Transcript:
Easan Arulanantham:
Got a new job. What should I do with my old 401k at my previous company?
Tom Vaughan:
Okay, so generally speaking, in my opinion of 401k, it just from our analysis and how many times we’ve looked at him, or what have you, is inferior to an IRA. And you can roll that 401k into an IRA. There are some exceptions, which we’ll talk about here a moment. But the reason that I like IRAs versus a 401k is predominantly because I have generally less cost, there’s quite a bit of cost, we have to do a lot of research on all the 401k is if we’re recommending to roll them over, there’s a lot of administrative costs and different things along those lines, you know, that you can kind of get rid of, but the main thing is, you generally have, you know, limited selection as far as what you can pick, and, you know, you might have 40, or 50 different options. As far as that goes, versus an IRA, I can do anything, any stock, any bond, any ETF any mutual fund, I mean, there’s probably over 10,000 different selections to build a portfolio. And I think more selections, at least in my opinion, adds up to a better rate of return. And in a, in a better portfolio. As far as that goes, there are some options within the 401k. Now, or they can do this what’s called self directed brokerage, we kind of have the same options as an IRA, basically anything as far as that goes. So you can make an argument for that. But again, you got a look at the expenses in total, and make sure that that makes some sense. But there is one caveat to that if you retire it, you know, before 59 and a half, you cannot get money out of your IRA accounts without tax penalties.
And there’s one way to do it, it’s called the rule of 72 T. And we’ve used that before, we’ll get too much into that, but it’s a little bit complicated. But they do have one little carve out, if you leave your 401k there, at age 55, you can start taking money out of your 401k. Right, without any penalty. And so maybe that would be a reason to leave it there. So you can get that money out. However, if you look at this what’s called a sequence of withdrawals, you do not, if possible, want to be taking money first in your retirement from your retirement plans. Ideally, you’ve built up some taxable assets outside of your retirement plan, some regular assets, brokerage assets, individual, you know, accounts, there’s lots of different names for it, but just non retirement plans, you want to live off of those. So if I retired at 55, and I had enough assets, and I did my planning properly. And this is a big thing we talk about all the time is trying to build up these you know, outside of retirement plan assets is a balance to all all the different pieces, then I can live off of that. I don’t have to worry about taking money out of my 401k at 55. Because I really don’t want to do that anyway, because the sequence of withdrawals is a big deal. So yeah, it’s an interesting question. There’s lots of pieces that go into that as to what you should do. You know, as far as that goes. And I think it’s it’s definitely a question worth thinking about.
Easan Arulanantham:
Yeah, and it 401k K’s, especially if I wouldn’t recommend rolling over into another 401k. Because of how a lot of friends that have done it. It’s just, it’s a lot more troublesome than rolling over into an IRA, if you want to have if you want to consolidate your accounts, so you have less accounts. Yeah. If you’re trying to back, the only reason I keep your old 401k is if you’re thinking about backdoor, I’m doing a backdoor Roth conversion on doing that step transaction. You don’t want to have any kind of money in an IRA. Otherwise, you’re going to have some issues when you’re doing that backdoor.
Tom Vaughan:
Yeah, I guess you could make an argument for rolling one 401k into another and keeping that going as you switch jobs, if you’re going to be using that 55 rule. Right? Just to make it simple. Got one 401k left, and I’m going to retire at 55 and I don’t have other assets to live off of. So you know, you can make some arguments for that. I’d probably spend way more time, you know, trying to build up assets outside of the retirement plans first because there’s a lot of other really big benefits to that. You know, that keeps coming up actually. So, yeah, it’s a good it’s a good question.