Rollover 401k or Rollover to IRA when switching companies?

[jeromedawg]

Hey everybody,

Curious what your strategy(ies) in the case of 401ks when switching companies/changing jobs from one company that has offers a 401k to another company that also offers a 401k. Do you suggest just doing a 401k to Rollover IRA transfer to the institution you use (in my case Fidelity)? Or do you just roll the 401k over to the new plan? If I'm considering FIRE in the near future it seems like it would make more sense to get that money into a Rollover IRA so that I would have the option to do the Roth conversion to provision for planning it into a Roth ladder. Otherwise, if you keep rolling the 401ks over into other 401ks, aren't you effectively 'locking up' your access to those funds (unless you're OK with paying the penalty)?
And as far as continuing to contribute to a 401k in general, couldn't you just open a new 401k under the new plan and go about it that way?



Thanks, 

[cool7hand]

Because we always preferred the additional options and control with self-directed rollover IRA at Schwab, that's what we always went with. The simple fact that the new employer plan can always change and limit its options was reason enough!

[Gronnie]

If you roll over to Traditional IRA that can get in the way of things like backdoor Roth contributions (pro-rata rule applies).

[msbutterbean]

I rolled over from a previous employer's account into the new company 401K when I started my current job some years back, and it was a mistake. Fees are much higher and options are quite limited. It has been an expensive lesson. (I can't speak to the potential impact on Roth conversions, though.)

[chicagomeg]

If you roll over to Traditional IRA that can get in the way of things like backdoor Roth contributions (pro-rata rule applies).

Same. However, I've also been lucky that I've always had good fund choices & low costs in my 401k's, so it's never felt like a big limitation. If I ever moved to a job w/poor funds I would just leave my money in my last company's 401k until I moved on to another with a good one. As long as your balance is over $5,000 they can't force you take the money out of a former employer 401k.

[Greenstache]

A few things that I consider:

1. Fee structure for the plan at prior employer.  If the fee structure is reasonably low and the investment options are decent, you may not want to move the funds at all (or not immediately).

2. Plans to do regular backdoor Roth IRA conversions annually - this is a big one.  If you are in a position to do an annual backdoor Roth conversion, you will not want to have a much larger amount also sitting in an IRA, as it will mean a higher tax bite (decent explanation here - https://www.kiplinger.com/article/retirement/t046-c001-s003-the-tax-consequences-of-a-backdoor-roth-ira.html).

3. Fee structure and investment options in the new plan.  Unless you really love the options at the new plan and / or the options and fees at the prior employee are quite poor, I typically wouldn't roll large amounts over to another 401(k) because it locks up that money. 

Also, given the various 401(k) revisions that are being loosely floated, these strategies may change greatly in the next year or so.

[seattlecyclone]

If I'm considering FIRE in the near future it seems like it would make more sense to get that money into a Rollover IRA so that I would have the option to do the Roth conversion to provision for planning it into a Roth ladder.

Just prior to retirement if you really need to increase your Roth balance, it's just as good (often better) to switch new contributions to Roth than it is to convert existing funds. The contributions can be withdrawn for free at any time, while you have to wait five years to withdraw conversions for free. Also if you must do conversions, look into the option of an in-plan Roth conversion within your 401(k). Many plans offer this option.

Greenstache's comments above about comparing the investment options between your existing 401(k), new 401(k), and IRA are solid. Some 401(k)s, especially at bigger companies, offer institutional index funds with lower expenses than you'll be able to get in an IRA. Other 401(k)s have pretty high-fee options. If that applies to you that might nudge you in the direction of an IRA rollover.

If your income is high enough (or might become high enough) that backdoor Roth IRA contributions might look like a good idea, you'll want to keep pre-tax money out of your IRA to leave the backdoor Roth option available to you.

If you think you might leave your new job sometime between the year you turn 55 and the year you turn 59½, you'll be able to make penalty-free withdrawals from that 401(k) but not your IRA.

Those are the main considerations I can think of. In many situations it doesn't really matter too much which option you choose.