IRA Benefits Over 401(k): Why a Rollover is the Power Move for Large Portfolios

For the average worker, a 401(k) is an excellent “set it and forget it” wealth-building tool. But for the retail investor who has successfully crossed the $1,000,000 threshold, the rules of the game change. At this level of wealth, your primary concerns shift from simple “accumulation” to tax planning, fee mitigation, and estate transfer. As a fee-only fiduciary, I often see high-net-worth individuals “park” their largest asset in an old employer plan, unaware that the structural limitations of a 401(k) can lead to significant “wealth leakage.” Below, we explore IRA benefits over 401(k) plans and why investors are increasingly opting for the control of an IRA.

1. Unlocking the “Investment Universe” Beyond Plan Menus

Most 401(k) plans limit you to a “curated” list of 15–20 mutual funds. These are often chosen based on the plan administrator’s relationships rather than your specific financial goals.

Access to Low-Cost Funds

In an IRA, you aren’t restricted to high cost, active mutual funds. You can hold low-cost ETFs that track their benchmark. Passive investing is often a great choice for people looking to reach their retirement goals.

2. Real Value: The Power of “Asset Location” Strategy

One of the most significant IRA benefits over 401(k) plans isn’t just what you buy, but where you hold it. This is known as Asset Location, and it is a hallmark of high-level wealth management.

Tax-Inefficient vs. Tax-Efficient Assets

In a 401(k), you are forced to view your retirement account as a silo. However, an IRA allows a fiduciary to coordinate your holdings with your taxable brokerage accounts.

• The Strategy: You place tax-inefficient assets (bonds or REITs that produce ordinary income) inside the IRA where they grow tax-deferred.

• The Result: You place tax-efficient assets (like municipal bonds or stocks) in your brokerage account. This coordination can increase your after-tax return, a benefit that is more difficult to execute within the rigid structure of a 401(k).

3. Eradicating the “Wealth Tax” of 401(k) Administrative Fees

Fees are the silent killer of compounding interest. In a 401(k), you aren’t just paying the expense ratios of the funds; you are often paying “Plan Administration Fees” and “Recordkeeping Fees” that are passed from the employer to the participants.

The Hidden Cost of 401(k) Administration

On a $1,000,000 balance, a seemingly small 0.50% administration fee equals $5,000 per year. Over a 20-year retirement, that’s $100,000—plus the lost growth on that money—simply to keep the account open. That fee usually doesn’t include the value of financial planning.

4. Advanced Tax Engineering: Beyond the Basics

Tax planning is the cornerstone of high-net-worth wealth management. The IRA offers a level of “tax agility” that the 401(k) cannot match, particularly regarding the timing of tax liabilities.

The Roth Conversion Ladder

For investors who retire before age 72, the “Gap Years” provide a unique window to convert pre-tax IRA funds into a Roth IRA at lower marginal tax rates. While some 401(k) plans allow for “in-plan” conversions, they are often administratively difficult. An IRA allows for precise, dollar-for-dollar conversions, helping you mitigate the “tax time bomb” of future Required Minimum Distributions (RMDs).

Qualified Charitable Distributions (QCDs)

Once you reach age 70½, the IRA allows you to perform Qualified Charitable Distributions. You can send up to $111,000 (in 2026) directly to a 501(c)(3) charity. This counts towards your RMD requirement without the distribution counting as taxable income. 401(k) plans do not support this feature, forcing you to take the income, pay the tax, and then take a deduction—which is often less tax-efficient. This is one of the biggest IRA benefits over 401(k) plans.

5. The NUA Strategy: A $1M+ Game Changer

If you hold a significant amount of highly appreciated company stock in your 401(k), rolling it directly into an IRA might actually be a mistake. This is where a fiduciary adds real value through Net Unrealized Appreciation (NUA).

How NUA Works

Under NUA rules, you can move the company stock out of the 401(k) into a taxable brokerage account. You pay ordinary income tax only on the basis (the price at which it was bought), but you pay the much lower Long-Term Capital Gains tax rate on the appreciation.

• Why an IRA matters here: While the NUA happens during the distribution, the remaining non-stock assets are rolled into an IRA to maintain their tax-deferred status. Coordinating this move requires the precision of an IRA rollover strategy that 401(k) call-center reps are not always trained to handle.

6. Estate Planning

A $1,000,000 portfolio isn’t just for your retirement; it’s a legacy. The way your assets are held at the time of your passing determines how much the IRS takes and how much your family keeps.

Consolidating “Orphan” Accounts

Most high-earning professionals accumulate 3 to 5 different 401(k)s over their careers. Leaving these “orphan” accounts scattered makes holistic estate planning very difficult. Consolidating into a single IRA ensures that your beneficiary instructions are uniform and your asset allocation is cohesive.

7. The Fiduciary Standard vs. Plan Administration

Perhaps the most overlooked benefit of an IRA is the quality of advice you can receive. 401(k) representatives are typically “education” providers, not “advice” providers. They cannot tell you how to coordinate your 401(k) with your Social Security or your taxable brokerage account.

Holistic Wealth Management

When your assets are in an IRA, a fee-only fiduciary advisor can look at your entire financial picture. This includes:

• Risk Parity: Ensuring you aren’t over-exposed to one sector across all accounts.

• Withdrawal Sequencing: Determining exactly which account to pull from first (Taxable vs. Tax-Deferred vs. Tax-Free) to minimize your lifetime tax bill.

Conclusion: Is a Rollover Right for Your $1M Portfolio?

While the benefits of an IRA over a 401(k) are substantial, the decision should be made within the context of your total financial plan. For many, the move to an IRA represents the transition from “saving mode” to “optimization mode.” If you value lower fees, unlimited investment choice, and advanced tax strategies like QCDs and Roth conversions, the IRA is a good choice for the high-net-worth investor.

FAQ: IRA vs. 401(k) for High-Net-Worth Investors

Does an IRA have the same creditor protection as a 401(k)? No. 401(k)s have federal protection under ERISA. IRAs are protected under state law, which varies.

What is the “Mega-Backdoor Roth” and can I do it in an IRA? The Mega-Backdoor Roth is actually a 401(k) feature. If your plan allows it, you might stay in the 401(k) until you’ve maximized this contribution, then roll the assets into an IRA once you leave the company or reach age 59½.

How do I avoid taxes during a rollover? To avoid the 20% mandatory withholding, you must perform a Direct Rollover (Fiduciary-to-Fiduciary). The funds should never hit your personal bank account.

Take the Next Step

Managing a seven-figure portfolio requires a level of precision that a generic 401(k) menu cannot provide. If you are ready to reduce your fee drag and implement a high-level tax strategy, a 401(k) to IRA rollover may be your most productive move this year.