When my D moved her jobs, I had close her retirement account from her employer and roll it to her IRA account. There may be some disadvantage to rolling it to an IRA account but I have a scatter brain. I can’t see anyone tracking all different accounts.
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AFAIK, it is only an issue (or offers an advantage) to those who earn above the Roth IRA contribution limit ($150K single filer), and wish to take advantage of the ability to complete a backdoor Roth. Some employers offer Mega Backdoor Roth as part of their employer plans, but my children have not worked for companies that have offered this option, hence the interest in maintaining the empty IRA in order to to fund the Roth to $7K/year.
There are many potential benefits to rolling to IRA. However there are also potential disadvantages. As mentioned above, rolling traditional 401k can be a limitation for backdoor Roth, with the pro rata rule. I expect that’s the most common disadvantage for rolling to IRA, particularly if you are a high earner. Other potential disadvantages include not being eligible for rule of 55, less legal protection of retirement funds, loss of 401k loan benefits, potential loss of tax benefits for NUA stock, loss of RMD flexibility, and loss of institutional level investment options.
Increased complexity including in tracking different accounts can also be a disadvantage, as you mention. There are many options for tracking investments in different brokerages, which list stats about your combined investments in the different brokerages as well as list the totals individually. This a relatively common feature of brokerages and spending trackers. I use Fidelity Full View for this purpose. However, I would not recommend Full View to others, as Fidelity plans on switching to a new Full View that removes their Investment tracking features next month, in spite of Fidelity users as a whole hating their repeated attempts to switch to the new Full View. In the past Fidelity has tried to switch 1-2x per year, then returned back to the original Full View after user complaints.
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My daughter has so far been fortunate that her retirement plans from her employers have both been in fidelity and she can see it all in one place.
If both her plans are with Fidelity, she may well be able to roll her previous 401(k) now IRA into her current 401(k). That is a possibility companies offer that many people don’t know about and would allow her the option of then being able to do the backdoor Roth.
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All the 401ks I ever had offered only a limited choice of mutual funds, usually with high fees. No individual stocks, no ETFs, no chance for other self-directed investments.
Plus, most 401ks I had had quarterly fees that got deducted from the account. Some employers will eat those, but almost none of mine did.
Yes you might lose some backdoor Roth advantages, but having access to a wide array of much lower cost investment choices makes it a better choice IMO to roll them into an IRA.
I think it is also beneficial to have most or all your money in one place. It makes life easier.
Not all 401k meet this description. For example, my 401k permits up to 95% of balance to be converted to Fidelity BrokerageLink, which supports investing 401k in nearly any stock or ETF offered to Fidelity non-retirement investors. This is not always a good thing. There are many Reddit WSB-type posts in which investors show pictures of losing nearly the entirety of their 401k balance over a short period by unsuccessfully betting on options. I know someone who has 90% of their 401k invested in Bitcoin. They wanted 100%, but employer plan admin required them to keep 10% of balance in something else.
Along the same lines, fees are all over the map for different 401k plans. I’ve heard of 401k plans with essentially zero fees passed on to employees (employer pays fees), and I’ve heard of fees as high as the equivalent of an extra >1% expense ratio. The vast majority of plans are between these 2 extremes. When I kept my 401k with a previous employer instead of rolling to IRA, my fees switched from low to zero. Apparently my past employer had a lower 401k fee structure for previous employees than active employees, perhaps relating to less active intervention.
I’d suggest considering the advantages and disadvantages of a converting 401k to rollover IRA (or rolling back in to employer 401k) for your specific situation, considering both your specific 401k plan and your specific financial situation and investment priorities. There will not be a simple rule that one option is always better or always worse. Instead the best option will differ for different persons and different situations.
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Some of the 401ks I had were so bad that I seriously suspected someone was getting a kickback for selecting only funds with 1-2% expense ratios, with nary an index fund to be found.
If you have a 401k that lets you invest in almost everything with zero fees, that’s amazing, but none of the 10 or so 401ks I had over my career came anywhere close to that.
It’s pretty easy to lose track of them too, especially if there’s not a huge amount of money in them and they aren’t held at one of the major players like Fidelity or Schwab.
