Benefits of Rolling a 401k Account into an IRA
Moving assets from a 401k account into an IRA has many potential benefits. First and foremost, it gives the account holder much more control over the assets once they arrive in the IRA. Instead of the IRA being under the control of the employer (as in the case of the 401k), it’s totally under the control of the account holder.
Second, employer-provided plans usually give account holders a much smaller selection of investment vehicles to choose from. Often, these selections are just a handful of mutual funds. An IRA, by comparison, delivers the entire U.S. securities market, including every stock and ETF that trades on the major exchanges. IRAs at some brokerage firms will deliver an even wider selection, including option contracts, bonds, and the over-the-counter marketplace.
A third advantage is that most Individual Retirement Accounts nowadays will be cheaper to manage. This is because mutual funds of different share classes can be purchased, and these typically have lower expense ratios than the mutual funds available in some employer-provided 401k accounts. The availability of ETFs creates even less expensive choices.
A fourth benefit of rolling over a 401k is that tax harvesting is possible. Tax harvesting is simply capitalizing on the government’s tax policies for retirement accounts. For example, rolling over a 401k account into a Roth IRA in a tax year when you have low income results in a lower tax bill compared to a year when you have high income. Managing the rollover in a tax-wise way results in greater savings.
Taxation of 401k Rollovers
Speaking of taxation, a 401k rollover may or may not be a taxable event. You should always consult a qualified tax professional before pulling the trigger and doing a rollover.
What actually happens in a 401k-to-IRA rollover is that securities and cash inside the 401k are transfered
into the IRA. The 401k account isn’t actually moved. It is closed when the securities and cash are
transferred out. It is simply a transfer of assets from one investment account to another.
When cash and securities are moved from a 401k to an IRA, the Internal Revenue Service wants to know about it, so a 1099-R will be created. You’ll need to hang onto this form and file it with your taxes, even if the Form 1099-R shows that you don’t owe any taxes on the rollover.
This is certainly a possibility. Let’s say you move funds out of a Roth 401k into a Roth IRA. Because both accounts have the same tax structure, it’s not a taxable event. Nevertheless, Uncle Sam wants to know the transfer took place, so a 1099-R will be generated (showing no taxable amount).
But if the rollover is from a Traditional 401k into Roth IRA, that’s a different story. In this case, it is a taxable event because the original 401k contributions were tax deductible. Under IRS regulations, taxes must be paid before contributions go into a Roth account. So the 1099-R will show a taxable amount. The full amount of the transfer will be considered taxable income on next year’s tax return.
Although IRAs have annual contribution limits, a rollover is not considered a contribution, so there is no maximum rollover amount. This is a good way to get a large amount into an IRA in a single year.
The taxation of 401k rollovers can be complicated, so we recommend visiting with a CPA or other tax expert before making a decision.
Types of 401k Rollovers
There are several circumstances under which 401k assets can be moved into an IRA. Here are some examples:
Attainment of normal retirement age: Typically this is 59½. At this age, the IRS is less grumpy about withdrawals and transfers.
Ebd of employment: This is the time that most employers allow their employees to perform 401k rollovers.
In-service distribution: Some employers allow their employees to move assets into an IRA before leaving the company. It’s definitely a good idea to ask if this is a possibility with your employer so that you can capture the benefits an IRA offers (discussed above).
Death: Self-explanatory.
Divorce: Under IRS Code Section 414(p), assets can be moved into an IRA under a marital settlement agreement.
To perform a 401k rollover, contact the plan administrator and ask for a “direct rollover” to your new IRA.
Types of Individual Retirement Accounts
Personal IRAs come in two basic varieties: Roth and Traditional. The latter offers tax-deductible contributions, but withdrawals are taxed. Contributions to a Roth are not tax deductible, so withdrawals are generally tax free.
The IRS can impose penalties for violating the rules. Generally, the age at which there are no penalties on withdrawals is 59½. The punishment for an early withdrawal is usually 10% of the withdrawal. There are other rules, though. For example, the Roth IRA also has to be at least 5 years old (starting from the first contribution). As always, consult your tax advisor.
Pretty much all brokerage houses that offer Individual Retirement Accounts will offer Rollover IRAs.
Besides the personal accounts, there are also small business IRAs. These come in multiple varieties, too.
First is the SEP IRA. This account uses pre-tax dollars for small businesses of any size, including just one employee, the business owner. The maximum annual employee contribution is $61,000 or 25% of income (20% for self-employed persons), whichever is less.
Next is the SIMPLE IRA. This one has lower contribution limits: $14,000 in 2026 with a $3,000 catch-up amount for persons over age 50. Unlike the SEP IRA, the SIMPLE requires employer matching contributions.
Both SEP and SIMPLE plans use pre-tax dollars for contributions, meaning that contributions are tax deductible.
Contributions to a SIMPLE IRA have a 2-year holding period before they can be rolled over to a Traditional IRA (violating this rule comes with a steep 25% penalty).
IRA Availability and Cost
Not all brokerage firms offer personal IRAs, although most do. Robinhood is one of the few brokers still without an IRA offering.
Those that do have IRAs may charge annual and closeout fees, although these are quickly disappearing. TradeStation, for example, has a $35 annual IRA fee and a $50 IRA closeout fee. Fidelity has neither.
Some brokerage firms may not offer small business plans (the SEP and SIMPLE accounts), although most will offer at least one type. Acorns, for example, has the SEP but not the SIMPLE.
IRAs usually have the same commission schedule as other accounts. Nowadays, this means $0 trade fees on stocks and ETFs, making an IRA a great choice over a 401k.
Robo IRAs
Another advantage that IRAs have over workplace 401k accounts is the robo option. Many brokerage firms today offer automated management for retirement accounts, and some of these are very low cost, even free in some cases (Ally Invest, for example).
Just answer a few questions and the broker’s software program will create a low-cost ETF portfolio that becomes more conservative as the date of retirement nears. It’s an easy, hands-off way to prepare for life after work.
Updated on 1/15/2026.
Chad Morris is a financial writer with more than 20 years experience
as both an English teacher and an avid trader. When he isn’t writing
expert content for Brokerage-Review.com, Chad can usually be found
managing his portfolio or building a new home computer.
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