Your 401(k) is a great tool for accumulation, but it’s probably not the best place to leave your money once your goals shift to distribution.  After retiring, it usually makes sense to roll your money out of your 401(k) and into your IRA.  Here’s why:

Simplification.  The average person changes jobs several times over the years.  That could mean multiple retirement plans at former employers in addition to your IRAs and other investment accounts.  During retirement, you will need to begin drawing money from those accounts.  The more accounts you have, the more complicated that becomes.  If you have multiple 401(k)s, roll them into an IRA.  If you have multiple IRAs, consolidate them into a single account.  Doing so will cut down on paperwork and expense and will make your distribution strategy easier to manage.

More choices.  Your 401(k) likely has a limited number of investment options.  That’s not the case in your IRA, where you can invest in pretty much any stock, bond, mutual fund or ETF.  More choices typically means more money, because you can choose funds with better performance and lower expenses.

More control.  When it comes to accessing your money, your IRA has fewer limitations and rules than your 401(k).  For example, you can take penalty free early withdrawals from your IRA for things like higher education or certain medical bills.  In addition, your 401(k) may have restrictions on how often you can make changes to your investment allocation. Finally, most people prefer to call the shots on their account rather than having to deal with their former employer every time they need to make a change or take a distribution.

Better beneficiary options.  Your 401(k) will typically require you to list your spouse as the primary beneficiary unless he or she consents to you naming someone else.  That can complicate planning for those in their second marriage who want to keep certain assets separate.  Also, if your spouse dies first and you haven’t named someone else, the 401(k) will typically default to your estate when you die.  That can result in unwelcome tax consequences.

With an IRA, you can name anyone as your beneficiary and that beneficiary has more distribution options than they would if they were inheriting from your 401(k).  With the IRA, they can choose to distribute the money over their lifetime, rather than being forced to take it all at once as with the 401(k).  That can spread the taxes out over many years.

Easier Required Minimum Distribution (RMD) calculations.  When you turn 70 ½, you are required to begin taking minimum amounts from your IRA and 401(k) accounts.  The fewer accounts you have, the easier it will be to calculate the correct amount and take the proper distribution.  Make a mistake and you will owe a big penalty to the IRS.


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