Was this financial advisor acting in a *fiduciary* advisory capacity to you?
Or was this just a co-worker who happens to masquerade as a "financial advisor?"
What alternative was this "financial advisor" offering as an alternative? Was it some sort of insurance product as an "investment?"
I guess I should've clarified. This advisor worked for the company who owns the 401K account. He suggested a Roth IRA account as an alternative. Was he just trying to make a sale I guess?
It’s hard to say what his intent was without more context. He could mean that your investment options are poor in your 401k, and he thinks you will see better returns with an IRA, where you have more freedom to choose your investments.
But to say you’re “wasting your money” on a 401k is such a bold, blanket statement that your skepticism is definitely justified.
I have definitely heard people use that phrasing with rollover money that could instead go to an IRA.
However that is contingent on the 401k having terrible options.
If you have to pick between high fee funds for the 401k you would be better off putting that money into an IRA where you can pick your own broker.
The whole Roth vs Traditional thing is weird though, the math is weird on that.
Roth vs. traditional is not that weird, it's different pots of money for different purposes. It's best to have money in both.
Rule #1 - contribute as much to a 401k as your employer will match. That's 100% ROI right off the bat, you can't beat it.
Rule #2 - prioritize roth contributions when you're younger and lower earning. more time to grow, and since you're lower earning you're not dodging a ton of taxes on the front end.
Rule #3 - prioritize 401k/traditional dollars on mid-career and beyond when you're in your higher earning years. Fill up a roth and/or backdoor Roth after you've reduced your AGI as much as possible.
You'll appreciate having both kind of money in the end. Assuming you own your own home by retirement, and the kids are out of the house and through college, you should need far less income than you did in your prime earning years. Use 401k/traditional money to augment social security and any pension dollars you have coming in. You're in a lower tax bracket anyway.
For any major purchases, that's when you pull a lump sum out of the Roth. Your home's HVAC dies? Roth. Your car's engine blows up? Roth. It's your tax-free rainy day fund.
That’s a good way to look at it. For whatever reason I have always only contributed to 401k (have maxed it out my entire life). Now that I’m 45 I’m wondering if I should add some Roth contributions.
Calling traditional/pre-tax accounts 401k isn't right, because 401ks can have traditional and Roth components. Contributing to a 401k can be either pre or post tax, traditional or Roth.
I prefer a bird in the hand so I put my money in a pre tax account. If I live long enough to be stuck paying RMD’s I may regret it. I know healthy people who have had fatal strokes before 62 so I’d rather have the benefit today.
It’s a crapshoot either way. You know your current tax rate but you don’t know your retirement tax rate. Things can change drastically (down or up) due to tax law changes by the time you retire.
> Assuming you own your own home by retirement
That's a giant assumption. Like I'm in my 30s, and quickly approaching the point where with a 30 year mortgage, I would not have a house paid off.
Then again, I also don't actually expect to reach retirement age. It's rare for men in my family to get that old, and I've got a chronic disease.
Even if it's not free and clear, you probably have it at a lower cost basis than market rate rent if you bought in your 40s unless everything has gone sideways.
Even if you don't have the house paid off, if you have the purchase price nailed down you can basically just subtract that number out of your savings for retirement planning. It's a bit harder to plan for rent changes.
IDK, that's a judgement call. 22% bracket starts at $44k and 24% bracket goes up to $182k right now for single earners, and dollars below $44k are taxed at 12%. If you're married 22% starts at $89k so adjust your math accordingly.
I'd say a good rule of thumb is that you benefit more from prioritizing pre-tax contributions if at least half your pre-contribution AGI would be over the 44k threshold. I'm just a regular dude though, not a fiduciary or any sort of finance professional.
This is what needs to be looked at. If the guy who runs the 401k is telling you the 401k is a waste, that tells me their options for investing the money within might not be that great. High fees, or bad compositions can make a 401k perform poorly. In the grand scheme of things a 401k is generally good for long term investing, but some 401k programs are much better than others, while a Roth IRA you have much more control over (which can be a blessing or a burden if you pick the right/wrong stocks, or just play it safe with major ETFs). The main reason people like Roth's on the lower income side, is it is safer to be more aggressive with it since the contributions can theoretically be used in an emergency, while the profits are subject to the same penalties as any other retirement account.
