Is Rolling Your 401(k) to an IRA Always a Good Idea?

When I left Prime Computer, I rolled my 401(k) into an IRA on the way out, and I kept that habit for the rest of my career. For years it looked like the smartest money decision I made. It also quietly cost me the backdoor Roth, and I didn't find out until years later.

Where My 401(k) Would Have Gone

In 1988, shortly after Prime bought Computervision, Bennett LeBow's MAI Basic Four made a hostile bid for Prime. To escape it, Prime agreed to a $1.3 billion leveraged buyout by J.H. Whitney and came out of it with about a billion dollars of debt. Prime's poison pill fully vested my pension and locked it in at my salary at the time. The layoffs that followed cut Prime's workforce by more than half. I stayed through them, and in 1992 I left for LSI Logic, rolling my 401(k) into an IRA on the way out.

Here's what would have happened to that money if I'd left it in the plan. In 1992 Prime renamed itself after the company it had bought, Computervision. PTC bought Computervision in 1998, and its 401(k) plan was sued over excessive fees and settled for $1.7 million in 2021. In October 2026, Schneider Electric agreed to buy PTC for $22.6 billion. Money I put in during the 1980s would be heading for its fifth owner, this time a French one. None of those decisions would have been mine.

My pension did stay behind. It was frozen in 1990, under the new owners and two years before I left, and in 2014 PTC, a company I never worked for, began terminating the plan. I could take a lump sum or an annuity PTC bought from an insurance company. In 2015 I took the lump sum and rolled it into my IRA. The lump sum was about what the payments were worth at the interest rates of the time, and the payments themselves had no cost-of-living increase. I had a mild worry about the insurer, but mostly I wanted to manage my own money, and I've never liked annuities as an investment.

That's the case for rolling over: when money sits in an old employer's plan, the plan makes the decisions. But control has a price, and it depends on where you are in your career.

Why Rolling Over Usually Wins Near Retirement

By the time you retire, an IRA does almost everything better.

• Roth conversions on your schedule. The years between retiring and claiming Social Security are often the cheapest time to convert, a little each year, filling a tax bracket. Many plans let a former employee take only a full distribution or fixed installments, which makes that hard or impossible. I wrote about those years in Crossing the Tax Valley.
• Qualified charitable distributions. From 70½ you can give up to the annual limit straight from an IRA to charity, tax-free, and it counts toward your RMD. You can't do it from a 401(k).
• One set of RMDs. IRA required distributions can be added up and taken from any of your IRAs. A 401(k)'s RMD has to come out of that plan.
• Your own investments, at your own cost.

What Rolling Over Costs You Earlier

Earlier in a career, an IRA rollover can close doors you don't know are there.

The backdoor Roth. Above the Roth IRA income limits, you can contribute to a nondeductible IRA and convert it to a Roth. The catch is the pro-rata rule: the IRS looks at all your pre-tax IRA money on December 31, and only the after-tax share of the conversion is tax-free. A $500,000 rollover IRA turns a $7,500 backdoor contribution into a mostly taxable conversion. Money in a 401(k) doesn't count. That's what my rollover habit did to me. Not that I could have seen it coming. When I first rolled over, Roth IRAs didn't exist; Congress created them in 1997. The backdoor only opened in 2010, when the income limit on conversions went away. The rules change, so when keeping an option open costs you nothing, keep it open. I wrote about my other backdoor Roth mistake in Don't Fall into the Backdoor Roth Trap.

What I didn't know: it can be undone. If your current employer's plan accepts incoming rollovers, you can move your pre-tax IRA money into it. Your IRA balance drops to zero, and the backdoor opens again. After-tax money can't go into the plan, so it stays behind, ready to convert. This is the reverse rollover.

The Rule of 55. Leave your job in or after the year you turn 55, and withdrawals from that employer's plan skip the 10% early withdrawal penalty. Roll it into an IRA and you wait until 59½. If you might retire early, this matters.

Smaller things. Some plans let you make after-tax contributions and convert them, the "mega backdoor Roth", but only while you're in the plan. Money in your current employer's plan can skip RMDs while you're still working there. And employer plans have unlimited protection from creditors. IRAs are protected in bankruptcy too, including everything rolled in from a plan, but outside bankruptcy it depends on your state.

A Tiebreaker for Your Heirs

One difference shows up only after you die. A child or other non-spouse heir who inherits a 401(k) can move it directly into an inherited Roth IRA, paying the tax as they convert. An heir who inherits an IRA can't. The inherited Roth still has to be emptied within 10 years, but everything it earns in that time is tax-free, and the heir can spread the conversions over the years with lower income. If your heirs face the 10-year rule I wrote about in The 2030 Inherited IRA Tax Bomb, that's a real option.

It depends on the plan's rules decades from now, and some plans pay beneficiaries out quickly. Treat it as a tiebreaker, not a reason to leave money behind.

So, Roll Over or Not?

It depends on where you are:

• In your 30s and 40s: if you earn, or expect to earn, above the Roth IRA limits and your new employer's plan is good, roll the old 401(k) into the new plan, not an IRA. That keeps the backdoor open. Below the limits, an IRA is fine.
• In your 50s: if there's a chance you'll retire early, think about the Rule of 55 before rolling out of your last employer's plan.
• Near and in retirement: roll over. Conversions, QCDs and one set of RMDs usually outweigh everything else, unless your plan is cheap and allows partial withdrawals and conversions.
• At any age: never cash out, and give instructions when you leave. Plans can force out balances under $7,000, into an IRA you didn't choose, or as a check under $1,000.

If you've lost track of an old plan, the Department of Labor's Retirement Savings Lost and Found can search for it, and the PBGC can help find pensions from terminated plans. Out of curiosity I searched it. It still lists my Computervision pension, frozen in 1990 and reported in 1993, even though I took the lump sum years ago. A match tells you a plan once owed you something, not that it still does.

Why I Built It This Way

WhenIm64's Roth conversion plans convert a slice of your IRA every year, sized to the tax bracket and Medicare surcharge threshold you choose. That only works if you can take a slice. It's the strongest reason to have your money in an IRA by the time you retire, and the main reason I'd still roll over at that point. You can see how the conversion years play out in WhenIm64's demo, which follows a retired couple in Austin, Texas. To run your own, create a WhenIm64 account.

If you have an old 401(k) at a former employer, look up who owns the plan now. You may be surprised.

Ben Sprachman is the founder of WhenIm64.ai, a retirement planning tool for people navigating retirement. He is not a financial advisor or tax professional. This article is for educational purposes only. Consult a qualified tax advisor for guidance specific to your situation.