Should I roll 401K to IRA?

[Dash man]

As I posted, Roth 401k are still subject to RMDs, an important distinction. I'm pretty sure you're wrong about IRAs having the same protection everywhere. A quick Google search confirms this from any number of sources.

If an IRA was a rollover from an ERISA protected 401k or other ERISA covered account, it retains the same protections. Additionally, an IRA can be protected up to $1M by declaring bankruptcy.
https://www.iraservices.com/is-my-retirement-plan-safe-from-lawsuits

 

[kaneohe]

If an IRA was a rollover from an ERISA protected 401k or other ERISA covered account, it retains the same protections. ........................................[/url]

What about under non-bankruptcy conditions?

 

[Dash man]

What about under non-bankruptcy conditions?

If the IRA was funded by an ERISA protected account, it retains the protections. If not, $1M is protected under bankruptcy. If no bankruptcy, each state has their own laws you would need to research.

 

[gwraigty]

In Ohio, assets held in 401Ks are more protected from law suits than assets held on IRAs.

That is incorrect. Here is the full text of the ORC (as referenced in the PDF file I linked to) that applies to the exempt status of IRAs, both traditional and Roth:

Lawriter - ORC - 2329.66 [See notes for adjustments for inflation] Exempted interests and rights.

The most relevant portion:

"(A) Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:

(c) Except for any portion of the assets that were deposited for the purpose of evading the payment of any debt and except as provided in sections 3119.80, 3119.81, 3121.02, 3121.03, and 3123.06 of the Revised Code, the person's rights or interests in the assets held in, or to directly or indirectly receive any payment or benefit under, any individual retirement account, individual retirement annuity, "Roth IRA,""

Here is a legal paper published in 2017 that provides excruciating detail on the matter regarding Ohio law:

http://www.wickenslaw.com/wp-content/uploads/2017/04/Creditor-Protection-of-Retirment-Plan-Assets.pdf

From page 6:

"Ohio law, for example, specifically exempts traditional and Roth IRAs from execution, garnishment, attachment, or sale to satisfy a judgment or order. There is no cap under the Ohio exemption."

Note that there are different protections for bankruptcy vs. lawsuits. There are also differences in whether the assets in the IRA/Roth IRA were funded outside of an employer plan vs. funded via a 401k rollover. The OP was specifically asking about lawsuit protection in a 401k vs. a rollover IRA.

"Assets in qualified retirement plans (pension, profitsharing, and section 401(k) plans) possess the most extensive debtor protections both within and outside of a bankruptcy proceeding. Assets in IRAs are exempt from creditor claims in bankruptcy (up to $1,283,025 for contributory IRAs and Roth IRAs and to an unlim‑ited dollar amount for SEPs, SIMPLEs and rollover IRAs). Outside of bankruptcy, one must look to state law to determine the level of exemption for IRAs."

With all that said, we don't know what state the OP is in, so Ohio law may not even be relevant to OP's situation. I just used Ohio as an example of a state that grants full protection to rollover IRAs, regardless of bankruptcy or lawsuits. OP has to do the research for the appropriate state. I simply tried to provide a starting point for that.

 

[gwraigty]

If an IRA was a rollover from an ERISA protected 401k or other ERISA covered account, it retains the same protections. Additionally, an IRA can be protected up to $1M by declaring bankruptcy.
https://www.iraservices.com/is-my-retirement-plan-safe-from-lawsuits

If the IRA was funded by an ERISA protected account, it retains the protections. If not, $1M is protected under bankruptcy. If no bankruptcy, each state has their own laws you would need to research.

In my state, rollover IRAs have unlimited protection under bankruptcy. So even that depends on the laws of your state.

 

[statsman]

How were you notified of this? Did they advise you via email/letter--or was this just buried in the online info and you had to search it out?

Buried in the documentation. It took a call into her old company's HR department to determine this change had taken place (apparently, my wife wasn't the only ex-employee who got bit by this).

 

[Cat-tirement]

I have kept my megacorp 401k since leaving work more than 4 years ago primarily because it offers institutional or custom classes of desirable funds with very low expenses. The savings more than makes up for admin fees of a few dollars each quarter.

 

[gauss]

'Taxable amount not determined' box - 1099-R IRA vs 401k

I am pleased to see that many good reasons for avoiding 401k to IRA rollovers have been mentioned by others in the group, so it looks like the word is getting out.

One reason, that hasn't been mentioned yet, to leave the funds in the 401k, rather than move to IRA, would be for simplification of tax return preparation down the road and increased confidence that you will not overpay taxes every year down the road.

For funds in a 401k, the plan custodian is nearly always responsible for correctly determining and reporting the taxable amount of any distribution. (ie the "taxable amount not determined" (box 2b) on 1099-R is unchecked and the taxable amount is correctly reported (in box 2a).

