How should i invest?
July 13, 2010 2:51 PM   Subscribe

Should I roll my 401k into an IRA

I recently (at the beginning of summer) quit my not-so-well paying job to finish my degree (graduating in december). I had a 401k that for the last three years i was barely contributing too, it has about 1300 in it. I am no longer in that job. Now of course i have amassed a (un)healthy amount of student loan debt, not too mention personal debt from relatives and some credit card debt.

I don't know who to ask, and it's not a lot of money, but should i roll it into an IRA since i am no longer at that job and therefore no longer contributing to it? Also, last quarter i lost more than i put in, so i think i want it in something a little more stable.

Is this the right thing to do?
posted by djduckie to Work & Money (7 answers total) 2 users marked this as a favorite
You don't need to convert it to an IRA for it to be more stable. 401(k) accounts can be invested in almost anything. You could theoretically buy treasuries with it if you wanted to.

Converting it from one kind of account to another is kind of a pain though and can have tax implications. Not very big ones, as 1300 isn't all that much money, but all the more painful as a result.

I'd call up the company that manages your 401(k) to discuss your options.
posted by valkyryn at 3:21 PM on July 13, 2010

There's certainly no reason that you have to. Sometimes people do it because you can have more options in an IRA, or it can be easier to manage, or better returns, etc. Often though there will be higher fees, especially for small balances (often the threshold for significantly reducing these feeds is $100k or $250k or something like that).

You can withdraw it to pay debt at an additional tax of 10%. Meaning you pay normal income tax on it, then an additional 10% on the 401k money. However, depending on the interest on your debt and how much you're making on the 401k, this is not necessarily unreasonable.

Simplest option is to keep it in the 401k but maybe reallocate to more stable investment options (if the 401k categorizes investment by risk this can be easier to figure out).

[usual I Am Not Your Financial Adviser disclaimer]
posted by wildcrdj at 3:36 PM on July 13, 2010

Rolling into an IRA has several advantages. Going forward you may have a lot of different jobs, and it's convenient to have all your money in one place. Also, alot of 401(k) plans have high fees. If you roll over the money to an IRA, you have more control over the fees. A good place with very low management fees is Vanguard. Alot of people don't realize that the investment management fees in a 401(k) plan can be as much as 1% of assets under management which can really add up over time. If you're someone who's not really that into investing, low cost index funds with a fee of .15% are really your best bet.
posted by bananafish at 3:46 PM on July 13, 2010

You'd want to know what fees you're paying each year through your 401K compared to what fees you'd be paying on your IRA. It can be a little tough to figure out with the 401K accounts (at least it is with the one my company provides), but a bit of persistence and maybe asking the right customer service person will probably turn that up for you. Then you'd need to weigh any cost differences against the number of investment options you'd have or want in each account.

If it were me, I'd probably roll it over to an IRA, but that's just because I don't particularly like the investment options in the 401K plan my company provides.

Vanguard is generally cheap, and certainly has low-rate funds well before you hit the 100K or 250k rate. At your account size, i would guess you'd expect to pay about 1 or 2 percent a year, which means you need to make 1 or 2 percent a year to break even. I haven't checked though. You should.

I know it seems like you could use the money now, and that's probably true. When you get to retirement age, you may find yourself wishing you hadn't spent it if that's what you end up doing.
posted by willnot at 3:47 PM on July 13, 2010

I have just been wrestling with this myself, as I come up on 9 months of unemployment. I think the answer depends on a) how much money you have in the 401K, b) what plan you have, and c) how old you are. I have Vanguard, which is a good plan with good options, including an IRA. $1300 really isn't much, and you have no hope of avoiding withdrawal penalties because of your age. Rolling it over therefore seems like a decent option, but I would argue that you'd be better off in the long run leaving it where it is. YMMV, obviously.

My circumstances are quite different but I ultimately decided to leave my 401K alone for now. It's good to know that it's there if things get really tight.
posted by Guy_Inamonkeysuit at 4:10 PM on July 13, 2010


If you don't do it now, you may find yourself 10 years down the road with a meelion different 401Ks (who knows how long you'll stay in your next job? Or the one after that?). Every time you move you will have to update your contact info on all of those accounts.

Not a big deal, except eventually one of your former employers will change 401K providers, and your old account info will no longer work, and you will wonder what happened to your money and call your old employer several times until you finally reach the correct HR person (who was not there when you were there), and they say to you, "Oh, sorry, we didn't know how to reach you. Here's how to access your new account. Let me send you some rollover forms." And you'll end up, at long last, rolling over that 401K and any others you've accumulated along the way, just so you never have to deal with the hassle again.

PS: There are no withdrawal penalties if you roll it over to an IRA in the correct manner. The check from your old account is made out to your new IRA account, so it isn't something you could cash personally, thus it's not a "withdrawal." The folks at vanguard or a similar outfit will be able to help with this.
posted by somanyamys at 7:34 AM on July 14, 2010

DO EET meaning, of course, roll it over, not cash it out.
posted by somanyamys at 7:35 AM on July 14, 2010

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