Why Roll Over a 401(k) or 403(b) to an IRA After You Leave Work

Short answer: An IRA usually gives you more control, more flexibility, and smoother planning than leaving money in an old employer plan. But "Can I roll over?" and "Should I roll over?" are different questions. This post outlines the best reasons to roll over, the key exceptions when you might want to wait, and the most straightforward way to do it.

Why an IRA often wins

1) Faster updates and fewer roadblocks

Rules change (hello, SECURE Act), and plans can be slow to adapt. In an IRA, you and your advisor can adjust quickly to beneficiary language, RMD strategy, and Roth coordination without waiting on a plan administrator's processes.

2) Fewer headaches for your heirs

Many plans don't want to administer 10 years of post-death distributions or track "exception" cases. Some will force a lump sum to beneficiaries because it's easier for them. An IRA allows heirs (or a trustee) to follow the 10-year rule or, when applicable, life-expectancy payouts, without having to navigate the plan's bureaucracy.

3) Estate plan flexibility (with the right paperwork)

Employer plans often require your spouse as the beneficiary unless your spouse signs a waiver. With an IRA, you can design clean primary and contingent beneficiaries (and use per stirpes for family branches). Key: If your plan requires a spousal waiver, file it before distributing the plan money.

4) A bigger investment menu

IRAs offer a wide range of investment options. You're not limited to a short plan lineup, and you can pivot quickly when markets shift.

5) Easier access to your money

Plans can restrict withdrawals, especially before 59½. IRAs generally provide you with immediate access (subject to taxes and a 10% penalty if you are under 59½). You may not use this often, but having the option is still valuable.

6) One home base for retirement money

Rolling old plans into one IRA simplifies life: one statement, one beneficiary setup, and a single strategy for RMDs.(IRAs let you aggregate RMDs across your IRAs and take the full amount from anyone; most plans require you to take each plan's RMD separately.)

7) Withholding your way

Plans usually must withhold 20% on eligible rollover distributions paid to you. In an IRA, you can choose to opt out, pick 10%, or set a higher number. (This is withholding, not the final tax bill.)

8) Better real-world service

As an ex-employee, getting thoughtful help from a plan call center can be tough. Working directly with an advisor in an IRA means you get proactive planning when taxes, rules, and family needs change.

9) Cleaner options for non-spouse beneficiaries

By law, non-spouse beneficiaries can transfer inherited plan money to an inherited IRA via trustee-to-trustee transfer. In practice, executing everything post-death through the plan can be cumbersome and prone to errors. If the money is already in an IRA when you pass, your family's job is usually simpler.

10) QCDs only come from IRAs

If you plan to use Qualified Charitable Distributions (QCDs) at 70½+ to keep gifts off your tax return and satisfy RMDs, you need IRA dollars. QCDs don't work from 401(k)/403(b) plans.

Fair warning: when not to roll over(yet)

Rolling to an IRA is common, but not always now. Here are four smart reasons to pause:

1) The age-55 plan exception

If you separate from service in the year you turn 55 or later (or age 50 for many public-safety workers), withdrawals from that employer plan are exempt from the 10% penalty. If you roll to an IRA, that exception vanishes until 59½. If you need near-term income, leave enough in the plan to use this rule.

2) The "still-working" RMD exception

If you're still working and roll pre-tax money into your current employer's plan (and the plan allows it), you may delay RMDs past age 73 or 75 (Determined by year of birth 1960) while you remain employed. That exception doesn't exist for IRAs. If you want to minimize RMDs while you're still on the job, consider the plan.

3) Creditor protection

ERISA plans (most 401(k)s) have strong federal creditor protection. IRAs are protected mainly under state law (and federally in bankruptcy). If liability risk is a concern, compare your state's IRA protections with those of your plan before rolling.

4) Employer stock with significant gains(NUA)

Hold highly appreciated company stock in your plan. The Net Unrealized Appreciation (NUA) strategy can be a home run:you pay ordinary income tax on the cost basis now and long-term capital gains on the appreciation later. Roll that stock to an IRA, and you lose the NUA break. If NUA might apply, analyze it before you roll.

Quick decision path (so you don't step on a rake)

Step 1: Can it be rolled?

Not all plan payouts are eligible. You cannot roll over RMDs, hardship withdrawals, certain corrective distributions, and a few other types of distributions. Putting ineligible dollars into an IRA creates an excess contribution (6% penalty each year until fixed). Take your RMD before you roll your plan.

Step 2: Should it be rolled now?

If you plan to use the age-55 exception, the still-working exception, or a NUA strategy, consider waiting (or rolling over part and leaving part) to maximize your benefits. If none of those apply, the IRA's flexibility, QCD eligibility, and heir-friendly administration usually win.

Step 3: If rolling, do it clean.

• Use a direct (trustee-to-trustee) transfer, no 60-day clock, no 20% mandatory withholding.
• Review the Custodian's Special Tax Notice before starting the process. Searchable on the internet: (Custodian's Name) Special Tax Notice, usually finds.
• Most plans require you to obtain the spousal waiver signed before assets are distributed from the plan.
• Rebuild your plan in the IRA on day one, including investments, RMD approach, Roth coordination, and beneficiary design (primary and contingent, with per stirpes if applicable).

Practical scenarios (to make it real)

You're 57, leaving PG&E, and need cash for two years.

Leave enough in the plan to use the age-55 exception for penalty-free withdrawals until 59½. Roll the rest into an IRA for investment choice, consider QCDs later, and implement clean estate planning.

You will stay at work past 73 years old.

Consider rolling pre-tax dollars into the current plan (if allowed) to utilize the still-effective RMD exception, then rolling over to an IRA later.

You have large company stock gains inside the plan.

Model NUA vs. rollover. If NUA wins, transfer the stock out under the lump-sum/NUA rules. Roll over the non-stock portion to an IRA. If a NUA doesn't pencil out, a full IRA rollover might still be the best option.

You plan big charitable giving at 70½+.

Contribute dollars to an IRA so you can utilize QCDs. QCDs can satisfy RMDs and keep those gifts off your tax return.

How we typically help clients do this(the "no-drama" sequence)

1. Eligibility check – We confirm what can be rolled and what can't, so you don't accidentally create an excess contribution.
2. Exception scan – We look for the age-55, still-working, and NUA opportunities and decide what stays in the plan (if anything) and what moves.
3. Direct rollover – We move funds trustee-to-trustee, line up any spousal waiver, and avoid the 60-day/withholding traps.
4. Rebuild the strategy – In the IRA, we set allocations, Roth/Tax buckets, RMD plan, and beneficiary forms (primary, contingent, and per stirpes).
5. Ongoing tune-ups – We update as laws change and life changes (retirement date, Social Security, Medicare IRMAA, RMD ages, etc.).

PG&E-specific note (why these matters for you)

Many PG&E employees retire with meaningful pre-tax balances. A partial rollover is often ideal: keep enough in the plan to utilize the age-55 rule (if needed) and roll the rest into an IRA to simplify RMDs, enable QCDs, and establish a clear beneficiary strategy for your spouse and children. If you hold PG&E stock in the plan, we'll first verify the NUA math.

Bottom line

An IRA rollover typically gives you more choice, cleaner planning for heirs, and fewer administrative headaches. But don't roll just because you can. First, confirm your eligibility, check for any exceptions that may benefit you now, and, if you proceed, use a direct rollover to rebuild your plan in the IRA on day one. Do it right, and your retirement money will work the way you expect, for you and for the people you love.