Rolling a 401k to a traditional IRA is almost always better than leaving it in an old employer plan: you get access to thousands of funds vs. a limited menu, often lower fees, and consolidation. The main exceptions: you need creditor protection (401k has stronger federal protection), you plan to do a backdoor Roth, or your old plan has exceptional institutional fund rates unavailable elsewhere.
When you leave a job, your 401(k) has four options: roll to the new employer's plan, roll to an IRA, leave it in the old plan, or cash it out. Cashing out is almost always the worst choice — you pay income tax plus a 10% penalty if under 59½.
Your Four Options Compared
- •Roll to traditional IRA: most flexibility, best fund selection, typically lowest fees — best for most people
- •Roll to new employer 401k: simplifies consolidation, maintains loan availability, protects backdoor Roth option
- •Leave in old 401k: only sensible if the plan has exceptional institutional fund rates or if you need Rule of 55 access
- •Cash out: worst option — pay income tax + 10% penalty, lose decades of compounding
Compare Roth vs. Traditional Growth
Traditional IRA vs. Roth IRA Rollover
A direct 401k-to-traditional IRA rollover is tax-free. Rolling to a Roth IRA triggers income tax on the entire amount in the year of conversion. On a $200,000 401k, a Roth conversion could create $44,000+ in additional federal taxes. It can still make sense if you're in a low tax year — but model it carefully before deciding.
The Backdoor Roth Problem
If you use the backdoor Roth IRA strategy (non-deductible IRA contribution then conversion), having pre-tax IRA money triggers the pro-rata rule — which partially taxes your conversion. If you rely on the backdoor Roth, keep pre-tax money in a 401k rather than rolling to an IRA.
How to Execute a 401k Rollover
- 1.Open a traditional IRA at a brokerage (Fidelity, Vanguard, Schwab — all free)
- 2.Request a direct rollover from your old 401k administrator (check payable to your IRA, not you)
- 3.Never take a check made out to yourself — 20% is withheld for taxes and you have 60 days to make up the difference
- 4.Confirm funds arrive and reinvest — rolled funds sit as cash until you allocate them