To Roll or Not to Roll: The $1 Million 401(k) Dilemma

The decision to roll over a $1 million 401(k) into an IRA managed by a financial advisor is a critical crossroads for investors nearing retirement. While the promise of personalized advice and expanded investment options may be enticing, the process carries risks—from higher fees to lost plan-specific benefits—that could outweigh the rewards. This analysis weighs the pros and cons of rolling over versus staying in a 401(k), with a focus on tax implications, liquidity needs, and the cost of professional guidance.

The Case for Rollover: Freedom and Flexibility

Rollovers to IRAs offer two key advantages: access to a broader array of investments and the potential to avoid 401(k) plan fees. Many 401(k)s limit participants to a handful of mutual funds with high expense ratios, while IRAs can include individual stocks, bonds, or alternative assets. For example, an IRA might allow an investor to hold low-cost index funds like the S&P 500 ETF (SPY) directly, whereas a 401(k) might only offer an expensive actively managed version of the same index.

Financial advisors often advocate for rollovers, arguing that personalized portfolio management can optimize tax efficiency and risk allocation. However, this advice comes at a cost. The median fee for a financial advisor is 1% of assets under management, which on $1 million amounts to $10,000 annually. Over a decade, this fee would total $100,000—money that could otherwise compound in the account.

The Case for Staying: Cost Efficiency and Plan Benefits

Staying in a 401(k) may be smarter for some investors. Many large employer plans offer institutional-class mutual funds with expense ratios as low as 0.1%, far cheaper than what's available in an IRA. Additionally, 401(k) plans often provide “in-plan” Roth conversions, which allow tax diversification without triggering penalties. For example, converting a portion of the account to a Roth 401(k) while still employed can spread tax liability over multiple years, a strategy advisors might not replicate as efficiently in an IRA.

Another hidden benefit: 401(k) plans typically offer loans, allowing penalty-free access to funds (though this incurs interest and repayment obligations). In contrast, IRA owners must rely on the IRS's $1,000 annual emergency withdrawal exception—subject to repayment rules and a $1,000 minimum account balance—described in detail by the IRS and frequently cautioned against by Suze Orman.

Tax and Liquidity Considerations: The Suze Orman Factor

Suze Orman's warnings about early withdrawal penalties are critical here. While rolling over avoids the 10% penalty on IRA distributions before 59½, taxes on withdrawals remain due. For someone needing liquidity before retirement age, the $1,000 emergency exception is a lifeline—but only if they can repay the sum within three years. Orman emphasizes that retirees should never rely on retirement accounts for emergencies, urging instead a separate cash reserve of at least six months' expenses.

Investors must also consider Required Minimum Distributions (RMDs). Starting at 73, 401(k) and IRA owners must withdraw 3.05% of their balance annually. Failing to do so incurs a 50% penalty. A financial advisor can help navigate RMDs, but this service may not justify the ongoing fee for disciplined investors.

The Bottom Line: Match Strategy to Goals

• Roll Over If: You seek lower-cost investments, tax diversification, or complex estate planning (e.g., trusts).
• Stay In-Plan If: Your employer offers low-cost funds, in-plan Roth conversions, or a robust loan feature.

The $1 million threshold amplifies the importance of avoiding unnecessary fees. A 1% annual fee on $1 million is a $10,000 annual expense—equivalent to the median U.S. household income. Only choose an advisor if their expertise (e.g., tax-loss harvesting, multi-generational planning) delivers value exceeding that cost.

Final Advice: Build Liquidity Outside Retirement Accounts

Regardless of the rollover decision, prioritize Suze Orman's warning: never let retirement savings become your emergency fund. Pair your 401(k) or IRA with a high-yield savings account (earning ~4% in 2025) or a short-term bond fund to cover unexpected costs. For those needing liquidity before 59½, explore RMD strategies or employer loan options before dipping into emergency withdrawals.

The $1 million 401(k) is a milestone, but it's not a piggy bank. Choose the path that aligns with your financial discipline, costs, and long-term goals.