Advice on legacy 401k

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gsvn
Posts: 3
Joined: Sat Jan 23, 2021 3:49 pm

Advice on legacy 401k

Post by gsvn »

Hello,
My wife has two 401k’s from previous employers. She is currently not employed. The total of 2 accounts is less than $10k. She does have a traditional IRA with vanguard.

Please help us determine the best path forward. Thank you in advance.
tenkuky
Posts: 1693
Joined: Sun Dec 14, 2014 4:28 pm

Re: Advice on legacy 401k

Post by tenkuky »

Depends on many factors.
1. What are the fees and expense ratios of the holdings in the 2 accounts?
2. Is any one account less than $5000? See here why... The IRS allows 401(k) plans to automatically “cash-out” small account balances – defined as less than $5,000 – without the owner’s consent upon their termination of employment. Under these rules, account balances between $1,000 and $5,000 must be rolled over into a personal IRA for the benefit of the employee. Amounts below $1,000 can be paid out by check.
3. What is the household income limit vis-a-vis the Roth contribution cap? If higher, are you doing "backdoor Roth" contributions, in which case it is preferable to leave the IRA balance zero to avoid pro-rate conversion.
4. Are you in a state which has more protections for 401k type accounts vs. IRAs?
dukeblue219
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Re: Advice on legacy 401k

Post by dukeblue219 »

Knowing nothing else, it probably makes sense to combine the two into a single 401k (whichever is cheapest) to avoid having one or both cashed out against your wishes (which may involve the hassle of taxes being withheld ).

Beyond that, rolling them both into an IRA is the simple, straightforward approach for most people. If you may do a backdoor Roth in the future, keeping pre-tax assets in the remaining 401k is a good idea.
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markjk
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Re: Advice on legacy 401k

Post by markjk »

I'd probably roll the two 401k into the IRA but as tenkuky points out, there are other options for this money depending on the situation.

At minimum, I'd do something and not let those accounts sit out there. Right now you have three retirement accounts (two 401k and one IRA) to manage. There could be good reasons to leave them separate, but the reasoning needs to be truly good in my mind to accept the complexity of multiple accounts.
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JoMoney
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Re: Advice on legacy 401k

Post by JoMoney »

There has been some noise and legal actions in recent times against brokers and financial advisers pushing people to roll their 401k into an IRA without full disclosure of the potential benefits of staying in the 401k. It's in the interest of most brokers and financial advisers to get you into an IRA, which gives them the opportunity to charge you fees to manage it for you or to sell you things that otherwise would not be available to you in a 401k. But that doesn't necessarily mean that it's not the right option for you (or somebody else) to roll all their 401k money into an IRA.

If someone is using a simple portfolio of low-cost index funds in a 401k, and would be using the same in an IRA, it likely won't make much difference to most people. But there are potentially lots of unique situations where it can impact someones individual situation.
A workplace retirement plan like a 401k might have unique investments not available outside the 401k (like super low-cost Commingled Investment Trusts, "Stable Value" funds, or employer stock/option plans.) Owning your employers stock/options in a 401k may have unique tax benefits not available outside the plan.
401k or existing IRAs may have after-tax contributions that can create different tax scenarios when a 401k is withdrawn or rolled over that need to be considered.
401k may have provisions that allow for early withdrawal if retiring at age 55 without tax penalty not available in an IRA.
401k may accept rollover from other 401k money.
401k is structured under federal laws such that the plan has some fiduciary responsibility to the beneficiaries, this is not necessarily required in an IRA, which are mostly self-managed with potentially more options for bad investment choices.
While inside a 401k money is effectively "judgement proof" (outside of divorce related scenarios), where the plan can't pay out the money to someone other than the beneficiary. In some states, state laws provide a judgement exemption that offers similar protections to IRAs, but not all states and the state-level judgement exemption may be seen as inferior protection. There is federal law that exempts certain amounts of IRA money (and unlimited amounts of 401k money rolled into IRA) if the owner files for bankruptcy protection, but not every situation is one where bankruptcy is an option or the best course of action.
There are potentially other scenarios where minor differences beyond the tax-deferral until retirement age can make a difference in some scenarios, but broadly probably not very likely to impact most situations.
There are also many features and benefits to IRA's that are not available in a 401k, like potentially lower cost options relative to a high-cost 401k, perhaps better choices for investments. Options to convert IRA money to Roth IRA money that may not be available inside a workplace plan. ... and some other scenarios.

Hard to know all the specifics of a specific persons individual situation, and what their preferences or future best options might be. FWIW, I personally rolled my 401k money over to a "Rollover IRA" and a Roth IRA (as I had after-tax contributions that allowed me to do that.)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
illumination
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Re: Advice on legacy 401k

Post by illumination »

If backdoor Roth conversions aren't something you're concerned with, I'd roll them into your already established Traditional IRA.

If for nothing else to just streamline and simplify. It's just such a trivial amount of money and so many of the "what ifs" just don't seem worth it to me to have dangling. If the previous employment 401k plan has a slightly lower expense ratio on some fund choices or has better bankruptcy protection, on a $10k balance, that seems meaningless.

I knew someone that had a "forgotten" account similar to this and got dinged badly because they didn't take an RMD.
Topic Author
gsvn
Posts: 3
Joined: Sat Jan 23, 2021 3:49 pm

Re: Advice on legacy 401k

Post by gsvn »

Thank you for giving me guidance. Both accounts are under $5000 each ($4400 and $3900). One of them has been moved to a rollover IRA.

Question:
1) Still okay to transfer to traditional IRA? Are there any risks given the total exceeds the contribution limit?
exodusNH
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Joined: Wed Jan 06, 2021 8:21 pm

Re: Advice on legacy 401k

Post by exodusNH »

gsvn wrote: Wed Nov 24, 2021 2:36 pm Thank you for giving me guidance. Both accounts are under $5000 each ($4400 and $3900). One of them has been moved to a rollover IRA.

Question:
1) Still okay to transfer to traditional IRA? Are there any risks given the total exceeds the contribution limit?
Rollovers don't count toward new contributions.
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