I think he's talking about traditional money in a 401k vs Roth money in a 401k/IRA. People keep saying 401k like it means traditional, when it can be both traditional and Roth.
How does one get a more complete understanding of the tax brackets one will be in in 40 years from now?
edit: looks like the person I replied to ninja-edited their comment. They made a comment along the lines that you needed to have a complete understanding of the future before being able to determine the best strategy.
You really can’t know for sure especially because tax laws can and do change. IMO it’s best to have some pre and post tax investments. That said, most people will be in a lower tax bracket when retired.
I have pre and post tax investments.
I have a Roth, but can no longer pay into it because the combined income of my wife and I exceeds 200k,
It's always good to diversify
A tech mutual fund with the Magnificent 7 in it ,for example
Even if taxes are higher, you're likely to be in a lower tax bracket because your taxes are based on your withdrawals, not your income in retirement, and you're likely not going to be spending as much. There's nuance to it and I'm kinda sick of the fear mongering "oh the government is going to tax you to death, better roth it up" I think retirement age individuals are one of the most protected classes historically from a policy perspective. At this point it seems like we're never going to pay our federal debt down, mostly because the economy depends on it too much, so let's all just ride it out
Roth contribution income limit for MFJ is 230k and you can contribute partial (ie less than the $8k max) if you’re in the $230-239,999 range. Not sure how far over 200k you are but just an fyi for 2024 in case it applies
I was gonna say I thought the income limits were related to MAGI, so you’d have to gross closer to 300K as MFJ if you’re maxing out two traditional retirement accounts in addition to the standard deduction.
Check into your 401k account. I just recently realized mine is offering Roth401k. A lot started offering that as well. No income limit and same contribution limit as traditional. I’m going to switch my full contribution to Roth 401k going forward since i have a decent amount in traditional now
**Underappreciated post should be upvoted.** You have to put more money into the Roth because it's post tax contribution to make up the difference. So you lose todays tax benefit, and have lower take-home, to save (very likely) tax at a lower rate in the future.
That's situational. I would agree that you should max the trad-401k and HSA first.
After those are maxxed though, there's a point when the Roth 401k looks a bit more appealing: there's no RMDs, they are inherited tax-free, and it's a great hedge if future tax rates/brackets increase or we just end up staying in a high tax bracket.
1. Take all of your expenses today and sort it into categories
2. Calculate how much your lifestyle will increase in each category over the next 40 years
3. Calculate how much inflation will affect each category over the next 40 years
4. Multiply your expenses today by the lifestyle increase and the inflation increase
5. Sum up all the expenses
6. Calculate what percentage of your income comes from each income source (earned, pension, capital gains, dividends, etc.)
7. Figure out what state you will live in after 40 years
8. Figure out how the tax brackets will change over the next 40 years
Generally when you have no (earned) income your tax bracket will be lower, unless your investments are so wildly successful that your tax liability from long term capital gains produce more liability than your salary did. If so, consider yourself to be very, very lucky.
Maybe (and probably for those age 40-ish and younger), but for anyone within 10-15 years of retirement, I think it's a gamble. You're generally in your peak earning years at that point and taking on the tax liability at that point may not be your best option.
That kind of goes without saying though, *any* investment "is a gamble."
It's also important to note that there are hard limits to yearly contributions for both 401k and IRA, if you're hitting one and still have money to invest towards retirement, it's gotta go somewhere.
Agreed. I have the option at present employer for Roth401k so I’m presently doing that. I’m (hopefully) not at peak earning so I can make adjustments as my situation changes. Already have a decent nest egg in traditional.
It really boils down to your incremental tax bracket. If in one of the highest tax brackets, it’s better off to assume during retirement withdrawals of regular 401k, you’ll be in a lower bracket.
