10

Currently in the US there are circumstances which allow you to rollover your existing 401K into an IRA, such as when you change employers. You may also keep it in the existing employer's plan or roll it into your new employer's plan.

Assuming there is no issue of minimum balances for the funds of interest, why would I not choose to rollover my 401K into my IRA whenever I'm allowed to do so?

It seems to me that an IRA is a superior account type.

  • Very nearly a duplicate of this question. I think the two questions should be merged so that littleadv's excellent answer is preserved instead of being ignored as an answer to a closed question. – Dilip Sarwate Nov 6 '13 at 22:54
  • @DilipSarwate I disagree. Whether or not to rollover one 401k into another is fundamentally different than whether is should be rolled into an IRA. – Matthew Nov 6 '13 at 23:59
  • And if you were to read the answers to the other question, you will find that they discussed the pros nd cons of (i) leaving the 401k investment with the previous employer (ii) rolling it over into the new employer's plan, and (iii) rolling it over into an IRA. – Dilip Sarwate Nov 7 '13 at 3:14
14

IRA is not necessarily superior. You have to consider all the things together. Here are some potential benefits of not rolling over from 401k to IRA:

  1. Investment options. IRA is generally allowed for more variety, but in 401k you may have negotiated rates and the funds you do have there - are cheaper than they could have been if purchased through IRA. You have to check your own plan, because it differs from plan to plan.

  2. Fees - 401k may or may not charge fees (in addition to the expense ratios of the funds), and so does IRA.

  3. Protections - 401k is protected from creditors under the Federal law, IRAs are protected (mostly) under the State law. Check which one is protected better in your State.

  4. Loans - 401k may allow loans, IRA never allows loans.

  5. Roth conversion - if you want to convert traditional IRA to Roth IRA - your total IRA balance is counted for tax calculation. If you don't rollover 401k into IRA - you have lower conversion balance => lower conversion tax. Especially important for those utilizing the back-door Roth IRA contributions scheme.

  6. A 401(k) permits penalty free withdrawals if you are age 55 or older on separation from employer. The IRA, age 59-1/2 or one needs to look at the Sec 72(t) rules which may not be what you want.

  • +1 - and with your permission, I added #6. (delete or edit if no permission!) – JoeTaxpayer Nov 6 '13 at 21:02
  • Sure, good point, probably more that I missed. – littleadv Nov 6 '13 at 21:12
  • For points 1 and 2: it is extremely unlikely that you will not be able to find substantially cheaper IRA equivalents for your 401k investments. – James Roth Nov 7 '13 at 17:12
  • I believe Joe brought an example of a fund available for him in his 401k at a very low expense ratio, but no fund with similar characteristics is available freely as cheaply... – littleadv Nov 7 '13 at 18:25
  • Yes, my 401(k) contains VIIIX an S&P index sporting a .02% annual expense. – JoeTaxpayer Nov 9 '13 at 5:13

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