future distributions are going to come from, and how the entire thing fits together.
And this is where an advisor should be doing more than simply picking investments. Are you getting actual retirement planning? Is someone coordinating your investments with your income needs? Is there a strategy for distributions? Is someone rebalancing the portfolio and making decisions based on the entire picture rather than looking at one account at a time?
That's actual planning.
The rollover isn't valuable because the letters on the statement change from “401(k)” to “IRA.” It's valuable because of what you can do with the money once everything is coordinated.
Sometimes the Biggest Value Is Preventing a Big Mistake
I just met with a couple a couple of months ago who had recently retired. They had done a great job saving and had accumulated plenty of money for retirement.
But when I looked at their accounts, both of them were sitting in nearly all cash equivalaents.
At the time we met, the stock market was up roughly 12% for the year.
They weren't that way because they had some sophisticated investment strategy. They decided to do it since they had retired, the responsibility for managing this money suddenly felt very real, and they were afraid of making a mistake.
This is something I see with retirees more than you might think. When you're working, you have a job. Your 401(k) is over there doing its thing, money goes into it every paycheck, and hopefully you don't spend much time messing with it. Then you retire and suddenly your investment portfolio can become your new hobby.
You have more time to watch the market, read financial news, check your accounts and worry about every move. And the money feels different now because there isn't another paycheck coming in every two weeks to replace it.
That's when fear can start driving decisions.
Vanguard has studied the value financial advisors provide for years through its Advisor's Alpha research, and one of its biggest conclusions is that behavioral coaching can be one of an advisor's most valuable jobs. Vanguard estimates behavioral coaching may add 1% to 2% in net returns and has pointed out that preventing even one significant behavioral mistake could potentially offset years of advisory fees.
I sometimes think of that as big-mistake insurance.
You don't necessarily need an advisor because they're going to find some magical investment nobody else knows about. Sometimes the value is much simpler than that. It's having somebody there to say, “No, we're not moving everything to cash.”
Or, in the case of the couple I just met, having somebody help them get the money invested in the first place.
That's also why I like consolidation after retirement. I would much rather have one coordinated portfolio built around an actual retirement plan than have someone staring at three old 401(k)s, two IRAs and a pile of cash trying to figure out what to do next.
Simplification isn't just about convenience. Sometimes it keeps you from making a very expensive mistake.
Some 401(k)s Are Really Good
That doesn't mean everybody should automatically move everything.
Large employers can sometimes negotiate extremely inexpensive institutional investment options. Your 401(k) may have low administrative costs and an excellent lineup of investments. If that's the case, it deserves consideration.
But I'd still ask the same question: What are we gaining by leaving it there?
If the 401(k) is inexpensive but now leaves one major piece of your retirement sitting outside the rest of your investment and income strategy, cheap isn't necessarily the same thing as better.
Cost matters. So does planning.
There's One Exception I Pay Particular Attention To
One of the biggest reasons to be careful involves people retiring relatively young.
If you separate from your employer during or after the calendar year in which you turn 55, distributions from that employer's qualified plan can qualify for an exception to the 10% additional early-distribution tax. That separation-from-service exception doesn't apply to IRAs.
So imagine retiring at 56 and immediately rolling your entire 401(k) into an IRA without thinking about it. You may have just given up a potentially valuable withdrawal option before age 59½.
That's exactly why I don't like automatic financial advice.
The answer can still be a rollover. But we need to understand what we're giving up before we move the money.
If You're Going to Roll It Over, Keep It Simple
If the decision is to move the money, I generally prefer the cleanest route: a direct rollover from the 401(k) to the receiving IRA.
With a direct rollover, the eligible assets go directly to the IRA rather than being paid to you. That's important because an eligible retirement-plan distribution paid directly to you is generally subject to mandatory 20% federal withholding, even if you intend to roll it over later. That withholding doesn't apply when the money is rolled directly to the IRA.
I don't see much reason to have a million-dollar retirement check made payable to you, stick it on the kitchen counter and start a 60-day clock if you don't have to.
Move it directly.
What Gets Better After the Rollover?
That's ultimately the question I care about.
Can we consolidate three or four retirement accounts into one? Can we create one coordinated investment strategy instead of managing a collection of unrelated accounts? Can we simplify distributions? Can we make RMDs easier down the road? Can we build the portfolio specifically around how you're actually going to use the money in retirement?
And maybe most importantly: Are you getting actual planning and advice instead of just having a 401(k)?
For most retirees, I think the answer to several of those questions is yes. That's why I'm generally a fan of consolidating old 401(k)s into an IRA after retirement.
It's not about moving money just for the sake of moving it. It's about turning a collection of retirement accounts into an actual retirement plan.
A good 401(k) helped you accumulate the money.
A well-structured IRA—and a real plan for how to use it—can make it much easier to actually retire with it.
