12 Reasons Not to Roll Your 401(k) Into an IRA

[MULTIZ321]

12 Reasons Not to Roll Your 401(k) Into an IRA
By Robert C. Lawton/ Retirement/ Forbes/ forbes.com

"American workers often change jobs and must decide what to do with their 401(k) balances at their prior employers. I’ve worked as a 401(k) plan consultant for more 30 years, with companies like Apple and AT&T, so I am an advocate for 401(k) plan participants and have dealt with this situation many times.

For the vast majority of 401(k) plan participants, in my experience, it does not make sense to roll over their 401(k) balances from a prior employer into an Individual Retirement Account, or IRA. Below are the reasons why......"

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Richard

 

[bluehende]

Very good article. The fact that 401k's are judgement proof was a good enough reason for me not to roll it over.

 

[bbodb1]

On the flip side, if your investment options in your 401-K are severely limited by a combination of your employer and/or the 401-K management company, getting your money out of a 401-K open up many more investment opportunities. My previous employer and their 401-K management company offered access to only piddling performing funds (and that is being generous). In some cases, a rollover is the only way to escape this trap. Thankfully, a company merger allowed us access to our 401-K funds.

Not all situations are the same, but let's keep in mind that 401-K funds are tuned (first) to the needs of the employer and the 401-L management company.
Employee interests are always lower on the priority pole....

 

[geekette]

Disagree with most of these "reasons". Which investments require 100K minimum??? What year is this? There are no advisors that want to work with people without substantial assets? Sounds like a scare tactic to me and not an effective one.

Here's the truth folks: if you roll your 401k into an IRA and decide later that's not going so well, roll it into current 401k. You can only do this if you don't co-mingle funds. In other words, don't roll your 401k into an IRA that has non-401k money and don't contribute non-401k money to it. Simple.

 

[geekette]

Very good article. The fact that 401k's are judgement proof was a good enough reason for me not to roll it over.

for me, it is last reason to keep it in 401k. I'll roll the dice on the possibility of getting some massive judgement against me.

 

[bluehende]

for me, it is last reason to keep it in 401k. I'll roll the dice on the possibility of getting some massive judgement against me.

When I retired my wife had an in home day care. We carried a 1 million dollar rider on our home owners but worried that a large judgement would wipe out our retirement also.

 

[VacationForever]

When I retired my wife had an in home day care. We carried a 1 million dollar rider on our home owners but worried that a large judgement would wipe out our retirement also.

We carry a multi-million dollar umbrella policy for the same reason. When my son was in an accident, t-boned on the driver side when the other car ran the light, the bad police reporting indicated my son was at fault. We were upset, especially when the passenger of the other car left on a stretcher in an ambulance and there was only one thing that came to our minds - "Injury lawyer". We challenged the police report and ticket that was sent to my son. One of the witnessses named in the policy report showed up in the court hearing approached us prior to the hearing that the report was not right as it was the other car who ran the light. She was at work and took the day off to ensure that my son did not get the blame when the fault was the other party. The judge threw out the report and cleared my son. The lesson that we learned then was to ensure that my son has everything in his name. He was driving one of our cars that day. I also got him to buy an umbrella policy after he moved to his own home.

 

[PigsDad]

Another reason that was not listed in the article: If you roll your pre-tax 401k funds to an IRA, that would affect the tax consequence of doing a back-door ROTH contribution (for those who do not qualify for a regular ROTH due to income limits).

Having the 401k be judgement-proof is something I didn't know before reading this article. That would be a big reason to keep funds in a 401k for me as well.

Kurt

 

[DavidnRobin]

I found only #9 to be relevant.

IRAs allow option trading that can be used as protective staregies for equity positions.
Also more array of fixed income holding choices in an IRA.

If you do go to RollOver IRA - make sure you get a bonus. I have gone from Fidelity to eTrade to Schwab - receiving a bonus each time (free money). Now consolidated all accounts.

 

[elaine]

Agree with pp. DH rolled his over and has been able to control investments and make much higher returns with lower fees than with his old employer funds. Which were the pits.
We also have an umbrella policy. Mine will stay in 401k.

