I don’t necessarily think it’s optimal for most people, but if simplicity and low risk are priorities, a good money market fund might fit, and it’s certainly compatible with a retirement account. For example VMFXX currently has a yield of 5.28% with an expense ratio of 0.11%.
I think this fund might even be the default for cash in a vanguard account right now.
My mom was so risk averse, all her money ( a lot she’s very frugal and lives simply) has been in CD’s. I figure it’s too late for her to start really investing it now, so it’s now in 5 percent interest savings accounts. Retired county employee so her pension is more than enough for her to live on anyway. I guess I’m pretty lucky that I don’t have to worry about it. She never did deferred comp / 401k type stuff, just stuck it in the bank.
1 is a no brainer. You should always roll your 401k’s into IRA’s when you leave an employer.
I’m also not an expert on 2 but AFAIK there aren’t any significant differences between 401k and traditional IRA RMD’s.
3 and 4 is also good advice but takes more planning. If you do nothing else today, do #1.
It’s like karma for Boomers.
Except we’re the ones who end up with no inheritance.
What are the fee differences? I’ve rolled 401ks from previous jobs into my current job’s 401k, should I have (or can I even do that now, do you have to hit retirement age first) rolled those into a traditional IRA?
It’s highly variable but IME 401k fees are terrible. You’d have to dig into your plan’s fine print. Sometimes you’ve gotta dig deep too. I had a John Hancock plan that seemed fine until you realized literally every investment option they had was charging about 1% more than the published expense ratio. I think I posted here about my current employer’s plan that charges around 0.3% annually and I was told that’s a good rate for a 401k. But good IRA custodians won’t charge anything more than a small flat fee. The only percentage based fees you might pay are for the funds you invest in, which you can keep low.
Unfortunately you can only free your 401k’s when you leave your employer, so you’re probably stuck for now. If you change jobs in the future you’ll be able to move it.
I’m not sure on the Roth. I guess it’s a hedge against tax rates going up at this point.
(I think for a lot of people they will pay the same or less tax rate in retirement with the laws as written, so the Roth is a bet on congress increasing tax rates in your bracket).
Looks like my year is going to be back loaded this year, so with significant invoices not coming due in 2024, I may be able to do a conversion this year in a lower bracket.
You’re covering three topics, one that is straightforward (type and custodian of account), and the other two very complicated without enough info (asset allocation and tax strategy).
An IRA rollover with a low cost broker will be an improvement over the 401k in terms of cost and investing options.
Regarding tax strategy, modeling software like New Retirement can be very helpful in understanding the relationship between RMDs, Roth conversions and SS. My sense is that at the point where you are taking RMDs, Roth conversions aren’t really doing much from a tax optimization standpoint except for if your heirs are in higher tax brackets and you want them to inherit a Roth.
Not enough info (budget, income sources, etc) to dive into asset allocation, but the advice from some ITT to put it all in cash is most likely terrible. Cash is a horrendous investment for any medium to long timeframe. Something like 50/50 stocks and bonds rates to be better general advice without more info.
Rolling into your new employer’ 401k has two potential benefits over an IRA
Ability to do backdoor Roth contributions and avoiding pro-rata rule.
Ability to access 401k funds penalty free when retiring at 55 (rather than 59.5)
401k also have more protection from creditors in most states. If your 401k is with a Megacorp (5k+ employees) then the fees are probably pretty low.
On a related tangent with respect to Roth IRAs, is there any risk that the Feds could go back on the “agreement” to not levy taxes against Roth withdrawals? Has our government ever reneged on an agreement with its taxpayers?
Thanks, I’ll check it out. Regarding the Roth conversion, if it’s in the bottom two tax brackets, isn’t it close to a freeroll? Maybe not because my father told me he’s paying ~no taxes right now living off social security and that pension.
Yeah I don’t think it should be all in cash. They’re living off under $50K a year, this is ~$100K. So if social security/pension stop covering their expenses, there isn’t much there.
This is just a tax arbitrage question. Strategic Roth conversions apply mostly to the years post-retirement but prior to RMDs and SS kicking in. For many people, RMDs and SS cause them to shoot up to a higher bracket, so it’s beneficial to smooth out their taxable income earlier in retirement.
This can all be very complicated. For example if your father is paying no taxes on SS, aggressive Roth conversion could make his SS benefits taxable and mean that he is actually being taxed at a very high marginal rate on those conversions. There could also be state income tax treatments that are relevant. This is why I recommend software that can account for all this.
There are factors at play that are just guesswork. For example, if one spouse passes away, filing as Single will likely result in higher tax rates. Or the fact that the TCJA rates are set to expire after 2025. Those would both be an argument in favor of converting now.
One of my accounts is in PA where tbey don’t tax the deposit or the withdrawal on my 401k. So I need to figure out if I need to keep that account isolated from the rest. (State rate is 3.x depending).
I’d be surprised if IRA are treated differently from 401k for state taxes. I haven’t seen that.
Only money deposited in PA are tax free when withdrawn in PA.
So if I have an account from MN, I would pay PA state tax if I withdraw in PA.
Both cases are for tax deferred deposits.
So my concern is not co-mingling those together. At this time I plan to remain in PA in retirement.
ultra dumb question
I have 3 trad 401(k)s from companies I no longer work at. 2 of which are through Fidelity, last and biggest is through their own “portal” (giantco). Should I do anything with these/is there any reason to spend whatever time and effort this takes to combine them or anything? Google isn’t super helpful here too general I think.
I think the most important factor is probably the fees that are being charged.
There’s a saying that “even terrible 401ks can eventually transition into decent IRAs”. This is more of an argument against not contributing at all to a 401k just because you’re being gouged on fees and/or the fund selection is terrible. But it speaks to the general idea that in a lot of cases rolling over to an IRA asap will be the right move in terms of better flexibility and better fees.
There are funds out there, even index funds, that are truly terrible. Consider RYSOX (Rydex S&P 500 Fund). This fund has an expense ration of 1.6% (not to mention a 4.5% load). This ER is 40x greater than the equivalent Vanguard fund (VFIAX) [note that is not 40% greater, that’s 40 TIMES greater]. I think funds like RYSOX exist expressly to be included in bad 401k plans because no sane person is going to buy it on the open market.
So assuming you’re happy with the investment choices offered, and they all fit together in your holistic asset allocation, and the fees are not unreasonable compared to alternatives that would be available if you rolled it over, it may be fine to just leave them alone.
Although probably rare, it’s also possible that you can have a better deal by leaving it in the old 401k. I worked for a company (Oracle) that was so big Fidelity created custom funds with ultra-low expense ratios just for our plan. I have left this one alone for years because there’s no way I’ll ever do better than an S&P500 index fund with an ER of 0.012%.
You probably want to take a look and make sure a big chunk isn’t sitting in a money market account after a fund closed or something as well. Having them in one place also makes it easier to find them later on…
Obvious fee structure is the #1 consideration. Another big reason to do it would be to give yourself greater future flexibility. A big reason not to do it would be having it mess up your pro-rata calculation on back door roths which parlayslow mentioned