I remember what I thought was a very clever, tongue-in-cheek statement on the wall of a restaurant. This seafood restaurant, in mural-sized font, had “Free Crab Legs Tomorrow” painted in the style of a fresco. I find that same statement to ring true for people who have just left a job and now have some admin to finalize. When will you typically address it? …that’s a task for an everlasting “tomorrow”.
Unfortunately, that leads to a breadcrumb trail of 401K crumbs behind you with the trail becoming harder and harder to backtrack the longer it gets. I’m hoping this quick article provides some tips as to what you should do with your 401K and why it’s a bigger decision than it seems.
Let’s end the suspense and say immediately that you probably SHOULD rollover that old 401K and the better question is where you should roll it to. You generally have two options: your new 401K or an IRA. There are pros and cons to each option and which one suits you best depends on your situation.
Rolling a 401k over to an IRA is the default answer and for many people and it isn’t necessarily a bad option! After all it:
- Gives you more investment options as you can invest in most investments you’d find on a stock exchange.
- Keeps your assets together in one place and is the easy “landing place” for all your old retirement accounts (yes, multiple old 401Ks can go into one IRA).
- Sometimes 401Ks have higher administrative fees associated with them but this isn’t always true.
- There are more exceptions to the rules for taking money out that include things like being able to use some for a first-time home purchase
Rolling money over into an IRA is a great option to keep things simple and often-times affordable.
There is also less administration later on as distributions from 401Ks can be a pain. There are some ways to access this money, as well, but talk to an advisor before taking anything out of your IRA. Overall, rolling over to an IRA is the easy and affordable way to manage old 401Ks.
Nothing wrong with convenience, but here’s why you might opt to not use an IRA:
- IRAs do not have protection against creditors like 401Ks do.
- You can’t take a loan from an IRA.
- Backdoor Roth Conversions are likely not viable anymore. 401Ks have an option, in some case, to take funds earlier than 59 1/2
You should be in touch with an advisor and/or an attorney if you are in a position of having creditors coming after your retirement accounts, but it happens! Be aware that if you are in a position of approaching bankruptcy filings or some other credit situation that you may have more protection for your assets inside a 401K.
Backdoor Roth Conversions are a fairly intricate strategy for high earners to get money into a Roth IRA. Without a lot of explanation here, you likely wouldn’t pursue that strategy if you had an IRA balance so you may opt to move funds into your new 401K.
Lastly, there is something called a 72(t) distribution in 401Ks. It allows you to start taking money from your 401K early if you meet certain criteria. It usually is because of an unfortunate situation but that flexibility can be beneficial.
Deciding to roll over a 401K is a straight-forward one and the intricacies of deciding WHERE to move it to make it a bit more of a difficult decision. Each situation is a bit different and your needs are unique so talking to an advisor would help way all options of the decision as they apply to you.