Quick sanity check wrt rolling 401(k) to my IRA

[LRDave]

Former employer used Fido to manage the 401(k). That is where my IRA is as well.

The funds available through the 401(k) are limited, but they wisely chose a decent selection of low-cost ETFs. The S&P500 index ETF was exactly the same in both funds. The expense ratio is the same for both the 401(k) and my IRA for any funds I'd likely be interested in. (Don't want/need a target date fund, for instance.....)

Nobody is telling me I need to roll my 401(k) over. I guess the protections are a bit better for the 401(k) but I understand this varies by state.

Since both are Fido, it all shows up in one log in, included in the same dashboard and both are managed as easily as two savings accounts for one account owner at Ally, for instance.

Assuming I stay with Fidelity, any reason to roll (or not roll) my 401(k) over? Am I missing a big-picture issue?

TIA.

 

[DrRoy]

I have heard that if someone sues you, at least in some states they cannot go after your 401K.

 

[HI Bill]

If you are between 55 and 59.5, you might want to keep it in the 401(k) so that you can take penalty-free withdrawals [if allowed by your former employer].

 

[GalaxyBoy]

You already mentioned that 401(k) plans offer better protection from creditors. A 401(k) can allow you to make withdrawals between ages 55 and 59.5. Some 401(k) plans offer better options in stable value funds (cash equivalents) if that’s important. OTOH, an IRA will likely offer better options in bonds or bond funds.

My old 401(k)s had terrible choices of funds, all with outrageous expense ratios, so it was a no-brainer for me to roll mine over. However, DW has a 457 with outstanding fund choices, so we left her money there. Heck, I wish we could move more money into that plan.

Here’s an article on the subject:
https://www.kiplinger.com/article/r...d-cons-of-rolling-your-401-k-into-an-ira.html

 

[CardsFan]

If you are happy with the options in the 401k, there is no rush to Roll over. A couple of things to consider:

- I believe a 401k has better protection from creditors (Federal requirement). IRA's vary state to state. But I do not have any details.

- You need to check on this one, but I believe, at RMD time, you will need to take distributions proportionately from each account. I think IRA's can be combined, but 401k's need to be handled individually (subject to correction on this one if I am wrong)

- Since they are both at the same institution, and you can look at them combined there is no simplification to having them in one account

- Does the 401k have a stable value account? These are not offered in IRA's, as far I have seen, and can be a good place to stash your fixed income AA.

FWIW, I rolled everything over to an IRA. Part of that reasoning was MegaCorp had just moved everything into a corporately managed system, and all options were unique to the plan (i.e. not funds that could be purchased outside the plan). Since then they have merged, spun off, and sold off pieces. Not sure how it is handled now, and glad I don't need to find out.

 

[trumpeting_angel]

I suppose, in addition to the protection from creditors, one might want to consider the company’s policies. Are they likely to change custodians? One could always roll over at that time, but the hassle could be increased.

From my own experience, the 401(k) somehow cost me more even with the “same” fund. I never figured out exactly where the fees were hidden, but rolled it over when I left.

 

[HI Bill]

From my own experience, the 401(k) somehow cost me more even with the “same” fund. I never figured out exactly where the fees were hidden, but rolled it over when I left.

Correct! I have a VG fund in a Merrill Lynch account. ML tacks on a hidden fee, that adds to the cost over the VG expense ratio. I once saw what it was, but can no longer find it...the laws seem to have reverted, and now they don't seem to have to disclose all the fees.

 

[jazz4cash]

The previous replies have covered the issue well. My situation is similar to yours but I have 2 employer plans plus the IRA. I try to exploit each account for whatever it does well. For example, one of my 401k’s has a stable value fund and the other one has an outstanding emerging market fund. I mainly use the IRA for individual stocks and I also have Roth, brokerage, and Visa accounts that all show on my dashboard when I login. One minor issue is that Fido tends to have a separate Dept for workplace accounts so it’s not as seamless as it could be. Kudos to employers that choose high quality retirement plan custodians and absorb the cost of doing so.

