47M – current 401k balance is around $310k. I’ll be divorced in the next 6 months and will be left with around $150k-ish.
The company that I work for was just acquired and the new 401k plan sucks (at least compared to my current plan).
The match may be up to 50% of the first 5% of my pre-tax contributions (catch-up contributions are not matched). Meaning they will contribute up to 2.5% if I contribute 5% or – for example – if I contribute 3%, they will match up to 1.5%, etc.), but ultimately this is determined at year-end and is administered through a one-time contribution the following year.
Some of my coworkers are not signing up for the new plan and putting their 401k balances into IRAs. Would it make sense for me to do the same?
I realize everybody’s situation is different and nobody will be able to tell me exactly what to do, I’m just hoping for a little advice. Thanks.
Need 401k advice – soon to be divorced – 47 years old
byu/Claude_Agittain inpersonalfinance
Posted by Claude_Agittain
9 Comments
Review the PF Wiki.
There are a lot of really great life advice guides within.
Here’s the section on Rollovers which goes over the thinking of how to decide whether or not to rollover a 401k to an IRA.
* https://www.reddit.com/r/personalfinance/wiki/retirementaccounts/rollovers/?rdt=45657
The new match has no bearing on what you should do with your current balance. What are the fees and fund choices like in the new one?
If you plan to ever do the back door Roth IRA then you want to avoid having money in a traditional IRA.
2.5% matching is fantastic! When I’m able to roll a 401k away from an employers limited investment options into an IRA I always do it. Then I can better control my investments. I understand that some 401k allow you to pick any ETF or stock but I’ve never had one that does.
No you want to get your free 2.5%. Set it and forget it. Tough situation you’re in and you need all the free money you can get.
Any match is like a FREE money. Take it while you get it!!
There’s two separate issues. The first is what to do with your existing balance. You can absolutely take advantage of the change to roll this amount over to an IRA. The only possible issue there is if your income makes you ineligible to contribute directly to a Roth IRA. If it does, then you can use the backdoor method and contribute to a traditional IRA first, then rollover to your Roth IRA. That works as long as you don’t have a large balance in any traditional IRA (all IRAs are treated as one for this).
So if you’re going to need to use the backdoor method to fund a Roth IRA, then you wouldn’t want to roll your traditional 401k to a traditional IRA right now. Otherwise, go ahead.
The other issue is new contributions going forward. You absolutely want to contribute at least 5% to the 401k in order to get the full match. Don’t leave money on the table! But if the investment options and fees aren’t great, then make contributions to your Roth IRA with any additional money you want to invest in your retirement. Once you have put 5% in your 401k and the annual max in your Roth IRA, and you still want to put away more you can look at maybe putting more into the 401k. Or if it’s really bad, put it into a taxable brokerage account.
Sign up for the new 401k and contribute 5% so that you get the full 2.5% match. That’s an immediate 50% return on every dollar you contribute, which is better than anything you’ll get with your IRA.
If you are able to dedicate more than the 5% 401k contribution and you really hate the options in the 401k plan (or maybe the fees are high), then prioritize maxing your IRA if you prefer.
If you want to save more for retirement, then you’re likely better off contributing more to your 401k than to a taxable brokerage account, especially since your current 401k may have better options in the future or you may change jobs again and then be able to rollover you account to a new plan with better options.
Also be mindful of income limits both for deducting pre-tax contributions to a traditional IRA and for making direct contributions to a Roth IRA. Depending on your income level, this may be something that didn’t affect you while married but will affect you now that you will be single and have lower limits. Even if you aren’t over these limits now, consider whether you might be in the future. If you don’t already have pre-tax funds in a traditional IRA, I wouldn’t recommend starting now (with a rollover or direct contributions) since they will interfere with the backdoor Roth strategy any time in the future.
Regarding your previous balance and assuming that the old plan will be ending once the new plan begins, I recommend rolling your traditional 401k into your new 401k instead of to an IRA in order to avoid having funds in a traditional IRA. If you have a Roth 401k, then I’d take the opportunity to rollover that one to a Roth IRA instead.
It’s awful losing half of your 401k balance I feel for you. Just sign up 2.5% but be careful with the woman going forward
Just to clarify, you old balance will not have any match correct? If I was you, and this is the case; get it out and put Into an IRA. You have limited options in a 401k as the company chooses what fund options to invest in. With an IRA, you have much more options. You could even buy stocks and sell weekly covered calls against those shares.
I wish you luck with the divorce.