Obviously YMMV and you have to evaluate your own circumstances, but I would bet for the majority of people, rolling into an IRA makes more sense.
Why not roll it into new employer’s 401k? Assuming new plan does not charge high admin fees and only offer funds with high expense ratios.
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I’ve never seen a 401k plan that only has actively managed fund options, without any index fund options.
The organization providing the 401k to employers charges fees, so nearly all 401k plans have some type of fees at the employer level. Much of the variation depends on how much of their fees they pass on the employee, and whether those fees are in the form of extras named “fee” or built in to the expense ratio. Sometimes these fees are a fixed value regardless of balance, and sometimes the fees are expressed as a percentage of balance. With this much variation, it’s difficult to generalize.
Regarding my 401k, I was talking about 2 different 401k plans. My past employer plan switched to zero fee when I left the company. My current employer 401k plan charges fees, but admin/advisor fees are not applied to the 95% of balance stored outside of the standard 401k plan in Fidelity BrokerageLink, which lets you invest in any standard ETF or individual stock. The BrokerageLink portion only has a record keeping fee.
According to the document at https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2021-understanding-brokerage-windows-in-self-directed-retirement-plans-capek-written-statement-08-26.pdf , half of large company 401k plans on Fidelity included support for BrokerageLink in 2021. I expect the vast majority support it today. It may not be obvious to employees that this option is available, as using BrokerageLink is not the default and the option may be well hidden in small print or less prominent links. I’m sure many 401k providers besides Fidelity offer something comparable.
Have you seen median 401k balances and participation rates? The Vanguard report at https://corporate.vanguard.com/content/dam/corp/research/pdf/how_america_saves_report_2025.pdf found that the median 401k balance was $38k in 2025, with a median age in 40s. For typical persons with a ~$38k balance, it probably makes little difference whether they rollover to IRA or not. Whatever option results in making increased contributions and prevents them from making a bad financial decision with the balance is probably the better choice.
Persons on this thread and their families are likely in the minority, so above comments about typical persons not well apply. I expect many on this thread do backdoor Roths and would lose the equivalent of thousands each year, potentially compounding to tens of thousands or even hundreds of thousands over time, if they lost the option to do backdoor Roths. However, this doesn’t apply to everyone. The overwhelming portion of investors will never do a backdoor Roth, and an increasing portion of young persons choose Roth 401k option, which makes backdoor Roth limitations irrelevant.
As noted fees vary wildly for different persons, as do their interest and benefit from other options besides 401k plan. Many persons don’t want to spend a lot of time on their 401k, or don’t know what fund/stock/ETF to buy in their IRA. A Vanguard study found that 28% of rollover IRA assets remain uninvested, and the majority of this group with univested IRA said they didn’t know their investment was in cash. Some prefer to simply buy a target date and hold until reaching retirement, and that can be a great strategy. Some persons will hang themselves if given enough rope, or give up if given too many investment options. And others have 401ks that do not have any good low fee options within their plan, and would switch to a good low fee option if offered in a IRA.
There is too much variation to offer a generalization, without considering the individual.
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If the employer offers that option and it’s an excellent plan, sure. None of the 401ks I ever had were even close to as good as an IRA though, in terms of fees and options.
I wonder how many people are actually doing backdoor Roths, especially since I think it’s becoming common to have Roth 401ks available.
I don’t have figures on how many back door Roths there are, and as more employers allow mega backdoor Roth within their plan up to $70K, the population of regular backdoor Roths is probably declining.
It does not kick in until $150K as a single filer, and a lot of people probably won’t bother with the logistics, but when you see how $7K/year compounds tax-free, it is appealing.
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half of large company 401k plans on Fidelity included support for BrokerageLink in 2021.
Never worked for a company that had the 401k hosted by Fidelity or Schwab or other giant financial firm, so maybe my perspective is skewed.
Last time I worked for a large company was probably 2005, I’m sure the plans offered by startups and small companies are not ideal.
This I can address: watch out for fees continuing on the old plan at Fidelity, and if there are fees on the old (or on both), then consolidate to the new one also at Fidelity.
I had three 403b plans at Fidelity, and only recently caught that the two old ones (No new contributions) were still charging me quarterly fees! Combined into my new one and now only one set of fees.