 

[gwraigty]

Here's a state-by-state breakdown of IRA protections:

https://www.assetprotectionplanners.com/planning/ira-by-state/

Check your current statutes referenced in the chart.

Also, make sure that leaving your money in the 401k is actually allowed by your plan.

 

[RE2Boys]

One caveat, if you have a basis in any Traditional IRA, it is not a good idea to roll your 401k into an IRA. It will be much harder to reduce the basis to zero the larger you make your T-IRA.

 

[kaneohe]

Here's a state-by-state breakdown of IRA protections:

https://www.assetprotectionplanners.com/planning/ira-by-state/

Check your current statutes referenced in the chart.

Also, make sure that leaving your money in the 401k is actually allowed by your plan.

These charts typically refer to creditor protection in bankruptcy situations.
The 401K has battleship protection (except vs IRS/QDRO) in both bankruptcy/non-bankruptcy situations while the IRA does not.
https://www.irahelp.com/slottreport/how-safe-creditors-your-401k-money-if-you-roll-it-ira

 

[gwraigty]

These charts typically refer to creditor protection in bankruptcy situations.
The 401K has battleship protection (except vs IRS/QDRO) in both bankruptcy/non-bankruptcy situations while the IRA does not.
https://www.irahelp.com/slottreport/how-safe-creditors-your-401k-money-if-you-roll-it-ira

I did say to check specific state statutes. The link I provided gives the specific codes as reference. My state provides unlimited protection to IRAs/Roth IRAs, bankruptcy or not.

Per the link below, non-rollover IRAs/Roth IRAs are federally protected in bankruptcy, up to an inflation adjusted limit.

Also, rollover IRAs/Roth IRAs are federally protected in bankruptcy, because they are sourced from ERISA protected accounts:

https://rodgers-associates.com/newsletters/retirement-funds-exempt-from-creditors/

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 offers protection for contributions to and earnings in IRAs, including Roth IRAs, up to $1,000,000. The dollar limit is adjusted every three years and currently is $1,283,025. This applies to all such accounts (not applied per account) and is scheduled to be adjusted again on April 1, 2019.

Company retirement plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA) are excluded from bankruptcy. The Supreme Court ruled1 that ERISA plans are excluded from an individual’s bankruptcy estate as provided under the Federal Bankruptcy Code2. This protection is provided for an unlimited amount of assets held in plans such as 401(k) and 403(b) company sponsored plans. SEP IRAs and SIMPLE IRAs are not subject to ERISA.

However, BAPCPA states these plans are excluded from bankruptcy for unlimited amounts and are not part of the aggregate total which applies to traditional IRAs and Roth IRAs. Rollover IRAs are also exempt from the cap. Since the funds from rollover IRAs originate from ERISA-qualified accounts, such as a 401(k) or employer pension, a rollover IRA is fully protected from creditors in bankruptcy.

Anyway, while it's vitally important to understand the consequences of a 401k rollover, as I said, it's not always an option to not rollover. It concerns me that many people might automatically assume they have a choice. Everyone should get an updated copy of their plan documents once in awhile. My husband's plan documents state that the entire plan balance must be distributed in either a lump sum or a direct rollover no later than the end of the year that he turns 70 1/2. This didn't use to be the policy, but it changed.

 

[Cobra9777]

I rolled to an IRA immediately. The 401K had a quarterly administrative fee. The fund choices were limited and the expense ratios were higher than what I could get elsewhere. But mainly I just wanted more ultra-low-cost investment choices and I wanted everything in ETFs. In Texas, 401Ks and IRAs have the same protection from creditors and lawsuits.

DW's 457B administrator was horrible. Some small outfit that required paper forms and snailmail. The website was useless. The S&P500 index fund had an ER of 0.25%. Most of the funds were actively managed with ERs around 1%. There was a decent stable value fund, but it wasn't worth the other hassles with this firm.