The 401k plan providers are required to track any non-taxable basis in the account, over the account's entire lifetime , and correctly apply the "general rule" to determine the taxable amount each year there is a distribution.

IRAs, on the other hand, will nearly always have box 2b checked. "Taxable amount not determined". Even if they report a taxable amount in box 2a, it should not be relied upon. The burden is on the taxpayer, not the IRA provider, to correctly determine the taxable amount -- which in general can be less than the gross distribution.

The issue is that far too many people will just type the amount of box 2a into their tax software and pay tax on the entire amount and not know the difference. This is even more common when surviving spouses take over responsibility for filing taxes after the passing of the first individual in a married couple.

-gauss

 

[gwraigty]

I am pleased to see that many good reasons for avoiding 401k to IRA rollovers have been mentioned by others in the group, so it looks like the word is getting out.

One reason, that hasn't been mentioned yet, to leave the funds in the 401k, rather than move to IRA, would be for simplification of tax return preparation down the road and increased confidence that you will not overpay taxes every year down the road.

For funds in a 401k, the plan custodian is nearly always responsible for correctly determining and reporting the taxable amount of any distribution. (ie the "taxable amount not determined" (box 2b) on 1099-R is unchecked and the taxable amount is correctly reported (in box 2a).

The 401k plan providers are required to track any non-taxable basis in the account, over the account's entire lifetime , and correctly apply the "general rule" to determine the taxable amount each year there is a distribution.

IRAs, on the other hand, will nearly always have box 2b checked. "Taxable amount not determined". Even if they report a taxable amount in box 2a, it should not be relied upon. The burden is on the taxpayer, not the IRA provider, to correctly determine the taxable amount -- which in general can be less than the gross distribution.

The issue is that far too many people will just type the amount of box 2a into their tax software and pay tax on the entire amount and not know the difference. This is even more common when surviving spouses take over responsibility for filing taxes after the passing of the first individual in a married couple.

-gauss

At it's simplest, when a 401k has a mix of pretax, after tax, and Roth contributions, the balances that are attributable to pretax (including earnings on pretax and after tax) can be rolled over into an IRA. The balances that are attributable to after tax (excluding earnings) and Roth (including earnings) can be rolled over into a Roth IRA. Here is a handy-dandy chart direct from the IRS that illustrates this:

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

If done in this way, balances that are subject to RMDs and are fully taxable will be neatly segregated from balances that are not. Knowing the basis wouldn't be necessary.

From Fidelity:

https://www.fidelity.com/viewpoints/retirement/IRS-401k-rollover-guidance

"According to IRS guidance, you can roll after-tax money to a Roth IRA and pre-tax money to a traditional IRA and avoid creating taxable income...In the most straightforward scenario, the entire account balance would be rolled out of the workplace plan, sending after-tax contributions to a Roth IRA and pre-tax contributions and earnings to a traditional IRA...If the plan allows partial withdrawals and does track each source balance separately, one could take a rollover of just the after-tax source balance, which includes both the after-tax contributions and all of the associated earnings. Again, the after-tax balance would go to a Roth IRA while earnings would go to a traditional IRA."

 

[GrayHare]

A lesser known benefit of 401k vs IRA is that some states treat 401k withdrawals as a pension that, again depending on state, might qualify for a reduced tax rate. That benefit can go away if you move 401k money to an IRA, even if it's a rollover IRA. Unfortunately I do not know a single web page that lists how each state handles this issue.

 

[53anddone]

I rolled mine from Vanguard into Fidelity. Mainly because the options for investment were far greater. Now I have my rollover invested into ETFs and Individual stocks which were not available in the company sponsored plan.

Fidelity made it painless and now I have everything under one roof so to speak.

 

[deserat]

Our 401K accounts are managed by Vanguard. I asked them about Vanguard rollover accounts. They told me that the S&P500 fund, and bond fund we hold in 401K are institutional shares. They will have to be sold; rolled over; purchase like-kind individual shares.

The expense ratio for institutional shares are lower than individual shares, so we left our money in 401K.

I will roll it over when I am ready to do Roth conversion maybe next year.

^^^^This - depending on your institution, they may have negotiated a lower management on any shares held/administrated by Vanguard versus you as an individual investor. That is the main reason I am holding onto my 403B from an employer which uses VG as the administrator. Additionally, the institution may have negotiated free or low cost access to services that would cost more if you had those shares in an individual area.

As an example, I have free access to VG retirement planning services which allow you to input information from all of your portfolio and then based on other variables that you tweak, they recommend an asset allocation as well as when/how to re-balance. They also have a similar retirement calculator to FIRECalc and I-orp. For peace of mind, it can be nice to have different calculators help with decision making: it's like having a staff give you option A, B and C and then you choose.

