Author Topic: Should I quit my job just to liberate my 401k?  (Read 948 times)

Must_Stash_NM

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Should I quit my job just to liberate my 401k?
« on: December 30, 2021, 09:24:45 AM »
So this is mostly a thought experiment; I have no plan to actually quit my job in the near future.

This comes about because of the current job market conditions that our economy is experiencing.  I work for a large megacorp and my division is actively hiring at a rapid rate.  New employees coming in have enjoyed nice pay increases from their previous jobs.

My situation:  I'm about 2 years from FIRE and the bulk of my money is in my company's 401k.  Thanks to generous employer matching and market growth it has done quite well.  I also have about 10% of my NW in a pension plan that the company phased out several years ago, which can be lump-summed into an IRA anytime after I quit the company, regardless of age.  I also have a Roth IRA set up so that I can initiate a conversion ladder when the time comes. 

So, the current job market situation has me thinking about the implications of quitting my job, which would do two things: allow me to take a sabbatical, and roll my 401k and pension money out of the company's plans and into a Trad IRA. 

In theory, under the current job market, I could quit now and simply return to my previous job in a few months to a year, without much of a career penalty.  During my "sabbatical," I would roll the 401k/pension into a Trad IRA where I would have more control over how that money could be used and invested. 

So... would this be a viable strategy, and what advantages would "liberating" a 401k have?  Is it just a waste of time if one's FIRE date is close anyway?  What if one's FIRE date is still 10 years out? 

I suppose that ultimately this isn't any different than a mini-retirement or ordinary sabbatical, but here I just want to focus on the financial strategies that would become available by quitting that would not be available by staying at my job and just riding it out a few more years.

Thanks in advance. 


 


secondcor521

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Re: Should I quit my job just to liberate my 401k?
« Reply #1 on: December 30, 2021, 09:38:12 AM »
Really the only two advantages to "liberating" a 401(k) is that you'd typically have more (and potentially better) investment options in an IRA, and the fees might be less.

The drawbacks of liberation would be the lower contribution limit of an IRA vs. a 401(k), the loss of the "year 55" rule that applies to 401(k)'s but not IRAs, and possibly different asset protection rules if you're concerned about bankruptcy or liability.  Plus the loss of any company match.  Depending on the tax history of the contributions to your 401(k), you might also be impacted by the pro-rata rule.

And generally, economic conditions could worsen either generally or at your company, so even though it might be easy for you to get your job back now, that could change after you start your sabbatical.  (This actually happened to me once - new company executives changed company policy and refused to re-hire employees who left voluntarily.  We were considered disloyal.)

Personally I would not quit a job just to liberate my 401(k).  And liberation really wouldn't mean much unless I had a really lousy 401(k), which thankfully I never had.

Also, if I were within a year or two of FIRE, I'd probably just stick it out, because a sabbatical might just change your perspective and make you really not want to go back to work.  And not wanting to go back to work yet having to go back is an uncomfortable position that I would not want to be in.

Dee18

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Re: Should I quit my job just to liberate my 401k?
« Reply #2 on: December 30, 2021, 09:46:05 AM »
While employed in job B I followed the advice of a Fidelity advisor and rolled over my 403(b) account from job A to a traditional IRA so I would have more options.  Later when I wanted to convert some money in other traditional IRAs (to which I had contributed significant post tax funds years earlier) to a Roth I discovered the "pro rata rule."  Google it before transferring any 401(k) account to an IRA.  In my case it meant that the tax bite on a conversion to Roth would have been crazy.
« Last Edit: December 31, 2021, 01:14:40 PM by Dee18 »

secondcor521

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Re: Should I quit my job just to liberate my 401k?
« Reply #3 on: December 30, 2021, 09:57:30 AM »
While employed in job B I followed the advice of a Fidelity advisor and rolled over my 403(b) account from job A to a traditional IRA so I would have more options.  Later when I wanted to convert some money in other traditional IRAs (to which I had contributed significant post tax funds years earlier)  a Roth I discovered the "pro rata rule."  Google it before transferring any 401(k) account to an IRA.  In my case it meant that the tax bite on a conversion to Roth would have been crazy.

Yep.  And unfortunately, pending legislation in Congress attempting to eliminate the backdoor Roth may also prevent people like you from doing Roth conversions at all, which is a pretty significant change that isn't getting much press coverage.

Holocene

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Re: Should I quit my job just to liberate my 401k?
« Reply #4 on: December 30, 2021, 10:06:00 AM »
I don't really see the point if you'd be doing it only for the opportunity to roll the 401k to an IRA.  Unless your 401k has high fees or terrible investment options, it doesn't seem like you'd gain much by doing this.  It would allow you to convert some traditional to Roth now so you can have access to the money a few years earlier.  But if you're planning to FIRE in 2 years anyway, it doesn't seem like this would make much of a difference.

It's also a bit risky.  The job market may be good now, but who knows how it will look when you want to return to work.  I wouldn't count on being able to get hired back by your company in a few months to a year.  Being 2 years from FI, this would probably be an acceptable risk though with less benefit since you're so close anyway that I'd rather just stick it out at that point.  I'd also rather have the option of returning to work with my company after full FIRE as one of many backup plans.  If you've already left them twice, I have to imagine they'd be a lot more reluctant to hire you the third time.

Another potential drawback is that 401ks generally have more protection than IRAs.  IRA protection is very state dependent whereas 401ks are protected federally.  So if someone sues you or you declare bankruptcy, you're probably better off with a 401k compared to an IRA.  Maybe not a likely scenario, but something to consider.  For this reason, I think I'll try and keep my 401k after I FIRE and just do partial withdrawals if I can to convert to Roth IRA.  My 401k has really low fees and good investment options though so YMMV.  My state also does not protect IRAs much at all.

Must_Stash_NM

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Re: Should I quit my job just to liberate my 401k?
« Reply #5 on: December 31, 2021, 08:09:17 AM »
Thanks everyone. 

Your input generally echoes my thoughts; that this maneuver would be somewhat risky without much to gain in return for that risk, and the effort required.

Secondcor521 and Dee18: thanks for sharing your experiences with Roth conversions.  These things I will want to understand for planning my financial transition to FIRE.   Specifically "pro rata rule."

Holocene: good point about partial vs full 401 to IRA conversions and the protections that 401s offer that an IRA may not.  I will want to understand how this works. 

I've got some homework to do!

Rdy2Fire

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Re: Should I quit my job just to liberate my 401k?
« Reply #6 on: December 31, 2021, 09:22:33 AM »
I echo all of the above on the quitting to liberate your 401k

BUT based on this statement (below) would think about quitting my job if you wanted the sabbatical. Of course before doing that I would probably just ask the company to take a leave as you could always quit if they say no.



So, the current job market situation has me thinking about the implications of quitting my job, which would do two things: allow me to take a sabbatical, and roll my 401k and pension money out of the company's plans and into a Trad IRA. 


 

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