401k rollover --- Vanguard/ Fidelity IRA .... or new employer 401k?

[PeterParker]

Hey there --

I changed jobs and have about $100k in a an old 401k that charges 1% of assets annually (pro-rated monthly) with Vanguard admiral funds (0.07% ER).

I'm definitely ditching that. The question is whether I should roll it into a traditional IRA, or roll it into my new employer 401k.

The new employer 401k fees:

0.40% so cheaper than current 401k, but still something.
Apparently this will get down to 0.25% if the entire company (100 people, mostly young-ins) reaches $1MM in holdings ... of which again I would be adding $100k. Not sure their current holdings though, couldn't find it on the Dept of Labor website since 2016. I wouldn't expect a change from 0.40%.

Limited funds, but the basics. Large cap, mid cap, small cap, bonds, international, real estate. Vanguard lazy Retirement.
There are really good ones "Legal & General" that have expense ratios of 0.01%, 0.03%, 0.05% international. Better than Admiral.

But with the better fund expense ratios, let's say it averages 0.03% ----- okay I shave off 0.04% ER ... but ADD 0.4% for 401k admin fees.

With $100k, the 401k admin fees would cost me $400 a year out of the gate.


Advantages of IRA with Vanguard/ Fidelity: Save $400 a year.

Advantages of new 401K:

1. Slightly better creditor protections, though this is a <1% scenario of ever coming into play. And IRAs are protected in Illinois.

2. Ability to take 50% loan from one-self from 401k. True, but this is probably a bad idea (it's expensive to take stuff out of market) -- but it's something to consider.

3. Future ability to do backdoor Roths. HOWEVER, I don't make $140k at the moment and perhaps never will (probably will end up at $95k this year). And if I do reach $140k income do I ever care about squeezing pennies at that point? No, I don't.

What would you do? What are your thoughts?

[seattlecyclone]

I think you've hit on many of the main differences. I'd probably go with an IRA in your case, and hope that if I did get to backdoor Roth income level that my 401(k) at the time would accept an incoming IRA rollover to facilitate the backdoor.

[terran]

The backdoor Roth IRA issue is the only thing that might convince me to roll over to the 401(k) and the $400/year cost of doing so would probably dissuade me, especially since that's not even a concern right now.

Do you have any self employment income that would let you open a solo 401(k) that you could roll into instead?

[PeterParker]

I am doing freelance consulting for my old employer, several hours a week.

Some other tax geek friend (who is doing the same thing re consulting) --- suggested I set up an LLC merely for receiving income from the "old employer consulting" as it had some tax and other benefits but he didn't get into the details.

Not sure if that would allow an independent 401k where I could choose the custodian and thus minimize the fees while retaining the upside.

[yachi]

I 100% would roll it over to an IRA.  I actually considered it a perk to be able to move my money into something I could control a little more.  I own Berkshire stock, and do a little selling stock/buying Calls when its price gets too low.  I can do this in my IRA and the buying and selling doesn't result in any taxes.
In 2006 I had a 401(k) plan with high fees, so I appreciate being able to select my own IRA provider.  If your new employer changes to a much worse 401(k) provider, do you have the option of moving the rolled-over 401(k) money out of the account?

[seattlecyclone]

You don't even need an LLC to open a solo 401(k). Sole proprietorships work too.

[Telecaster]

Just remember there is a hard cap for the individual contributions across all 401(k) plans.  $19,500 (I think?) for 2021 for those under 50. 

[terran]

Agreed, you can open a solo 401(k) as a sole proprietor. I'd do that. E*Trade is good.

And there aren't any tax advantages to running your business as an LLC, although there can be to being taxed as an S Corporation depending on your income and the the facts of your business (mostly if you can justify a lower salary than what your business makes such that some of your income could be considered profit instead of wages to save on self employment tax). An LLC can either be taxed like a sole proprietor or like a S-corp.

As Telecaster said, there is a combined cap ($19,500 in 2021) on the employee salary deferral contribution, but the 415(c) limit ($58,000 in 2021) is separate, so you can make a full 20% employer contribution to your solo 401(k) and still make the employee contribution to your workplace plan and get the match. One tricky thing for any future readers who may have a workplace 403(b) is that the overall cap between that and a solo 401(k) actually is combined.