Advantages of rolling 401k to IRA?

18 years ago

Hi,

I have a very small 401k sitting in my old employers plan, growing at 8+%

I had planned on moving it to a new employers plan when I get a new job, which will hopefully be within the next 6 months.

Other than more control over the investments (which I wouldn't really bother with now), would there be any advantage to rolling it over to an IRA with the same company? (Fidelity)

They keep 'suggesting' I do this, so there must be some advantages in it for them (investment / service fees etc).

(I don't want to put the $ into anything that isn't readily available in case I need it if I have problems getting a new job etc.)_

Any advice would be appreciated!

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Comments (10)

zone_8grandma
18 years ago
Since you will have the opportunity within the next 6 months to move it to your new 401K, personally I'd leave it where it is.

8% isn't bad (even though right now the market is doing much better than that), but if you put it into an IRA with Fidelity, then you wouldn't be able to add it to your new 401K. Keep in mind that if you are under 50 1/2, the penalties for early withdrawal are the same.
missjulied
18 years ago
One advantage of having more control over the investments is that you could possibly find a fund with lower fees than you currently have. No need to be paying more fees than you have to.

Every time I've left jobs I've rolled the 401k into my IRA. You never know when you get a new job what their 401k administration is going to be like. I've had some where the websites were so poor that it was really hard to get clear information on how my account was doing.

Hope that helps -
jd
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steve_o
18 years ago
Given your situation, I'd hold off on a rollover until you feel more comfortable with your new job. However, I would recommend doing the rollover at some point in the not-too-distant future.

I maintained 401(k)s in previous jobs for years. After a while, I tired of managing the paper cloud that arrived quarterly (including the ubiquitous "For your convenience, we have jiggered around with the fund options and management company again" notice). It also was more difficult to manage diversification simply. "OK, x% in U.S. stocks, y% in bonds, z% in international stocks. Ooops -- this plan doesn't offer an international-stock fund. Oh, what's this? Boy, that sure is a carppy bond fund!" And, of course, reallocating actual dollars across 401(k)s was impossible.

I moved everything (except my current employer's 401(k)) to Vanguard. I get one statement, management hasn't changed substantially in years, Vanguard has a great rep for lower costs, and it's really easy to reallocate when necessary.

Good luck with your decision.
saphire
18 years ago
I would either leave it for a while or IRA it. I would not turn it over to your new employer. Since you sound relatively young I would use this time to educate yourself about finance so that you are familiar with alternatives to mutual funds. Then move it to an IRA where you have a better idea of where to invest it
jakkom
18 years ago
You'll probably have multiple employers over time. Set up an IRA at a good low cost broker - Vanguard, T. Rowe Price, Fidelity - and when you leave a job, roll your 401(k) monies into your IRA.

Consolidation will make not only your paperwork easier to create a proper allocation mix (and annual re-allocation), it will also be a great relief to your heirs. Yes, I know you're young and healthy, but believe me, it is a LOT easier to keep the beneficiary designations updated on ONE consolidated IRA account, rather than the half-dozen assorted 401(k)s you've created after a while!

Right now my nephew/niece and I are beating up on their dad (figuratively, of course!) because he has 401k funds at possibly 7 or 8 companies. I think my sister, his ex-wife, is still listed as beneficiary on most of them. Since she's got a million bucks in the bank and is semi-retired by choice, and he'd prefer the money go to his kids, it seems rather foolish to be risking letting his paperwork go - particularly since he suffered an unexpected heart attack recently!

Really, you'll find life is much simpler if you consolidate your accounts. All it usually takes, once you've set up the IRA, is a phone call and a few simple pages to fill out.
rachelh
18 years ago
I was told at the point that I set up my husbands IRA from his 401K rollover, that it would be possible to roll it back into another 401K as long as he hadn't added any other contributions to it. When he left the company they required him to take his 401K with him or else I would have just left it there.
bunnyman
18 years ago
I've not looked at tax law but I don't think it has changed recently....

Roll into a REGULAR IRA... tax free going in. Then convert to a ROTH IRA... tax free going out.

Don't know if that is still an active loophole but very much worth doing if it still open. Taxes take a huge freakin chunk of how ever much money you have. Other thing you can do is be a freak like me and avoid retirement accounts all together.... straight up brokerage account... total control.
randy427
18 years ago
In converting into a Roth, you must pay income tax on the principle plus earnings as if it were regular income in the year you do the conversion. The tax dollars must come from another source, not the IRA. I can't think of a way to come out ahead by doing this.
jakkom
18 years ago
It is only worthwhile converting the IRA rollover to a Roth if you have at least 10 years before retirement, preferably 20, to allow the tax-free compounding to work for you.

If you are close to retiring, unless your retirement income is going to be really low compared to your current income, then a Roth conversion will not generally work in your favor.

One exception is if your current income has dropped so substantially that you can easily afford the "tax bite" of the Roth conversion for that tax year. One of my friends had her income drop from $60,000 to $17,000, and doesn't plan to retire for another 15 yrs, so it was worth it to her to do the Roth conversion on her IRA.
PRO
acdesignsky
18 years ago
Just be aware of the upfront costs before switching. It may make more sense to leave it alone.
DH had a 401K at his old job that had grown into 6 figures over the course of nine years. His new employer didn't offer a 401K and his old employer was facing really bumpy times ahead, so he rolled it over into an IRA.
I didn't realize how much we had been saving in fees with his 401K. The IRA rollover cost over 13K in fees alone. I'm sure that had something to do with the funds (or whatever the term) he'd chosen, but it still hurt to see over a year's worth of savings gone in an instant.

Advantages of rolling 401k to IRA?

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zone_8grandma

missjulied

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