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This is a major financial decision for retirees. 25% of retirees over 60 still have their savings in a 401k plan, 5 years after retirement.
There are advantages for each option.
IRA
401K
There are many more pros and cons for each. Much will depend on individual situation.
If you are already a retiree, which option did you pick and why? Are you happy with that decision? What would be your advice to others?
If you are planning to retire soon, which option are you considering and why?
I moved my funds into an IRA for simplicity – everything in one place – and for better choices – my 401k had some lousy choices compared to the options available at Schwab.
When doing Roth conversions as I have for the past couple of years, I roll over from my traditional 401(k) to Roth IRA. And since both are at Fidelity, if the funds are in money market, it takes only one day.
I am looking into this option. Thanks!
I was thinking about this topic last week because a recent Clark Howard article on 401(k) safety (https://clark.com/personal-finance-credit/investing-retirement/is-a-401k-safer-than-an-ira/ ) reminded me to look into whether my 403(b) retirement accounts have ERISA protections like a 401(k) does. It ends up my 403(b) does not have ERISA protection. Apparently some 403(b) providers do meet the requirements for ERISA protection, and some don’t: https://www.standard.com/brokers-advisors/retirement/in-the-loop/erisa-vs-non-erisa-403b-plans-primer ; https://blakeharrislaw.com/blog/retirement-income-and-protection-plan . State protection of tIRA and Roth IRA assets from creditors varies with state, as Jonathan provided a table of.
Putting this together, for my combination of tIRAs, Roth IRAs, inherited IRA, non-ERISA 403(b)s, and non-retirement accounts, for my particular state, I found that the majority of my savings is not protected from creditors.
I have some creditor protection from a high level of auto liability insurance, plus the liability insurance within my homeowners policy. I also have an umbrella liability policy, for additional coverage. But after reviewing my current numbers I realized I was far from adequately protected from creditors, so I tripled my umbrella liability coverage, largely to make up for the lack of ERISA protections on my 403(b)s. Fortunately, umbrella liability coverage is very cheap compared to many other insurance products.
Another factor to consider: Many (not all) 401k’s require *both* spouses to sign off on any distributions. Trust me, this can be a lifesaver if one spouse becomes mentally compromised for whatever reason. Also related: a spouse has no legal right to inherit funds from their spouse’s IRA, but is legally enabled for first claim on assets in a spouse’s 401k. Once again, this may or may not become important, but the more you know…
And something else that’s good to know: SIPC insurance is good for up to $500k per brokerage and/or retirement account, per owner, something to think about before putting all your eggs in on basket by consolidating everything at one place. Spreading things around a little may add a slight amount of complication, but it just might help you sleep better.
agree. there’s this beast called Qualified Domestic Relations Order (QDRO) that will divvy up 401k.
The lawyers and two parties will divvy it up, but not always. I had a case once where a retiree saw his pension payment was half what it was. He came to our building with a gun he claimed looking for me. Where’s my pension? Turned out his lawyer had agreed to the 50% QDRO, retiree signed it but had no idea what he was doing. We had some interesting discussions trying to resolve QDROs.
Our 403(b) and 401(k) with TIAA and Fidelity only required a one time spousal waiver for distributions. We have spousal POD beneficiary designations on all of our retirement accounts, including an ordinary IRA.
This decision was easy for me.
I had a 403b that had higher fees than normal and fewer choices than normal. I suspected the account was maintained at the company where it was maintained as a “pay off” to a member of our Board of Directors. We were located less than 10 miles from the home offices of Vanguard, and certainly could have benefitted from their offerings and lower fees.
For my last 5 years of employment I made it a practice to use “In Service Distributions” annually, moving my money from the 403b account to my self directed IRA at Vanguard, thereby gaining access to the lowest fees and the broadest selection of funds and ETFs available.
When I retired in January 2024, I made the final transfer from the Roth Election Account, and I have never looked back.
The IRS regulations and bankruptcy laws are of little concern, and I carry a large Umbrella Liability Policy so I am not concerned about lawsuits either.
Being able to control your assets at one provider is a benefit I enjoy. The only holdings I have outside of Vanguard are two Income Annuities, which will remain deferred until 2029, at which time I will “turn them on” and thereby reduce any sequence of returns risk, inflation risks, market risks, and a number of additional risks in the meantime.
Life on Earth is Good.
A couple of items to keep in mind regarding 401K vs. IRA accounts. The expenses of a 401K plan can include costs that are not investment related, but are plan related. As a former CFO, I worked at several companies whose practice was to charge all plan related costs to the plan. For example, annual audits, plan fees and plan related legal expenses were allocated to the individual accounts. This is not a cost you would see in an IRA.
If you rollover your 401K to IRA, you will come under the IRS rules for aggregation should you seek to convert a non-deductible IRA account to Roth. https://smartasset.com/retirement/ira-aggregation-rule
Harold, good points!
“The expenses of a 401K plan can include costs that are not investment related, but are plan related.” These are the expenses that most do not see, or look to find them. Glad you mentioned it.
If all you have is a 401K and no IRA with 8606 funds, it may or may not matter. If you leave it with the employer, find out the true expenses…not just the fund(s) itself. Your employer also has their hands in your pocket and are receiving a fee. I saw my remaining cash balance go down the drain until it was gone. There was a NetBenefits article by Fidelity about this and most people don’t realize your company is being compensated if you participate in a 401K. Know all the expenses if you leave it behind. I don’t care how solid a company is, things can change and they could go bankrupt. Don’t ask how I know.
If you do have 8606 funds in a T-IRA, it would be good to ask a tax person or the brokerage all the ‘what if’ questions. If you have other retirement accounts not mentioned in your post, seek assistance. You don’t want to learn several years down the road something you overlooked and wished you had planned better.
