Should You Roll Your 401(k) Into an IRA When You Retire? The Honest Pros and Cons

"Roll it into an IRA" is the default response most people receive when they retire and ask what to do with their 401(k). Sometimes it is the right answer. Sometimes it is not. The decision is worth making deliberately, because once you roll assets into an IRA, several advantages that exist only inside a 401(k) disappear permanently.

The Case for Rolling to an IRA

The IRA rollover has three genuine advantages, and they are real. Investment choice is the most commonly cited reason. A 401(k) is limited to whatever investment menu your employer's plan offers — typically a curated selection of mutual funds, sometimes with a self-directed brokerage window. An IRA, by contrast, can hold virtually any publicly traded security: individual stocks, bonds, ETFs, mutual funds from any fund family, REITs, and more. For investors who want more control over their asset allocation or who are dissatisfied with their plan's fund lineup, the IRA provides that flexibility. RMD aggregation is a practical advantage for people with multiple accounts. Required Minimum Distributions — the annual withdrawals the IRS requires from traditional retirement accounts starting at age 73 — can be aggregated across all IRAs. If you have three IRAs, you calculate the total RMD due from all three combined and can take that total from any single account. Multiple 401(k)s cannot be aggregated this way; each plan requires its own separate RMD calculation and withdrawal. Rolling multiple old 401(k)s into a single IRA simplifies this considerably. Estate planning flexibility is the third advantage. IRAs can be more easily integrated into a trust structure or assigned specific beneficiaries with custom arrangements. Some plans make beneficiary designations more cumbersome.

The Case for Staying in the 401(k)

Here is what rolls away with the assets when you move to an IRA. Creditor protection under ERISA is the most significant advantage that most people have never heard of. The Employee Retirement Income Security Act (ERISA) provides 401(k) assets with what is essentially absolute protection from creditors, lawsuits, and judgments — outside of IRS tax liens and qualified domestic relations orders. If you are sued, if a creditor obtains a judgment against you, if you go through a lawsuit that results in a large award against you, your 401(k) assets are protected by federal law. IRA protections, by contrast, are governed by state law for non-bankruptcy situations. Some states offer protections comparable to ERISA. Others offer much less. A person who moves from a state with strong IRA protections to one with weaker protections midway through retirement may not even realize their situation has changed.

The Institutional Share Class Advantage

This is the one the industry rarely discusses openly: large 401(k) plans have access to investment share classes that are not available to individual retail investors. Institutional share classes — often labeled as R6, I, or Institutional — have significantly lower expense ratios than the retail A, B, or C share classes that an IRA investor buys. Research from the Pew Charitable Trusts and others has documented the difference: the median retail share expense ratio for equity mutual funds is approximately 34 basis points (0.34%) higher than the institutional equivalent. On a $500,000 account, that is $1,700 per year in additional fees. Over a 25-year retirement at that level, the compounding effect of higher fees produces a reduction in ending wealth that research estimates can exceed $100,000. The IRA may offer more funds to choose from. But if the funds available in your 401(k) are cheaper by 30 to 40 basis points, "more options" is not the advantage it appears to be.

The Still-Working Exception for RMDs

One advantage that is specific to a current employer's 401(k) — not old plans, and not IRAs — is the still-working exception for Required Minimum Distributions. If you are still employed by the company sponsoring the 401(k) and you do not own more than 5% of that company, you can defer RMDs from that plan until you actually retire, regardless of age. The IRS requires RMDs from traditional IRAs beginning at age 73, full stop, regardless of whether you are still working. A person who is 74 and still employed can defer RMDs from their current employer's 401(k) — but not from their IRA. For people who want to keep working past 73 and minimize forced distributions, keeping assets in the current employer's plan has specific tax-deferral value that an IRA cannot match.