Retirement savings: Risks and rules of 401(k) to IRA rollovers

Retirement savers can potentially roll over funds from a 401(k) to a Roth IRA while still employed, provided the employer’s plan allows for in-service distributions. Moving pre-tax money from a traditional 401(k) to a Roth IRA is generally treated as a Roth conversion, meaning the amount is added to the individual's taxable income for that year.

While millions of Americans participate in rollovers—with $682 billion moved into IRAs in 2023—financial advisors warn of significant risks. Most rollovers from a 401(k) to an IRA are irreversible. Additionally, IRAs may carry higher annual investment fees than workplace plans because individual investors lack the collective purchasing power of employers to access lower-cost institutional shares. While IRAs offer greater investment flexibility compared to the curated selections in most 401(k) plans, the expanded choice can lead to decision paralysis or exposure to intermediaries without fiduciary obligations.