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Question for the Money Doctors

Question submitted on May 9, 2019.

Question

Upon retirement, many people rollover their 401k accounts to an IRA. The argument is that it will give more investment options and one may be able to lower their fees if their 401k has funds with high expense ratios. It can also represent an opportunity to simplify the management of the portfolio by consolidating into fewer accounts, which can become more important particularly as one ages.

However, advantages of a 401k are that they may have lower cost institutional shares, the only place you can have access to a stable value fund for the near-cash part of ones portfolio and they are afforded greater creditor protections over IRAs should the owner be sued, for example.

My questions are, how do I weigh these differences in deciding whether to rollover or not. Are there other factors to consider besides those I've mentioned?

Thanks.

Answer

Another possible reason not to rollover to an IRA would be if you were planning to retire prior to 59 1/2, which is the age at which you can take IRA distributions without a 10% penalty. If you quit your job or are laid off , you can take a distribution penalty free from your 401k if the plan is held at the same employer.  Also, the 401k is an ERISA account and is protected is usually protected from creditors and bankruptcy.  IRAs are usually exempt to some extent but there are limits.  

Considering everything, unless you think you'll fall into one of the categories above, I would roll your 401k into an IRA.  I would also keep this separate from any other IRAs you may have, so it does not lose it's identity.  True, the you can only access a stable value fund with a 401k but there are other ways to reduce your interest rate risk with an IRA portfolio (floating rate bonds, etc.), so I wouldn't let that hold you back.  Also, exchange traded funds (ETFs) are offered by all the large brokers, some with 0% annual fees. So you'll probably do better with those than even with institutional shares. 


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