 

[CalGalTraveler]

If you don't like your new company's 401K investment choices, and you own a business, set up a solo 401k at Schwab and do a 401k reverse roll-over to get investment choice and protect your money. You control the plan, it's free and and it is like having a trading account at Schwab with all of the choices including CDs.

 

[CalGalTraveler]

I found only #9 to be relevant.

IRAs allow option trading that can be used as protective staregies for equity positions.
Also more array of fixed income holding choices in an IRA.

I don't believe this is true. We have our small business 401k at Schwab and we can invest in everything that Schwab offers including options, bonds and CDs. Schwab offers a very flexible and easy to administer plan - and as the employer you call the shots on early retirement withdrawals at 55, in-service distributions, hardship loans etc.

 

[DavidnRobin]

I don't believe this is true. We have our small business 401k at Schwab and we can invest in everything that Schwab offers.

Sorry for the misinfo - I was comparing to the 401k from my ex-company (thru Fidelity).
I wasn’t aware that one can buy/sell call/put options in a 401k.
Is the same true for Muni bonds?



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[CalGalTraveler]

I believe you can also invest in Muni's. I know we can invest in CDs, bonds and Treasuries (it's like a normal Schwab account.) Suggest that you contact Schwab's small business retirement group (not the front line people) and speak to an expert. They offer a nice plan. E*Trade also offers a 401k Roth. Wish Schwab had a 401k Roth. They keep saying it is coming but it's like waiting for SWA to fly to HI!

P.S. Vanguard's small business retirement plan is very limited, has high fees and not as much flexibility.

 

[DavidnRobin]

Oakland to Oahu on SWA just started.
$49! (Sold out)

My IRA is a non-business account - we are straight up retired. I am now working on transferring to a Roth what equities I can and stay in our pre-RMD retirement Tax Valley (Fed and CA tax rates at lowest for our limited income since our Spend mainly comes from after-tax cash).

I see that it matters if the retirement account is self-directed or not.

I am using Schwab as my brokerage account for both our Trust and IRAs. I finally consolidated into one brokerage. I had 3 brokerages, and over last 18 months I have finally moved to one Schwab account (and picked up $6000 in transfer bonuses).


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[WinniWoman]

On the flip side, if your investment options in your 401-K are severely limited by a combination of your employer and/or the 401-K management company, getting your money out of a 401-K open up many more investment opportunities. My previous employer and their 401-K management company offered access to only piddling performing funds (and that is being generous). In some cases, a rollover is the only way to escape this trap. Thankfully, a company merger allowed us access to our 401-K funds.

Not all situations are the same, but let's keep in mind that 401-K funds are tuned (first) to the needs of the employer and the 401-L management company.
Employee interests are always lower on the priority pole....

And a lot of the 401k's have high fees as well. Not the funds within them, necessarily, but because there could be a broker/investment firm involved.

I rolled mine over into my IRA for that reason. And also because I wanted to own nothing that had anything to do with my past employer,

 

[WinniWoman]

Sorry for the misinfo - I was comparing to the 401k from my ex-company (thru Fidelity).
I wasn’t aware that one can buy/sell call/put options in a 401k.
Is the same true for Muni bonds?



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Why would you want muni funds within a tax sheltered account like a 401k or an IRA? They are already tax free,

 

[geekette]

And a lot of the 401k's have high fees as well. Not the funds within them, necessarily, but because there could be a broker/investment firm involved.

I rolled mine over into my IRA for that reason. And also because I wanted to own nothing that had anything to do with my past employer,

yes, my last 401k charged a monthly asset fee. That is, for me, way beyond the pale. I got my dough out of there as soon as I could. There are no brokerages charging me fees beyond trade transactions, and I control all of those. I don't have any mutual funds nor ETFs so no leakage there, either.

 

[CalGalTraveler]

Oakland to Oahu on SWA just started.
$49! (Sold out)

I see that it matters if the retirement account is self-directed or not.

I am in Schwab - finally consolidated into one brokerage. I had 3 brokerages, and over last 18 months I have finally moved to one account (and picked up $6000 in transfer bonuses)


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Great news on SWA. Booking our summer tickets now(!)

