Roll Over an IRA to a 401(k): The Pros and Cons

In the world of retirement account rollovers, there’s one type that doesn’t get much love: the IRA-to-401(k) maneuver, which allows you to roll pretax traditional IRA assets into a 401(k). It’s frequently overshadowed by rollovers in the other direction — 401(k) to a rollover IRA — because they’re more common. But in some cases, this less common move is also worth considering.

There are a few reasons you might want to roll a traditional IRA into a 401(k), though it should be noted you can do this only if your company plan accepts incoming transfers. Here are six of those reasons:

Potential for earlier access to that money

If you leave your job, you could start tapping your 401(k) as early as age 55. Qualified distributions from traditional IRAs can’t begin until 59½ unless you start a series of substantially equal distributions — a commitment to take at least one distribution per year for at least five years or until you turn 59½, whichever comes last. The distribution amount is based on IRS calculation methods ^[0]

Some plans may have lower costs

The operative word here is “some,” because 401(k)s can come with administrative costs and a smaller selection of higher-cost funds; in some cases, they are more expensive than an IRA. But there are cases, particularly for plans at large companies, where the investments are actually cheaper in a 401(k). This is especially true if you use managed options such as target-date funds.

Some 401(k) providers may also give you access to free financial advice, which you’ll pay for if you work with a financial advisor or robo-advisor for your IRA. Bottom line: Compare costs among your retirement plans to find out where you’re getting the better deal.

Easier conversion to a Roth

This is a bit complicated, but stick around: Many high-income earners who don’t meet the Roth IRA rules for eligibility rules want to get in on the action anyway, due to the tax-free growth this account offers. If that’s you, you can do so through a Roth IRA conversion but you must pay taxes when you convert pretax money. That gets hairy if your IRA contains both pre- and post-tax money, based on previous contributions and rollovers.

In that situation, you might want to move pretax money back into a 401(k), leaving you with only post-tax money in the IRA. That money could then be converted to a Roth IRA without adding to your tax bill. As we said, this is complicated — but potentially very valuable — so you may want to get a tax pro and/or financial advisor to help you pull this move off.

Protection against creditors

There are protections against creditors that 401(k)s have and IRAs don’t provide, including in bankruptcy and against claims from creditors. IRAs are protected in bankruptcy up to a limit of $1,512,350 per person across all plans. IRA protection from creditors may vary by state.

You may be able to put off distributions if you work longer

A traditional IRA generally requires minimum distributions to begin at age 72. A 401(k) does, too — the IRS wants to get its hands on the taxes you owe when you take those distributions, because they’ve been deferred since the contributions were made — but if you’re still working, you can postpone distributions from a 401(k) until you retire.

401(k) loans

Ideally, this should be considered as a last resort. But if you’re in dire need of money and you have nowhere else to get it, a 401(k) might offer you the option to take a loan from your own account, then pay yourself back with interest.

» See how a 401(k) could improve your retirement: Try our 401(k) calculator.

On the flip side, there are plenty of areas where a traditional IRA has a leg up on a 401(k) — that is, of course, why so many people roll a 401(k) into an IRA. Here are the top three you should know:

1. Wider investment selection: Within an IRA, you can invest in nearly anything under the sun — not just the mutual funds, index funds and exchange-traded funds that show up in 401(k) plans, but also individual stocks and even options (whether you should employ those strategies is a different story). You can also shop around for the absolutely lowest-cost funds, which can save you money. As noted above, you should look closely at your 401(k) plan and its investments to see if you’d save money by leaving your funds in your IRA.

2. More loopholes for early withdrawals: Aside from the aforementioned loans, a 401(k) may allow hardship withdrawals in certain situations — the IRS defines hardship as an “immediate and heavy need,” which means things like unreimbursed medical expenses, funeral expenses or disability. Those will waive the 10% penalty on early distributions; you’ll still owe income taxes on the withdrawal. But a traditional IRA casts a wider net, allowing early distributions without penalty — but with taxes still owed — for higher education expenses and a first-time home purchase (with a limit of $10,000).

3. Low-cost options for investment management: If your 401(k) plan doesn’t come with anything in the way of investment advice, and you want that sort of thing, you’ll have more options for getting it on the cheap within an IRA — if you’re open to a robo-advisor. (A financial advisor will help you manage investments in either account, though he or she will be relatively hamstrung by the small, curated investment selection typical in a 401(k).)

If you’ve weighed the choices and decided you’d like to combine retirement plan balances inside your 401(k) — and your 401(k) plan provider is ready and willing to take those IRA assets — there are steps you need to take to do it right.

First, know that you can’t roll a Roth IRA into a 401(k) — not even into a Roth 401(k). We’re specifically talking about pretax money in a traditional IRA here. The IRS ^[0]