 

[Murph]

I like how my 401K performs, so I just left mine in there.

 

[wildbilly]

"I remember reading somewhere that if you were sued it was harder to take the money in the 401K compared to the IRA. Is that a consideration?"

I won't move mine because of this reason. You can't even buy that kind of insurance and it's free(per the federal governments rules). IRA's laws are governed by the state and most have similar protection but only for the for $50-$100K or so; some have no protection.

 

[pb4uski]

"I remember reading somewhere that if you were sued it was harder to take the money in the 401K compared to the IRA. Is that a consideration?"

I won't move mine because of this reason. You can't even buy that kind of insurance and it's free(per the federal governments rules). IRA's laws are governed by the state and most have similar protection but only for the for $50-$100K or so; some have no protection.

Sure you can... its called umbrella insurance and many of us here have it.

 

[lakehawk]

I stopped working in August 2016 and still have the company 401K. I am considering moving it to my normal IRA to simply things. Both are at the same large brokerage company.

I can pick funds for the 401K and it seems to have recently swapped the "supposed" premium versions of funds to the same class that I have in my regular brokerage. There seem to be some sort of "fees" being deducted quarterly from the 401K. I don't think my IRA has such deductions, but there may be some sort of fees built in that I do not realize.

So, my question is: "Is there any major reason that I would want to keep the 401K active and not roll it to an IRA?"

I am under the impression that the 401K will be added to my IRA's for the mandatory distributions once I hit 70. The 401K does not help dodge that does it?

I remember reading somewhere that if you were sued it was harder to take the money in the 401K compared to the IRA. Is that a consideration?

Other than that I can't see any reason not to consolidate into the IRA.

Thanks in advance for any advice.

Joe

Not all states protect rolled over 401K's to an IRA. Wyoming is one of them and that is one of the reasons I did not roll into an IRA. 401K's may also have a stable value fund where IRA's do not.

 

[leeg]

If you have a basis in your Traditional IRA (you made non-deductible contributions to you T-IRA sometime in the past), you may wish to keep the total of all IRAs relatively low to allow recovering a larger percentage of the basis with each IRA withdrawal. If you increase the total size of your IRAs, a smaller percentage is deemed non-taxable ( recovery of your basis ) upon each withdrawals. I have that situation and I may never roll my 401ks into the IRAs.

Yup, I made this mistake. Cost me money on Roth conversions.

 

[wildbilly]

So the most common is a 1 million dollar umbrella; and yes, you had to PAY for it and it has it own special rules. The 401K rules don't have a limit and it's free.

 

[pb4uski]

Most of us have an umbrella anyway so the incremental cost of protection is negligible. Besides, the protecns that you are hanging your hat on vary widely from state to state. Not to mention that the investment options are much wider in a tIRA.

Seems to me that once you're past 59 1/2 that the only reason to stay in the 401k is if it has a good stable value fund or some really low cost index funds.

 

[wildbilly]

401K protection is at the federal level so there is no variation for US citizens. IRA's protection is at the state level.

Insurance is really a whole legal ponzi type scheme anyway. We/Lawmakers(how ironic) should fix the problem(of excess suing) instead of having to pay others for a perceived bandaid which will just require more and more funds/cost in the future.

 

[pb4uski]

Looks like all but 5 states protect IRAs.... and none are states that it is likely that I will ever live in.

http://moranknobel.com/news/State_Laws_Protecting_IRAs.pdf

 

[wildbilly]

One better read all the exemptions, rules, limits and fine print of what the States cover with respect to IRA's. Some of these rules are listed in the URL posted. Typically it doesn't cover the whole amount for those close to or in retirement.

 

[gwraigty]

One better read all the exemptions, rules, limits and fine print of what the States cover with respect to IRA's. Some of these rules are listed in the URL posted. Typically it doesn't cover the whole amount for those close to or in retirement.

I agree that one needs to brush up on the laws of their state. Too often, people assume they can only leave their funds in the 401k for creditor protection. Fortunately, my state protects IRAs with no limit.

 

[Dtail]

Most of us have an umbrella anyway so the incremental cost of protection is negligible. Besides, the protecns that you are hanging your hat on vary widely from state to state. Not to mention that the investment options are much wider in a tIRA.

Seems to me that once you're past 59 1/2 that the only reason to stay in the 401k is if it has a good stable value fund or some really low cost index funds.

+1
3.78% net current yield on my Stable Value. Will not touch until RMD's.

 

[ychuck46]

Yes, but ...

If your 401K has a Stable Value fund, and if you desire such a fund in your portfolio, leave it at the 401k. IRAs do not have access to stable value funds.

True, but all the big players have money market funds that are pretty much on par (at least right now) with the interest being paid by a Stable Value fund. Think Vanguard and Fidelity for instance.