Disadvantages of 401k rollover

[Packman]

With my ER coming in about 50 days, I would like to roll my 401k to my current IRA account after I terminate my employment. The main advantage for me is many more investment choices. What are the disadvantages? Can I just add to my current IRA since both the IRA and 401k are all pretax money? Or do I need to open another IRA account?

The 401k is about $600k. Both the IRA and 401k are through Fidelity. I will not need to touch this money until RMD's are mandated, although I may draw on it sooner for tax efficiencies.

 

[RunningBum]

The only "advantage" I know if is that you can't take a loan from an IRA. I'm not even sure you can take a loan from a 401K if you're no longer employed, but if you took a new job you could roll it into that plan and probably be able to take a loan. But, taking a loan from a 401K isn't usually a good idea anyway.

I suppose it's possible that your 401K has some great institutional low cost fund that you couldn't get elsewhere, but usually the fees in a 401K tend to be higher.

Rolling it into an IRA is almost always the best choice. I think you can put it in your existing IRA, but Fido should be able to advise you on this.

 

[Koolau]

I have heard discussions to the effect that an IRA may be more vulnerable to civil judgements (i.e., law suits) than a 401(k). This may be state specific, but, again, not sure of any of this. Might check it out. YMMV.

Congrats on your impending ER!!!

 

[Alan]

Rolling it into an IRA is almost always the best choice. I think you can put it in your existing IRA, but Fido should be able to advise you on this.

+1

I know that when you leave a company you have to pay back any existing 401k loans so I doubt that you can get a 401k loan from a 401k from an employer you retired from. However, if you actually needed money you can always do a 72(t) withdrawal.

 

[growing_older]

The rules for taking withdrawals from 401(k) and IRA differ from age 55 to 59 1/2. In your case it may not matter and if you do rollover to an IRA, there is always the 72t substantially equal payments option. There was a nice summary on Retire Early: Can I withdraw money from my IRA before age 59½ ? although like any retirement program, the rules could be changed again, so you might want to verify before you count on any of this.

You can make penalty-free withdrawals from a 401(k) at age 55. You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. While this seems like a big break for a 55-year-old retiree, there are several things to consider; (1) Your employer must make it convenient for an ex-employee to make retirement withdrawals, many employers can't be bothered, (2) Rolling over your 401(k) funds to an IRA may increase the variety of investments available to you and lower your fees. If that's the case, the hassle of SEPP withdrawals from an IRA may be worth it.

Note: There is one fine point that many people miss in taking penalty-free withdrawals from a 401k at age 55. To do so, you must terminate your employment no earlier that the year in which you turn age 55. (See IRS Notice 87-13) If you retired at age 54 and waited until age 55 to make withdrawals from your 401k, you would not be able to make unlimited penalty-free withdrawals. You could only make penalty-free withdrawals by using SEPP.

 

[rescueme]

For me, the only change was the title of the account. While I rolled over "in place" all my 401(k) holdings (Fidelity) to a TIRA (Fidelity), the account was labeled "Rollover - (Non-Traditional IRA)".

My T/Roth IRA's are held at VG, so there was no reason to label the account as such, IMHO but that's just the way they did it.

Normally, a Non-Traditional IRA refers to holdings outside the market, such as investments in (non-residence) property, or a business. However, in this case it was just a way to differentiate what was a rollover vs. normal contributions. The main case in keeping it separate (for those who will continue or return to w*rk) is that the funds are kept separate and can be transferred back to another company's 401(k) - if they accept such funds. Once you "mix" it with your traditional contributions (e.g. non-401(k)) you can't break it back out easily.

 

[Alan]

My rollover 401k in VG, and DW's rollover 401k in Fidelity are also kept seperate and labeled as Rollover-IRA. This is useful to segregate them from the existing T-IRA's which have non-deductible contributions to keep track of.

 

[JOHNNIE36]

I was retired from megacorp and Fidelity managed the 401K. I took several loans from the 401K while retired. Then a few years ago I rolled the whole thing over into an IRA. It's important to pay attention to the rules for these type transfers.

 

[ziggy29]

I have heard discussions to the effect that an IRA may be more vulnerable to civil judgements (i.e., law suits) than a 401(k). This may be state specific, but, again, not sure of any of this. Might check it out. YMMV.

Yes, this is definitely state-specific. In Texas, Florida and Oklahoma for example, IRAs essentially get the same, unlimited asset protection as 401K plans.

 

[FinanceDude]

My rollover 401k in VG, and DW's rollover 401k in Fidelity are also kept seperate and labeled as Rollover-IRA. This is useful to segregate them from the existing T-IRA's which have non-deductible contributions to keep track of.

I like that idea..........

 

[Brat]

I kept our rollover IRAs in separate accounts from other IRAs, merged them only after we were long retired and facing MRDs. In OR & WA IRAs are protected assets, as are retiree annuities.

 

[HFWR]

I've kept my 401k from ex-megaconglomocorp separate, to allow for the option of penalty-free withdrawals before 59.5.

After I reach that age, I may consolidate for simplicity.

 

[MasterBlaster]

As others have posted the big drawbacks are.

1) the lack of penalty-free withdrawals at 55 in an IRA. You'll have to wait until 59.5 or do a 72T scheme.