Can you explain this part, just to double check that I am not providing bad advice to my children.
Why is the backdoor Roth irrelevant when contributing to a Roth 401(k)? I thought that one could max out the Roth 401(k) and then do the backdoor Roth for the additional $7K.
My earlier post said, an increasing portion of young persons choose Roth 401k option, which makes backdoor Roth limitations irrelevant"
The backdoor Roth limitations with rolling over a 401k to IRA relates to the pro rata rule. A quote from Vanguard about pro rata rule is below. If you rollover a traditional 401k to a rollover IRA, then your rollover IRA has pre-tax $. If you want to do a backdoor Roth, you can’t selectively just covert the new $7k post-tax contribution from traditional to Roth. In Vanguard’s example with $93k out of $100k being pre-tax $, 93% of the conversion is considered taxable income, leading to a big tax hit if you choose to do a backdoor Roth.
This limitation becomes irrelevant for a Roth 401k rolled over to IRA because all of your IRA is in post-tax $. In the Vanguard example with a Roth 401k, 100% of the $100k IRA would be post-tax $, so you can do a backdoor Roth without incurring a tax hit.
The pro rata rule requires any IRA conversion to be treated as coming proportionally from all traditional IRA accounts combined, including both pre-tax and after-tax contributions.1 For example, if you have $93,000 in a pre-tax traditional IRA and make a $7,000 nondeductible contribution (giving you $100,000 in total IRA assets), 93% of your conversion will be considered taxable income, even if you’re only converting the $7,000 contribution. This significantly reduces the tax efficiency of the backdoor IRA strategy.
Thanks! I understand the pro rata rule, which is why I have been suggesting on this thread that young employees roll their 401k from an old employer to a new one.
I just wanted to make sure that I was correct in advising my children to fully fund the Roth 401k and then do a backdoor Roth for the additional $7K.
To belabor even further…For someone changing employers, is there a reason to not transfer Roth 401k funds to one’s own individual Fidelity Roth account? Is there any reason to segregate employer Roth 401k funds from individual Roth money?
I know to transfer employer 401k from old employer to new employer in order to retain the ability to transact the backdoor Roth each year, but am now wondering if employer Roth 401k should not be mingled with Roth IRA money? (The reason to transfer it out is to avoid any fees charged by employer plan.)
Thanks!
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Lotta discussion of backdoor Roth’s, but still they are rare. Our plan did not allow them. (I looked into it, but didn’t think the changes we’d have to make were worth it.)
As to Why not roll tIRA or 401k from former employer in to a personal IRA or 401?: such plans have some additional legal protections from creditors, legal settlements and even bk if they are retained by your employer – or rolled into new employer – under federal ERISA. Some states offer same, but not all. See your attorney for details.
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There are potential disadvantages (and advantages) of rolling over a Roth 401k beyond just influence on backdoor Roth. I wrote a list in my earlier posts, including the one at How Much Do You think You Need to Retire? What Age Will You/Spouse Retire? Investment and General Retirement Issues (Part 3) - #2663 by Data10 .
One lesser known disadvantage I touched on in a different post from above is the 401k investments are usually liquidated to cash after doing a rollover to IRA, particularly when rolling over to an IRA at a different brokerage; and a good portion of persons don’t re-invest that cash. The previously noted Vanguard study found the majority of younger persons still had their rollover IRA assets in cash 7 years after the rollover event. When asked why they have been keeping their rollover IRA in cash, most said they did not know their IRA assets had been uninvested for the past 7 years.
In contrast employer 401k plans almost always have a default investment in target date fund. As I recall the Vanguard study found 96% of plans had a target date default. If you are a typical young person who doesn’t pay much attention to retirement account investment selections, the retirement accounts will most likely be invested in a target date with an employer sponsored 401k plan, and most likely be uninvested in cash with a rollover IRA.
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Perhaps you are referring to a mega backdoor, which is done through employer plan? Backdoor Roth doesn’t require involving employer or employer plan. I did mine this year by creating a new, traditional IRA at Fidelity, then transferring assets from that traditional IRA to a Roth IRA that I also created at Fidelity. It took under 5 minutes.
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