There were a lot of things I didn’t know when I moved my 401K into a Rollover IRA. I felt pressured by hearing the benefits of doing so, but not the downside.
Each time I was laid off from my job twice at the same company I rolled over my 401K into my Vanguard IRAs. The company I worked for had State Street funds and when I spoke with State Street they refused to provide me with prospectives for their funds which seemed wrong. I believe they said the makeup of each fund was proprietary.
Also we have an umbrella policy which is very inexpensive and covers the value of all our investments and the value of our house.
I believe this protects our assets from lawsuits.
When I consolidated to Fidelity, I moved the 401k into an IRA – 10 years after I retired.
All plan costs were paid by the 401k trust plus they added an additional annual fee on inactive accounts. That really annoyed me as I would be paying twice to maintain the account.
Being consolidated make things much easier.
Probably leave my 401k since it’s at a large employer, I like the options in the plan and see no reason to move. I also have an IRA which conveniently is at the same firm, Fidelity whete my 401k resides
My wife has two 401ks and we’ll probably just move those to Fidelity as an IRA when the time comes, but who knows. Right now they are with large employers one with Vanguard and the other with Schwab. Wr arenomly 53, so we have a bit of time. I do like the simplicity of having everything in one place.
Nick, thanks that’s a good article that I missed in the WSJ recently. In my case I did “in-service distributions” from my 401k while still working in advance of my retirement. I was able to roll the funds over to various IRA investment options including a MYGA for funds I might need early in retirement (although I haven’t drawn on those yet). I did continued to participate in my company 401k until I retired.
Kept it in the 401k, which has very low cost index funds, a stable value fund and company stock.
The stable value fund forms the bulk of our fixed income allocation. Can’t beat the return this gives at for very low risk.
Company stock has the potential for NUA when taken out, but that requires distributing everything in the account, and the attractiveness of the stable value fund means that’s not going to happen anytime soon. Plus happy to keep holding the stock.
While consolidation is good in principle, there’s a safety/security diversification benefit from having some assets under a different custodian.
“There’s a safety/security diversification benefit from having some assets under a different custodian”. Agree. I have assets distributed amongst several top investment firms/custodians.
At some point after I retired I consolidated everything at Vanguard except the stable value fund in my 401k. I moved that money over when I had to start RMDs. I haven’t worried about a need for protection, I carry umbrella insurance and don’t owe anyone any money.
Upon retirement, I rolled my 401(k) into my Schwab IRA for more investment options, lower fees and to simplify my financial accounts for myself, for my spouse (if I die) and for our executor (if we both die). Seemed like a no-brainer. That was 2 1/2 years ago and am very happy so far.
Great question to ask. I think this is a really important question to consider, especially depending on which state you reside in or potentially might reside in during your retirement as that’ll radically impact what level of protection you give up by rolling a qualified 401K into an IRA. Another aspect to this is if you’re going to continue investing in a few broad index funds, what real advantages are you gaining with the rollover IRA that’s worth losing ERISA protections. Since most (if not virtually all) 401K’s won’t allow you to roll it back into the 401K later, this really needs to be thought out before the rollover is done. There are various strategies that can help protect your IRA such as personal liability policies or declaring bankruptcy, but they all have limitations and come with their own costs and risks. But ERISA protected funds; I don’t know but I suspect most ambulance chasers won’t even take the case since I believe they know that (with few exceptions) they won’t be able to get the 401k money nor distributions from it. Meanwhile, some states limit IRA protections in various ways, including “…to the extent necessary for the support of the individual…”, which is probably open to interpretation by the judge and most likely means legal costs to defend the IRA in court. Meanwhile, in my state the maximum legal IRA protection is about 55% of my IRA. I wish I’d know all this before I (somewhat blindly) followed conventional wisdom and rolled my 401k into an IRA when I retired. I guess you could say it was a mistake I can’t rollback.
For those who are curious, here’s a chart that details IRA protection by state — you need to scroll down:
https://www.irafinancialgroup.com/learn-more/self-directed-ira/ira-asset-and-creditor-protection/
I’m no expert, here’s a link to a chart that paints a different picture: stateirachart.pdf (thetaxadviser.com). You’ll note that on it there’s more exceptions to the limits of protection under state law. On it, if I’m reading it correctly now about 6 states now limit protection to “necessary for support”. Seems like there may be a trend developing.
Spouse just retired at beginning of the year and is doing some part time work for the company they retired from. They are eligible for 401k still, including match, so haven’t had to make a decision yet. Chris
At retirement in 2021 I happily rolled my TIAA 403(b) and Roth 403(b) over to my IRA and Roth IRA, respectively, at Vanguard. The index funds offered at Vanguard more closely matched what I wanted, and the expense ratios were lower. Furthermore, only the IRA, not the 403(b), was eligible for taking a QCD.
I left mine with my previous company. Since I have a pension and retiree health insurance, I’m joined at the hip with them for life regardless. Their 401(k) plan is great—low fees and good options. And as you say, there are added protections. As I near 75 (many years from now), I’ll probably roll it over to an IRA so I can do QCDs.
I don’t know, but it might be possible (if you 401K allows it) to just rollover the amount necessary to fund the QCD’s. Worth checking to see it that’s allowed.
Here is a great article about this
https://www.wsj.com/personal-finance/retirement/what-to-do-with-401k-after-retirement-22b9b787?st=4esd3pkpvvr8s0y&reflink=desktopwebshare_permalink
Nick, thanks for this link. Good article. I read it and it didn’t change my thinking on our decision to consolidate at Vanguard. None of the cons directly impact us. One other advantage of combining accounts that I haven’t seen mentioned – at Vanguard and others the more you have invested the better they treat you. At various levels of service you get more perks.