Should I Keep My 401k At Work?
When you’re ready to finally retire you’ll have some major financial decisions to make. Probably one of the biggest decisions is should you keep your 401k plan at work or roll it into an IRA or Roth (in the case of after-tax or Roth 401k balances).
Generally speaking, most investors (and their advisors) recommend rolling their 401k assets into an IRA or Roth. There are however some serious issues to consider when faced with the 401k rollover decision. Leaving your 401k assets in your old plan may just be the right decision for your situation.
3 points to consider when deciding to roll your 401k
Creditor Protection. 401k’s are protected against creditor judgements under federal law because they are “ERISA” qualified plans. There are several plans which aren’t ERISA qualified plans, such as most 403(b)’s, IRA’s, Roth IRA’s, SEP’s, etc. Non-ERISA plans are protected under state law.
Each state has their own rules regarding creditor protection. In Nevada non-ERISA accounts (such as your IRA’s) are protected to $500,000. Some would argue the $500,000 is higher in the case of your 401k rollover. There’s minimal case law to substantiate that however.
Better Investments. Many employer sponsored plans enjoy economies of scale with their investment options. They can negotiate lower investment fees due to the size of their plan assets. The lower the fees, the more you make and keep as an investor. Consider carefully your investment options and if your fees will go higher or lower before rolling your 401k plan into an IRA.
The new Department of Labor fiduciary rule directly applies to the investment part of this decision. Any financial advisors influencing the decision whether or not to roll your 401k into an IRA must have concrete reasons why. They must also act as a fiduciary and pay special attention to the fees you pay inside of your 401k and the fees an advisor would charge.
Withdrawal Flexibility. IRA withdrawals prior to age 59 1/2 are generally subject to a 10% penalty. However if you leave your 401(k) assets in the old plan and retire at age 55 or older, you can avoid the 10% penalty on distributions. If you’re a public safety worker (police, firefighters, EMS workers) and separate from services after age 50 the 10% penalty is waived. This applies to distributions from your government sponsored pension plans.
For many individuals, this waiver of the 10% penalty proves a massive boost in their retirement planning options. For others who will work past 59 1/2 anyway it’s irrelevant.
If you’re still working over age 70 and 1/2 an additional benefit is your RMD’s (required minimum distributions) are waived. The caveat is you cannot be a 5% or greater owner in the company you work for.
So Should I Keep My 401k At Work?
Most retirees should consider rolling their 401k into an IRA/Roth IRA when they retire. This is generally the better option, and gives you much greater flexibility with investing. The added flexibility can help you coordinate your investment plan across all of your separate investment accounts.
That being said you should seriously consider leaving your 401k in tact with your employer if you’re younger than 59 and 1/2. In an emergency if you needed funds from your 401k this would allow you to avoid the 10% early distribution penalty.
The moral of the story is be very careful when deciding whether to roll your 401k into an IRA. There are more things to consider than what your financial advisor may be promoting.