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Why Roll Your 401k to an IRA?

When you stop working for a company where your 401k lives, you basically have four choices.

  1. cash out the money in the form of a distribution, on which you will pay income taxes and, if you are under 59 1/2, an additional 10% penalty. That’s almost always not a good idea.

  2. you can usually just leave the money where it is. Many employers will allow ex-employees to maintain accounts indefinitely.

  3. if you have a new job with a new 401k plan, you can transfer the money from your old 401k to the new one.

  4. (the best course of action for just about everybody) is to roll the 401k over into an IRA.

Why You Should Roll Your 401K to an IRA

Rolling over your 401k into an IRA is the best way to make sure that the money in those accounts in invested according to the best proven investing strategies (investing in a risk-appropriate, well-diversified portfolio of low-cost mutual funds which have a tilt toward small and value. And with an IRA rollover, you preserve all of the existing tax advantages of your 401k. Here are some of the benefits of rolling to an IRA:

1. More and Better Investment Options

In an IRA, you can select your own investments. You won’t be limited to the funds and managers selected by your employer. Consider that the average 401k employer plan contains just 13 investment choices making it difficult, if not impossible, to achieve a diversified portfolio whereas an IRA can give you access to thousands of investments, including stocks, bonds, CDs, and mutual funds.

(note: Among the investment choices that you will gain access to by rolling your 401k to an IRA are the funds from DFA. I believe strongly in the approach to inverting developed by DFA (Dimensional Fund Advisors). The vast majority of my personal investments are with DFA. Their approach is based on the best academic research by Fama and French, which resulted in the Three-Factor model of investment returns (the market factor, the value factor and the size factor). DFA Investment Strategies are designed to take advantage of these factors AND … DFA funds are almost never available in 401ks.

You can read more about DFA Funds at the DFA Page on my website –

2. Lower Fees

Under a 401k, the average annual administration fee charged to your account is 0.50 percent (Morningstar and Deloitte recently published a study that found that participants in employer-sponsored retirement plans paid administrative fees averaging 0.72% of assets. That’s on top of fund expenses (which, due to poor investment options, are often unreasonably high in a 401k to begin with).

These fees represent money that is being wasted and ,worse, this money isn’t being used to fund your investments. Most IRA rollover accounts do not have any administrative fee associated with them. This represents an immediate savings. In addition, because you can choose where to invest with an IRA account, you’ll get to take advantage of funds that typically have lower expense ratios than funds available through your 401k.

Note: A small reduction in expenses over the course of many years represents a significant savings. The average person retiring at age 60 should expect to have that money invested and growing for 30 years, or more. To demonstrate the power of lower fees, consider this: $500,000 invested at an 8% growth rate for 30 years will become approximately $5,031,000. If the return is eroded by higher expenses of only .5% (resulting in a 7.5% return, that amount drops to only $4,377,000 – $654,000 less (13% less money). This could have a significant impact on you standard of living during those thirty years.

3. Easier Account Management

With your retirement money earned from prior jobs in a single place you will have better visibility over your money and it will be easier to manage

4. Easier Asset Allocation

With one account for consolidating your retirement assets, you’ll be able to more readily see the mix of investments in your portfolio and adjust the balance as necessary to stay on track with your retirement goals.


  1. The biggest of several motivations for rolling your 401k is that you can then invest your IRA in almost anything you want to.

  2. You avoid the hidden 401k costs and can select the best low-cost investments, resulting in higher returns and increased wealth.

  3. It is also likely to make dealing with your investments a little simpler.

Here is an excerpt from another article addressing this subject:

If you leave a job, what you generally want to do is roll over your 401k into an IRA. And in this case, when I say “generally” I mean very nearly always. An IRA is basically the same as a 401k except that you can choose any investment you like rather than the short list available in a 401k, the fees are transparent, and the customer service is often much better.

Finding reasons why a person might want to stay in a 401k is not easy and quickly degenerates into a personal finance trivia game. The 401k might have access to special investment options not available IRAs belonging to the general public.

But even when added together these reasons can only apply to a tiny slice of the ex-employee population. If it is as much as 1% I would be surprised. For just about everybody there is nothing to discuss.

Roll your 401k into an IRA as soon as you can navigate your way through all the helpful folks trying to talk you out of it.

Generally, I tend to favor “it depends” as an answer to personal finance questions that many pundits answer with an unequivocal yes or no. But in cases like this, where the answer is a no-brainer for just about everybody, the answer is clear.

From Another Article:

I often harp on the point that one-size-fits-all personal finance advice is unwise, but this is one of those situations where a universal rule almost works. For most folks, there’s just not much to talk about. Search the web for advice on this and you won’t find very much because few writers think it is worth mentioning. A recent post on Smart Money’s sister blog The Wallet discusses a variety of issues surrounding 401ks if you are laid off and mentions, in passing and without discussion, that rolling over into an IRA is what most planners advise.

I’m in complete agreement. Get your money out of that 401k as soon as possible.

You can read a couple of other articles here:

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