2) The courts have ruled that IRA accounts are only protected against lawsuits (depending on your state) to maybe $1MM. Anything beyond that may be subject to court decree. 401k accounts have unlimited liability protection. Therefore if you have large accounts (depending on your state) you may consider keeping accounts where they are.

3) The downside to 401k accounts, as others have posted, is the lack of choices and flexibility. Sometimes high fees are levied.

 

[kaneohe]

My rollover 401k in VG, and DW's rollover 401k in Fidelity are also kept seperate and labeled as Rollover-IRA. This is useful to segregate them from the existing T-IRA's which have non-deductible contributions to keep track of.

I did this too in the past for the same reasons tho I eventually found it to be more a psychological comfort than a real help. If the accounts that had non-deductible contributions had a value of X, then I knew the basis could not be larger than X. However that didn't really help me in calculating basis (because of the earnings) so F8606 was what really tracks the basis and it doesn't really matter (for this purpose) if the accounts are mixed up. Perhaps keeping them separate might be useful for creditor protection purposes.

 

[kaneohe]

My impression is that 401Ks have much stronger creditor protection than IRAs.....untouchable by most creditors except IRS and former spouse and w/o having to file for bankruptcy.

IRAs have varying amounts of protection (state dependent) and often/usually?
you have to be under bankruptcy to get that protection.

If you need to use the funds for living expenses, the flexibility of the IRA might sway you one way.
..........but if you don't need the funds, you might balance the creditor protection of the 401K against the lower expenses/flexibility/etc. of the IRA.
IRAs Could Be Fair Game in Lawsuits - latimes.com

 

[Sarah in SC]

We've been recommending to some folks that they roll their regular IRAs into their company retirement accounts and converting non-deductible portions to Roths. Most are small business owners so this is relatively straightforward.
Might be a possibility to help get rid of those non-d contributions that will likely prove pesky in the future.

 

[sn2792]

My 401K is with Fidelity also. I rolled part of it over to a rollover IRA with TD Ameritrade. I left enough funds in 401K so I would have penalty free access to the money until I turn 59.5. However, I have a self-directed brokerage link option, so my 401K money is in a number of mutual funds and not tied to the company funds. If you have this option with your Fidelity account, you would have a lot more mutual fund options.

 

[Gone4Good]

Access to a 'stable value fund' has kept me from rolling over my 401(k). I'm getting 10-yr yields with far less duration risk than with similar yielding bond funds. I'm gonna sit tight with this until a better fixed income alternative materializes.

 

[FIRE'd@51]

A possible disadvantage to retaining the 401k is that there is a mandatory Federal tax withholding of 20% on distributions. With an IRA there is no mandatory withholding for taxes, although you may elect to have an arbitrary withholding if you choose.

 

[Packman]

Thanks for all of the replies. I did hear about the liablity protection issues afforded to 401k's versus IRA's. I'll check on that in my state (Colorado).

I can't imagine why I would need access to these funds until after 59.5. I suppose there is some potential of that, but I think that concern for me is more than offset by the lower fees I would pay (in an IRA) and more investment choices. My 401k only has one bond choice (PIMCO). The brokerage link account is an option for me, but for some reason, my employer has put a 25% limit on using that feature.

I'll check with my Fidelity rep, but I think the option of more investment choices and lower fees wins in my book. Especially since I may not touch these funds for another 17 years.

As a side note regarding PIMCO - good fund, but it aggrevates me that this fund (and a bunch of others) hold large positions in cash. When I put my money in a bond fund, I'd like to be in bonds - is that too much to ask.

 

[kaneohe]

A possible disadvantage to retaining the 401k is that there is a mandatory Federal tax withholding of 20% on distributions. With an IRA there is no mandatory withholding for taxes, although you may elect to have an arbitrary withholding if you choose.

This is a good point to remember. Wouldn't think it should be a determining factor though since you could compensate by cutting back on estimated taxes.....in fact, some folks like to take the RMDs from IRA/qualified plans late in the year and withhold most/all of it for taxes since it counts as being w/h evenly throughout the yr.

 

[veremchuka]

Since you are under age 55 you can't take any 401k distributions prior to 59 1/2 without incurring the 10% penalty. If you retire at 55 or older you can take 401k distributions w/o the penalty prior to 59 1/2. Since you say you won't take any distributions prior to RMD this may not be an issue but one never knows. I kept some of my 401k intact in case I needed money which I did not.

Another advantage of having some of your money in the 401k is if you have a stable value fund you will be getting a better yield than on similar (short term bond funds) safe holding and won't suffer nav loss when interest rates rise. My 401k stable value fund has a 3.5% yield and no nav loss over the years I have tracked it since 1998.

Since it's 2 am and I want to go to bed some of this may have been said.

 

[photoguy]

What are the disadvantages?

While you do the rollover, your money may be out of the market for as much as a month. If you did a rollover last september, this would have been as much as an 8% loss.

 

[haha]

I kept our rollover IRAs in separate accounts from other IRAs, merged them only after we were long retired and facing MRDs.

What was the reason for keeping them separate? You might have said it earlier but I missed it.

Ha

 

[kaneohe]

Since you are under age 55 you can't take any 401k distributions prior to 59 1/2 without incurring the 10% penalty. If you retire at 55 or older you can take 401k distributions w/o the penalty prior to 59 1/2.

a problem in the 1st sentence? either you meant an IRA /59.5 or 401K/55?