Ask the grumpies: Heuristics for 401k rollovers

jjiraffe asks:

 I have 3 401ks accounts – one in another country. What are good rules of thumb for when to roll over accounts – and when not to?

The first big thing to think about is fees (and within that, choices).

Second, hassle– effort to change vs. benefit of consolidation

Third, benefits of having a larger balance with some providers (access to lower cost funds)

Fourth, Roth conversions complicate things– if you want to convert a traditional IRA into an IRA Roth, or if you want to fund a “back-door” Roth, then you should keep your 401K as a 401K either with your previous employer or with your new employer.  This is because you have to pay taxes on your traditional IRA balance when you make a Roth conversion no matter how much you convert.  Of course, if you want that traditional 401K to become a Roth, then rolling over to an IRA and paying taxes makes sense.

Fifth, if you’re planning on early retirement, check to see if your 401K plan allows early withdrawal (such as at age 55), meaning before the IRA age of 59.5.

Personally I prefer making switches when the stock market seems to be behaving itself without huge fluctuations, though this is a matter of personal preference.  I just hate the thought of things changing a lot, possibly in a bad way, if there’s a hold-up in the selling/buying that happens when you roll over the 401k.

Never “cash out” the plan if you can help it.  If you do roll over your 401k you have a choice between rolling it over to a new employer or rolling it into an IRA.

No idea about the other country 401k– that may have different rules.  Talk to a tax person about that.

Standard disclaimer:  We are not financial planners and we have no fiduciary responsibility.  Talk with a professional or do your own research before making important decisions.

4 Responses to “Ask the grumpies: Heuristics for 401k rollovers”

  1. chacha1 Says:

    I would be interested in knowing what an outside-US 401(k)-equivalent even *is*. My suspicion would be that to convert that one to a US vehicle, it would have to be cashed out and taxes paid, which probably means foreign AND US taxes – I’d leave it alone unless there is an immediate financial need and/or incentive to have all funds domiciled in the US. If, for example, that amount of money, counted as a domestic asset, might make the difference between being approved for a mortgage or not.

    I’ve been rolling a series of 401(k) accounts thanks to working in a series of law firms since 1989. One into the next. For me, it’s just simpler to have all the money in one place. It’s enough money that compiling it all can add up to significant gains (or losses), but not the kind of money where there’s a question of trying to “maximize returns” by shopping around to providers. No responsible account manager would look at my balance and say anything other than “keep this safe, don’t play around with it.” I use target-date allocation in low-cost funds and just forget about it.

    • jjiraffe Says:

      I worked in the UK for a while, and their 401k equivalent is called an ISA – I contributed to that through my company while I worked there. It’s still sitting in the UK in pounds invested in the FTSE. I guess it keeps me diversified?! Lol. I can’t withdraw it without major penalty so I am keeping it there.

  2. jjiraffe Says:

    This is really helpful – thank you!! Appreciate all of this awesome advice.


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