401k or IRA? How to Make the Right Choice When Your Retire
When most people think about retirement, their 401k is often front and center. For many, it’s the single largest asset they own, making it one of the most important financial decisions they’ll ever make. The challenge is that there’s no one-size-fits-all answer for what to do with it. The wrong move could cost you thousands of dollars over your lifetime, while the right decision can give you more flexibility, lower costs, and greater peace of mind.
One of the first questions retirees face is whether or not to roll over their 401k. Many people assume rolling it into an IRA is the default option, but that’s not always the case. For example, if you retire between ages 55 and 59½, you can access funds from your 401k penalty-free. If you roll it over to an IRA, you’d lose that benefit and face a 10% penalty for early withdrawals. Similarly, if you’re doing backdoor Roth contributions, keeping money in a 401k helps you avoid the IRS aggregation rule. And sometimes, rolling older 401ks into your current employer’s plan gives you more access and flexibility when you finally retire.
Of course, there are times when rolling over to an IRA makes sense. The key is comparing costs, control, and investment choices. Some 401ks carry hidden administrative fees, so it’s important to look at the all-in cost. IRAs often provide greater flexibility in trading, more investment options, and a cleaner user experience. Having your accounts consolidated in one place also makes it easier to coordinate your investment strategy and asset allocation. On the other hand, if your 401k is low-cost with solid options, you may be better off leaving it alone.
Tax treatment is another crucial factor. Pre-tax contributions roll into a traditional IRA, Roth contributions roll into a Roth IRA, and employer matches are treated as pre-tax funds. If you’ve made after-tax contributions, you can roll those into a Roth IRA but keep in mind that any growth on those contributions is considered pre-tax and must go into a traditional IRA. Understanding these distinctions prevents costly tax mistakes.
There’s also a little-known strategy called Net Unrealized Appreciation (NUA) that can be a game-changer if you hold company stock inside your 401k. With NUA, the original cost of your stock is taxed as ordinary income, but the growth is taxed at capital gains rates, which are often lower. Imagine having $50,000 in company stock that grows to $500,000. You’d pay income taxes only on the $50,000, and the $450,000 in gains would be taxed at capital gains rates instead of ordinary income rates. That’s a powerful strategy worth considering.
Timing matters, too. With IRAs, withdrawals before 59½ usually face a 10% penalty. With a 401k, you can often take penalty-free withdrawals at age 55 if you’ve retired from the company where the plan is held. That three-and-a-half-year difference can make a big impact for early retirees who need access to funds.
So which should you choose a 401k or an IRA? It depends. A 401k might be best if it has low costs, strong investment options, or you’ll need penalty-free access before 59½. An IRA might be better if you want more control, more investment flexibility, or if your current plan has high costs and limited choices.
At Root Financial, we’ve helped countless clients navigate this decision, and the truth is that the right choice depends on your specific goals, income needs, and retirement vision. That’s why personalized planning is so important. Your 401k isn’t just a number on a statement it’s the foundation of your future. And making the right decision with it can make all the difference in the kind of retirement you enjoy.
If you’re facing this decision, don’t go it alone. I founded Root Financial to help people like you optimize your financial lives with clear, personalized strategies. Visit our website to learn more about how we can help you take the guesswork out of retirement planning.
You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns.
Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.
