Q&A: 401(k) followup

Dear Liz: Your reply about what to do with a 401(k) after someone leaves a job was off base, in my opinion.

You advised the questioner to leave the 401(k) with the former employer until it could be rolled over to a new 401(k) with a new employer. Wouldn’t it be better to roll over the old 401(k) to an IRA? An IRA offers more control and better investment options than a 401(k).

Answer: More is not necessarily better. Some people appreciate the chance to diversify their investments by using a rollover IRA. Many others, however, have no need for thousands of investment options and in fact could be paralyzed by so many choices.

The investment options available for IRAs also can be more expensive than what’s typically available in large company plans. These 401(k)s often offer institutional funds with low expense ratios that are unavailable to retail investors.

Finally, 401(k)s have better protection from creditors than IRAs if the worker is sued or files for bankruptcy, although that won’t be an issue for the vast majority of savers.

People can protect an unlimited amount of money in a 401(k), while IRA protection is limited to $1,245,475.

Keeping an account with an old employer, or rolling it over to a new one, won’t be the right solution for everyone. But neither is an IRA rollover—despite what brokerage houses that profit from IRA rollovers may tell you.

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Comments

  1. I agree. If you don’t need to do anything with your 401(K), why be in a rush to do something with it.

  2. Bruce Wilbat says:

    Also, very important, funds left in a 401k plan are NOT subject to Required Minimum Distributions that personal IRAs are!!!

    • Liz Weston says:

      Funds in old 401(k)s are subject to RMD rules. Funds in your current 401(k) are exempt from RMDs only as long as you continue to work for the employer that sponsors the plan. The rules for RMDs can be a bit complex, so it’s a good idea to consult with a tax pro as you approach RMD age.