When you switch jobs or retire for good, you have the option of rolling over your 401(k) retirement plan account at your former employer into an IRA. Doing so has plenty of advantages, and many people reflexively do a rollover as soon as they become eligible. Yet what many people don't realize is that there can also be good reasons to leave your money at your ex-employer's 401(k). Below, we'll go through the pros and cons of rolling over your 401(k) to help you make the best-informed decision for yourself.

Pros of rolling over your 401(k)

The primary reason why so many people roll over their 401(k)s is that an IRA inherently gives you a lot more control over how you invest than a 401(k) does. Typically, employer-sponsored retirement plans come with a fixed set of investment choices, and many 401(k)s feature limited options that consist entirely of mutual funds. Depending on the way that your employer sets up the 401(k) plan and the relationship your employer has with the financial institutions that provide management and recordkeeping services, the funds that make it onto the menu of available investment choices for participants can sometimes come with high management fees and other expenses that eat into employees' returns.

By contrast, an IRA allows you to invest in a much wider range of permissible investments. You can choose mutual funds with lower expense ratios or you can avoid mutual funds entirely and go with individual stocks or exchange-traded funds. You can also more readily change in and out of investments without the restrictions that some employers place on moving money across investment options.

In addition, in some cases, you don't have the right to stay in your employer's 401(k). Based on current law and regulations, an employer can choose to make a distribution from a 401(k) for a departing employee with an account balance of less than $5,000. However, distributions above $1,000 require the employer to set up an IRA to receive the transfer unless the former employee elects otherwise.

When not rolling over your 401(k) makes sense

It's mostly based on that greater flexibility that many advisors recommend rolling over 401(k) money into an IRA. But there are some good reasons why choosing not to do a rollover can be the better move.

First, 401(k) plans allow for penalty-free distributions as early as age 55 if you were at least that age during the year when you left your job. Once you roll over a 401(k), you'll have to wait until age 59 1/2 to get penalty-free access unless you qualify for one of the penalty exemptions.

In addition, creditor protection is somewhat stronger under a 401(k) plan than with an IRA. Changes to bankruptcy and insolvency laws have tried to align the treatment of qualified plans like 401(k)s and the treatment of IRAs, but there are still some differences that make many attorneys more comfortable with 401(k) assets in situations involving potential lawsuits against the accountholder.

Some 401(k) plans also offer more access to lower-cost investment alternatives than are available in retail IRAs. For example, a large employer might negotiate with a mutual fund company to offer institutional-class shares at a lower expense ratio than the corresponding retail-class fund shares offered to the general public. Once you roll over your 401(k) to an IRA, you lose access to the cheaper fund option.

Finally, if you own company stock through your 401(k), then it can make more sense to leave it in the 401(k) rather than rolling it over. Doing an IRA rollover will eventually require you to pay full ordinary income tax rates on the value of the stock when you withdraw it from your IRA. However, special rules let you do a direct in-kind distribution of shares from your 401(k) to a taxable account, only paying tax on what you paid for the stock and eventually getting capital gains tax treatment on the profit.

Whether it makes sense to keep your 401(k) money where it is or to roll it over to an IRA will depend on your individual circumstances. Regardless of which you pick, either is much preferable to the mistake of simply taking money out of your 401(k) without doing a rollover at all.