Congrats on your bonuses. We made a bunch of 401k reversals and retirement shifts last fall to prepare for backdoor Roth IRAs and all they would offer was 100 free trades. Were these taxable accounts?

 

[DavidnRobin]

Why would you want muni funds within a tax sheltered account like a 401k or an IRA? They are already tax free,

Sorry for confusion - I am using Munis in our Trust account (not Retirement) as to limit our taxable income in order to have more income space for IRA to Roth conversions as our taxes for next 6-7 years will be at their lowest (under current tax structure).
Also taking LT CapGains and staying as much as we can at the 0% tax level and rebuying similar equities with intent of holding until qualified for LT CapGains.

My corporate 401k did not have same investment choices as our Rollover IRA - I see in self-directed 401k that these are available.


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[WinniWoman]

I honestly don't find most of these arguments in the article valid. I have rolled over many a 401K and if you use a reputable no load mutual fund company like Vanguard, Fidelity or T Roe Price, for example, there are no fees and you have a lot of choices for your investments.

It is good to keep your money under your control if at all possible. And it is nice to have everything consolidated under one roof if possible.

I do agree about the stable value fund. My husband has one so we might keep it there IF he is allowed to when he retires.

And- I agree about the judgment proof point. That is true.

As for loans- why would you want to take out a 401k loan? Pay taxes twice and a penalty? Uh- not a good strategy.

I think there are more good reasons to roll it over rather than keep the money in a 401K.

 

[DavidnRobin]

Great news on SWA. Booking our summer tickets now(!)

Congrats on your bonuses. We made a bunch of 401k reversals and retirement shifts last fall to prepare for backdoor Roth IRAs and all they would offer was 100 free trades. Were these taxable accounts?

The transfer was from 401k to Rollover IRA - then Rollover IRA to Rollover IRA, repeat... (after holding periods).

I find many people do not know about the bonuses, and perform these exchanges w/o cash compensation.


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[CalGalTraveler]

Thanks @DavidnRobin for clarifying. Our small business 401k and the Rollover IRAs were already set up for years and we were simply transfering between existing accounts; there were no new accounts other than Vanguard who didn't want to give us anything because we already had accounts with them.

At least we asked. Congrats on getting $6k out of it.

 

[CalGalTraveler]

I honestly don't find most of these arguments in the article valid. I have rolled over many a 401K and if you use a reputable no load mutual fund company like Vanguard, Fidelity or T Roe Price, for example, there are no fees and you have a lot of choices for your investments.

It is good to keep your money under your control if at all possible. And it is nice to have everything consolidated under one roof if possible.

I do agree about the stable value fund. My husband has one so we might keep it there IF he is allowed to when he retires.

And- I agree about the judgment proof point. That is true.

As for loans- why would you want to take out a 401k loan? Pay taxes twice and a penalty? Uh- not a good strategy.

I think there are more good reasons to roll it over rather than keep the money in a 401K.

One big reason missed is if you are over 70 1/2 you can avoid required min distributions if you work part-time at an employer (even for 1 day) and can roll your IRA's into the large employer's 401k plan.

Doesn't work if you own more than 5% of the company. However if one could sell the company to a relative and make the former owner a < 5% owner, then the 401k plan would possibly qualify. You would be passing the company to someone anyway. Will have to check this out when the time comes (personally with almost 15 years to go, laws could change a lot.)

"If you continue working past age 70 1/2, you may not have to take RMDs from your current 401(k), as long as you don't own 5% or more of the company you work for. This rule does not apply to IRAs or 401(k)s held by former employers, though you may be able to roll your any 401(k)s held by former employers over into your current 401(k)."
https://www.fool.com/retirement/2018/12/17/4-ways-to-reduce-your-required-minimum-distributio.aspx​

(I love owning a small business because you can call the shots, and there is a lot of tax-favored treatment particularly for retirement.)

Note: edited above because you cannot sell the company to your kids to make this work. Must be a niece/nephew, sibling, cousin, uncle/aunt or other person.

 

[WinniWoman]

Working?! LOL! If I am working- even one day per week- then I am not retired. No thanks. Ha! Ha!