The 401(k) Rollover Decision: Why Moving to an IRA Can Be a Million-Dollar Mistake
The 401(k) Rollover Decision: Why Moving to an IRA Can Be a Million-Dollar Mistake
CORE INSIGHTS
- The Backdoor Roth Block: Rolling pre-tax 401(k) money into an IRA triggers the Pro-Rata Rule. This permanently disables your ability to make tax-free Backdoor Roth contributions.
- Asset Protection: 401(k)s are protected by federal ERISA law (creditor-proof). IRAs are protected by state laws, which vary and often have caps.
- Early Access: The Rule of 55 allows penalty-free withdrawals from a 401(k) at age 55. An IRA forces you to wait until 59½.
When you leave a job, brokers scream “Rollover!” But for high-net-worth individuals, moving money to an IRA is often a strategic downgrade. You trade federal protection for state risk, and tax efficiency for complexity. Inertia is often the superior move.
What-If Scenario: The Lawsuit & The Tax Bill
| Strategy | Creditor Protection | Backdoor Roth |
|---|---|---|
| IRA Rollover | State Capped ($1.5M max) | Blocked (Taxable) |
| Stay in 401(k) | 100% ERISA Safe | Allowed ($7k/yr) |
Visualizing the Opportunity Cost
*Figure 1: Tax-Free Growth Potential. The Green Bar (Backdoor Roth Access) creates massive wealth over 20 years.*
Strategic Action Steps
If you already rolled to an IRA, move it back! Most 401(k)s accept incoming rollovers. This clears your IRA balance to $0 for Backdoor Roths.
Only roll over if your 401(k) fees are egregious (>0.50%). Otherwise, the legal protections of the 401(k) outweigh minor fee differences.
Roll old 401(k)s into your new employer’s 401(k). This keeps money in the ERISA ecosystem and simplifies your life.
The Bottom Line: Who Should Choose What?
- Keep in 401(k): High earners (Backdoor Roth users), Doctors/CEOs (High Liability), and Early Retirees (Rule of 55).
- Roll to IRA: Low balance investors (<$100k) who want unlimited investment choices (Crypto/Stocks).
Frequently Asked Questions
Does an IRA offer the same protection as a 401(k)?
No. 401(k) plans have federal ERISA protection (unlimited). IRAs are subject to state laws, which may have caps or exemptions.
How does a Rollover affect the Backdoor Roth?
It triggers the Pro-Rata Rule. If you have pre-tax money in an IRA, you cannot convert new non-deductible contributions tax-free.
Can I move my IRA back into a 401(k)?
Yes. A “Reverse Rollover” moves pre-tax IRA funds into a 401(k), clearing the IRA balance to $0 and reopening the Backdoor Roth door.