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Reasons Not to Roll Your 401k Balance

I like pranks.  I loved messing with my older brother growing up.  If you ever want to tease a financial advisor tell him you are leaving your job and you don’t know what to do with your sizeable 401k/403b/457 balance.  Pretty much every advisor will start drooling like Pavlov’s dog.  This is because they are paid based on assets they manage and hearing “money in movement” sounds like the treat bell.


I have preached before about how rolling your 401k to an IRA may not be the best move, regardless of what my industry says.  Recently I have had quite a few conversations with people and the feedback has been along the lines of – Why didn’t I know this before?  Let me hit some of the more common reasons not to roll your 401k balance over immediately.


First, fees in many 401k plans are lower than if you work with a financial advisor.  While the average 401k expense is over 1%, it is often less than what an advisor would charge.  The average assets under management (AUM) advisor charges 1% annually.  On top of his 1% fee you have internal investment fees, which can easily add another 1% to your costs.  In an IRA you often have other expenses, like an annual account fee and trading fees.  While you have more investment choices they may come with an expense.  That expense may be doubling what you pay.


Next, most employer-sponsored retirement plans allow for loans and/or hardship withdrawals.  While I am not a fan of using them, it is available in those cases where you really need access to the money.  In an IRA there are no loans available.  And, if you want to take money out early (before 59 ½ years of age) you will pay a 10% penalty.  This is in addition to the distribution being taxed at your ordinary income level.


The last main point is how rolling your 401k balance to an IRA can mess up doing Roth conversions.  This is the most frequent conversation I have because the bulk of my clients are high income earners.  They max out their 401k contributions and would like to do more saving in a tax-efficient manner.  Unfortunately, by having an IRA due to rolling over a 401k they may have a huge tax bill when it comes to a Roth conversion.  I won’t go into the details as I have talked about it before and don’t want to bore anyone to death.


So, if you are leaving a job and have a 401k balance, think before you decide.  There are many options out there such as your new employer may allow you to roll your old 401k balance into their 401k plan.  In this case you may save fees, still have access to loans, and don’t restrict your Roth conversion option.  Remember, if your advisor starts drooling at the mention of a 401k rollover it may be in your interest to consider other options than rolling a 401k into an IRA.

About Dan Johnson, CFP

I am the President and CCO of Forward Thinking Wealth Management, LLC, which is the flat-fee financial planning firm located in Akron, OH, and set up to work virtually with clients across the country. I charge clients a flat fee of $4,800 regardless of asset size. My firm is a solution to what I feel is a broken system where clients pay advisors based on something out of their control - the performance of the market.
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