Looking for advice on what to do with the funds in my 401K.
Recently laid off for the first time in my adult life. I called the company where my funds are and they said there are a few options, but they recommend moving the funds into an IRA (of my choice). Their fees are about 1%. I have about 225K in there. I'm 48 and plan to work until 65 (at least). I have lots of equity in my house.
I plan to be working again soon, but if I understood them correctly, it makes more sense to have these funds in an IRA that I have more control over, rather than putting them into a 401K account offered by my next job which may have rules I don't like.
Are they giving it to me straight? Any advice?
Laid off after 25 years, what to do with 401K ???
byu/bored3227 inpersonalfinance
Posted by bored3227
12 Comments
Read rollovers in the wiki.
You can just leave it if the Ira would have a higher fee
Check on the fees. When you leave, they usually push the fees on to you. If they happen to be very low, theres no reason you need to do anything. You could just leave it there.
The best option is to see if you get a new job, with a new 401k, and rollover to that one. So even if there were fees, maybe its not for too long.
3rd option is to rollover to an IRA. Traditional 401k > Traditional IRA, Roth 401k> Roth IRA.
This is also super simple and IRAs provide no fees and much better fund choices.
However…. depending on your income, if you rollover to a Traditional IRA, this can hinder your ability to do the Backdoor Roth IRA. So if you need to do that (income over ~$150k), its advised against this option. (Roth 401k>Roth IRA, is totally fine, can do that no matter anything else)
Edit:
>rather than putting them into a 401K account offered by my next job which may have rules I don’t like.
Your current employer has no place giving you advice on what your next employer may or may not offer you. You will see their options when you start a new job. It could be a lot better than this old one!
If you don’t like any new employer plans, then you figure it out then.
You haven’t mentioned your income, or if you need to do the Backdoor Roth. But if so:
Option 4: Since you’re currently unemployed… if you were to find ANY 1099 job, to give you some self employment income… you can open a Solo 401k, and rollover the old 401k into this one. Then it will stay in the 401k bucket. Solo 401k, though a bit more annoying to setup, since its usually with the same big brokerages: also no fees, and better fund choices. (Mine is with Schwab)
If you are comfortable investing yourself I would roll the 401k to an IRA. Fidelity and Schwab do not charge fees.
if you do rollover then make sure the money goes direct from institution to institution or there are tax consequences
401Ks charge more fees than they should
Pick one of big 3 and roll it into their IRA. Schwab, Fidelity, or Vanguard.
At your new job, it may be worth rolling it into their 401K, especially if you will have a high salary and need to do backdoor Roth IRA contributions.
Yes, roll it over into a Rollover IRA that is self-directed. But shop around, 1% fees are way more than you need to pay.
A low cost custodian like Vanguard could cost you as low as 0.03%.
create a rollover IRA at Fidelity or Vanguard. Transfer your balance to this new account
Rollover IRA is your best bet.
Potential pros of moving to an IRA:
* Lower fees than your next 401(k) plan (and certainly lower fees than your current plan);
* The most control over your investments.
Potential pros of rolling over into your next 401(k) plan:
* Backdoor Roth conversions, if you aren’t eligible for regular Roth IRA contributions otherwise;
* Rule of 55. If you leave an employer on or after the year you turn 55, you can withdraw from your current employer’s 401(k) without penalty.
I say “potential,” because there are other factors at play you could read up on and see if they apply.
There’s really no bad choice, except maybe for leaving it in your current 401(k) longer than it needs to be since the fees seem high.
I was laid off two years ago. I left mine with my previous employer and when I found a new job I just transferred to my new 401k. It was a relatively painless process with an interims hard copy check phase.
I wouldn’t do anything with it until you have your new job. The benefits at the new job will impact what your best decision is, whether that’s rolling into an IRA or a new 401k, because both options have pros and cons, and you can’t undo rolling into an IRA from 401k.
An IRA is advantageous because you can get very low or no fees and have complete control over your investments, while most 401ks have high(er) fees and limited investment options. But if you do, you lose the special benefits of the 401k, such as the ability to take a loan against the 401k, backdoor Roth strategies, and so on. 1% fees suck, but a few months of them won’t kill you while you figure out your best plan. If and when you do rollover to an IRA, do not accept high fees, there are tons of options without them. Fidelity has no fee self directed IRAs. And you can roll your money to any provider you like.
sorry you’re dealing with that. 25 years at one place and then getting laid off is a big hit.
they’re not wrong that rolling it into an ira gives you more control. you’d usually get a wider range of investments and potentially lower fees, especially if you open an ira at somewhere like vanguard, fidelity, or schwab and use low-cost index funds. 1% is pretty high in fee terms — on 225k that’s over 2k a year, which adds up fast.
that said, it’s not automatically better in every case. a few things to think about:
* if you think you might need to do backdoor roth contributions in the future, having a big traditional ira can complicate that because of the pro-rata rule.
* 401ks sometimes have better creditor protection than iras (depends on state).
* some 401ks have access to institutional-class funds that are actually very cheap.
* if you plan to work again soon and the new 401k is solid and low-cost, rolling into that can keep things simple and avoid the pro-rata issue.
you don’t have to rush. you can usually leave the money where it is for now as long as the balance is high enough and you’re okay with the plan’s fees and investment options.
the key thing: do a direct rollover if you move it. don’t have them cut you a check personally unless you’re 100% sure how to handle the 60-day rule and withholding.
if it were me at 48 with 17+ years to go, i’d focus less on “control” and more on total fees and investment flexibility. low cost + broad diversification matters more than where the account lives.
When I leave jobs I roll over my 401 or 403 to my Vanguard IRA. Roth to Roth, traditional to traditional and buy ETFs. This has been very inexpensive and has worked well for me so far.