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Top 4 Reasons to Roll Over Your Old 401K to an IRA


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written by: victoria mcgruder, cpa, cpwa®

We are in the midst of what’s called the Great Resignation. Millions and millions of people are leaving their jobs and careers to seek other professional opportunities or are simply waiting for something better to come along. So what better time to talk about the reasons to roll over an old 401K to an IRA than a time where there are millions of people leaving their employers and their 401Ks behind.

According to a white paper created by HiCapitalize, an estimated 24.3 million 401(k) accounts and $1.35 trillion in assets have been left behind by job changers.

I cannot tell you how many times I have had a conversation with a client where one of these comments is made when discussing an old 401K… “forgot about that one” or “oh it’s so little, it doesn’t even matter” or “oh yeah, I have been meaning to roll that over for years.”

Life gets busy and if we don’t take action and make it a priority now, it is going to continue to get more and more challenging to make it a priority as you add responsibility and change to your life. So let’s go through your options and talk about the why behind rolling over your 401K.

When you leave a company and in turn a 401K, you have a few options on what to do next:

Your contributions to your 401K, or employer provided retirement plan, are yours. Your employer contributions are subject to the employers terms and may require you to work there for a specified amount of time for their contributions to “vest” or to transfer ownership to you.

But the bulk of the 401K that you contributed to is yours to do what you want with. So what are your options?

You May keep your old 401K within the employer plan

  • You will no longer be making employee contributions to it, nor will it be receiving employer contributions. But it will remain invested in accordance with how you left it. (Most employers allow this, but I would still advise you confirm with your employer or plan administrator to ensure you may leave your 401K as is until you have determined how to move forward with it).

You May be given the option to roll it over into your new employer 401k plan

  • Again, this will depend on your new employer plan and their offerings, but this may be an option for you to consider in an effort to consolidate your 401ks.

You may roll over your 401K to a Rollover IRA

  • If you have a Roth 401K, you may rollover to a Roth IRA.
  • If you have a Traditional 401K…
    • You may rollover to a Traditional IRA or,
    • You may rollover to a Roth IRA….with the understanding that the full distribution and rollover will be taxed at ordinary income rates. In this scenario, you are going from a Pre-Tax (no tax yet paid) to a Post-Tax (Tax already paid) investment vehicle and thus you must pay tax on the money going into the new post-tax Roth IRA first.

In my opinion, probably the best and easiest option for you would be to roll your old 401K plan over into a Rollover IRA. Here’s why.

The Top 4 Reasons to Roll Over Your 401K to an IRA

1. Lower Administrative Costs and Fees

Often times 401K plans will have an element of administrative costs along with the expenses associated with your investment selection. These fees could range from anywhere between 0.50% – 2% depending on what you are invested in and the size of the employer plan. That is a meaningful fee that is eating away at your investment returns when, in most circumstances, the account is not even being actively managed by a professional.

If you were to roll over to an IRA, you would have the option to do any one of the following:

  • Open an account at a brokerage firm (like Fidelity, Vanguard, Charles Schwab), self-manage the account and typically only pay for the investment fees related to the specific investments you have purchased.
  • Open an account with a Robo-Advisor to have managed for you based on your time horizon and risk tolerance for a minimal fee.
  • Hire a financial advisor to have your IRA actively managed by an advisor for a fee.

    Opening an account to self manage or opening an account with a robo-advisor would be your cheapest options for your roll over and would save you significant amount in fees over time as a comparison to leaving your 401K in your previous employer plan.

2. More Investment Options

When investing in your employer provided retirement plan, your options for investing are limited to a range of pre-approved funds. You are limited in your investment selection and do not have the option to invest in whatever it is that you want.

If you were to open an IRA, you would have access to invest in individual stocks, bonds, ETFs, mutual funds, etc. and would not be limited to a pre-approved list of options.

3. Financial Control

401Ks provide you with little control aside from choosing investments from a list of pre-approved funds and how much you plan to contribute. But especially when you leave your employer, please take into consideration that you now may no longer be kept abreast of any plan changes.

401K plans also tend to limit the amount of changes you can make to your portfolio throughout the year. So often times, you are not able to buy and sell your investments at your discretion.

Once I leave my employer, I want the freedom to decide where my account is held, how it is invested, what changes I make to it and when and the fees being charged. You will find that type of control by opening an IRA.

4. Convenience & Ease

I am a big proponent of creating an organized financial life that makes it easy for you to manage. Easy for you to review, gain access, and monitor. Keeping assets at old employers, having accounts at this firm and that firm, will inevitably create an environment that will become very difficult to manage.

Make this part of your life as simple as you can.

How Do I Roll Over My 401K?

I am a huge advocate for taking action and rolling your old 401K over into a rollover IRA because I will say it again, life gets busy and if you’re not going to make it a priority now it will be very hard to imagine that you will make time for it later.

But lucky for you this, at one time, very time consuming and tedious process of rolling over an old 401K to an IRA has just been made so much simpler for individuals and I couldn’t help but share it.

Of course, you have the option to take matters into your own hands, open an account, call (yes call, most don’t allow you to do this electronically) your plan administrator to have the funds rolled over, spend about an hour+ of your life on the phone (trust me on this one) to help you rollover……

OR you have the option to use a new FinTech company Capitalize.

Capitalize takes over all of the mundane paperwork and time consuming process around rolling over your old 401K to a new IRA and they do it as a free service to you. Their compensation is through the brokerage firm that YOU choose to open your rollover IRA account with.

If you have been waiting to roll over your 401K or it just seemed like an annoying process you don’t have time for – click on the link below to roll it over now. If not now, then when!

Click here: Roll Over Your 401K to an IRA With Capitalize

It does seem too good to be true. But I recently just participated in the process for my own old 401K so that I could write about the process for you, and I can assure you that they make it incredibly easy and it was a seamless process.

I will be posting a step by step guide on how to roll over your 401K using Capitalize in a blog post next week! Stay tuned for the step by step process!

Tune in to more weekly blog posts every Tuesday and Thursday!

Follow @finpoweredfemale for more personal finance, tax, investing and business ownership tips on building wealth with confidence!

hey there, i want to introduce myself!

Thank you for being here - I'm Victoria!

I'm a financial advocate, coach, and blogger on a mission to help you build wealth with confidence! 

Having worked closely with countless clients over my 14 year career, I've gained a very deep understanding of money management and effective planning strategies in guiding individuals and families towards financial success. Now, I want to share that wealth of knowledge and insight to empower YOU to take control of their finances, make well-informed decisions, and create a life of abundance without the stress of finances looming over you. I'm so glad you're here! 

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