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2 Reasons Not To Rollover Your 401k
When leaving a job, it is common for employees to have the option to rollover their 401k retirement savings account into another retirement plan. While rollovers can provide certain advantages, there are also circumstances where it may be wise to avoid this option. In this article, we will highlight two reasons why you should think twice before deciding to rollover your 401k.
1. Access to Funds Before Retirement:
One of the main reasons why some individuals decide against rolling over their 401k is the potential need for immediate access to funds. When you roll over your 401k into another retirement account, such as an individual retirement account (IRA), it becomes subject to strict retirement withdrawal rules. This means that you may face penalties and tax implications if you need to access the funds before reaching retirement age (typically 59½ years old).
In contrast, leaving your 401k with your former employer can provide the advantage of early withdrawal options. Some employers allow former employees to take loans against their 401k balance, which can prove useful in times of financial need. Although it is generally advisable to avoid dipping into retirement funds, having this option available can provide a financial safety net in emergencies.
2. Creditor Protection:
Another aspect to consider when deciding on a 401k rollover is creditor protection. In certain circumstances, leaving your retirement savings in a 401k can offer better safeguards against creditors compared to an IRA. While federal law provides some protection for retirement funds in an IRA, the degree of protection can vary depending on the state you reside in. By leaving your money in a 401k, you may have the advantage of more robust creditor protection, shielding your retirement savings from potential claims in case of bankruptcy or other financial challenges.
It is important to note that the level of creditor protection offered may differ depending on your specific circumstances and the regulations of your state. Therefore, consulting with a financial advisor or legal professional to understand the protections available to you is crucial when considering a 401k rollover.
In conclusion, rolling over your 401k is often the recommended path when changing jobs or retiring. However, it is not always the best option for everyone. If early access to funds or stronger creditor protection are important factors for you, leaving your retirement savings in the 401k plan with your former employer may be a wise decision. Always weigh the advantages and disadvantages, and seek professional advice when making important financial decisions related to your retirement savings.
Thanks Josh.
Borrowing from 401k – is that amount not subject to market increases/decreases.
Shouldn't take the loan anyway as you cause it to not be working for you except the interest you pay yourself back. The purpose of 401 is Retirment, not emergency saving or loan shark to buy a new car. Plus, most of us roll to IRA because we retire, I don't think we will be wanting to borrow from it since wont' be employed:)
I always used to rollover my 401(k) to my new employer until someone introduced me to a self directed IRA. I moved my last 401(k) to this and now have been investing in private equity through my IRA. It's fun to dabble in other types of investments.
Also it's my understanding that if you do annual backdoor Roth contributions and have pre-tax money in a traditional IRA it triggers the pro-rata rule however if your other pre-tax money is instead in a 401k it will not trigger the pro-rata rule. So, if you are doing or planning backdoor Roth contributions it is yet another reason not to roll over your traditional (pretax) 401K to an IRA.
Remember that at RMD time, Roth 401k have RMDs. Roth IRAs do not have RMDs.
Not all 401k plans have the 55 rule option. I retired at 55 with a Fidelity plan that was set up for a one time distribution without penalty. Did not allow multiple distributions penalty free like I was told. So make sure you call your 401k provider to see how your company set up your work plan. First one is free, then they charge you the 10% penalty until you turn 59 1/2.
Thanks, this might be a good reason to move my former employer's plan over in the next few years.
Would it be beneficial to roll your IRA into your crappy old job B's 401k if the fees are low such as vanguards for example?
Don't forget that both an IRA and 401k allow penalty free withdrawals at any age under 72t. The terms are not as generous as Rule of 55 withdrawals (although recent rule changes make them more useful) but the option is there.
I’m deleting mine prior to 67 and social security. Other accounts are bigger anyway
The fees assessed by most 401k plans are typically much higher than IRAs. Unless you plan to take advantage of the early access strategies mentioned here, wouldn't the savings in fees alone warrant rolling over to IRA?
The downside is, if you want to shift to dividend investing in retirement, you need the IRA to get into individual stocks. Can’t do it in the 401k..
I believe the “rule of 55” is stated to be the year in which you turn 55. Meaning you don’t need to be 55 or older, only be turning 55 in that calendar year on which you withdraw. Check me if I’m wrong on this.
Maryland taxes IRA distributions in retirement, but not from 401k.
Good info
I am retired 14 months now, thanks to Josh's advice on this subject.
Thanks again Josh
More special treatment for the public sector, eh? I've no doubt there are very good people in the public sector but let's not pretend they're immune from the Pareto Principle. Kids, if you're not going to be most exceptional in the private sector, the public sector is where you want to be.
Thanks again maestro, I have left my 401k with my previous employer since retirement 6 years ago, figured it worked for many years during employment, might at well let it ride
number 3: your 401K is protected by the federal government from law suits. IRA's are not protected federally, your state might have limited protections, but they might now