My logic has always been to go traditional as if I am in a higher tax bracket then I can afford the taxes and if I am in a lower bracket(due to under performing investments) I'll be in a lower bracket.
This obviously assumes similar tax brackets.
Valid advice from advisor. I recommend OP make another appointment, so you can ask for clarification and recommendations on education materials. This will help you to increase your understanding on investing. Here is what I had discovered over time and wished I had learned it sooner. Only invest in your 401K to the company match. Next contribute to a Roth IRA until you can max out that contribution. Once you can do this return to contributing to your 401K (pre tax or post tax if offered) until you can eventually max that out. Eventually open a brokerage account to take your savings to the next level. You don’t want all your retirement savings tied up to 59 1/2 year of age. You never know what life will bring. It’s also important to have a nice mix of pre and post tax dollars saved for tax planning purposes when RMD’s start in retirement. This is only scratching the surface, but hopes it helps. Please take the time to educate yourself because no one will care more about your money than you.
It depends on your goals and specific situation. For a lot of people it makes sense to max out the 401k first to maximize the amount of income you can deduct before contributing to a roth.
There are ways to access that money earlier if you really want to but for a significant amount of people your tax rate in retirement will be lower than your working years.
And even if post-tax retirement accounts make more sense to your situation, it still might make more sense to max a roth 401k before moving to IRA if your 401k plan offers lower fee funds than what you have available in an IRA. You can always rollover a roth 401k into a roth IRA if you want.
It varies a lot and depends on what you’re looking for. My 401k has TDFs that are ~~cheaper than I can get anywhere else~~ very competitive. Some employers are really bad about offering competitive options, though. In those cases, yeah it’s probably better to use an IRA.
I would be surprised if you couldn't find a cheaper TDF ETF with someone like Vanguard. VFIFX expense ratio is .08%.
Not saying it isn't possible, I would just be surprised. 😁
Fair point, I was thinking my current brokerage (Fidelity). I can’t get vanguard mutual funds there. The 0.12% I’m paying on my employer’s TDF is extremely competitive, from what I’ve heard online. But you are right.
I think you hinted at it, but EVERY companies 401k is different and how they add to is also different at every company. I worked at a small company that had a 401k and they reserved the right to match up to 3% but did not guarantee it. In my 4 years there they never matched so my money in my 401k was just that, my money with no1 else contributing and in that case a Roth IRA would have been better.
If this is the company managing OPs 401k this might just be the guy doing him a solid and saying hey you're company has a 401k but it doesn't do anything, you'd have better returns in a Roth IRA, may just be him pointing out the companies lack of matching outside initial investment.
All that to say, really depends on the 401k package.
Lol I was in this role previously. We were measured on account openings and money flows into personal accounts. The man's just trying to make money. If the account is free, the fund selection is good, you don't need the extra legal protection of the 401k, AND the IRA aligns with your own goals. Do it.
I didn't go so blunt because the plan is hiring me to advise their participants, saying the plan is a waste of money is just bad business. If HR/Benefits department hears them saying the plan is a waste of money, they would get fired.
I work with 401k accounts and this was my take also. The dude's trying to get sales charges and higher ongoing commissions as well as a account numbers under direct management bump from selling the participant on a direct IRA with them instead. Normally they're able to keep it in their pants until the participant retires with two pennies to rub together when it would make sense to consolidate all of a person's scattered retirement funds into a consolidated IRA not directly under the control of their employer anymore, but I guess jumping and snatching an incoming rollover out of the air happens too.
> the extra legal protection of the 401k
What extra protections exist for 401(k)s? I had assumed that an IRA was virtually the same except set up outside of an employer (and with different contribution limits)
I was planning to roll my 401k into an IRA with lower fees when I next change jobs, but is there a reason to avoid this?
Wow, I never would have thought of that. It looks like my state (California) exempts IRA assets but only to the amount that a judge determines you would need to retire and support any dependents
> He suggested a Roth IRA account as an alternative.
Well then perhaps the financial advisor had less nefarious intent. Perhaps the advisor is still an idiot, but at least not an idiot that is looking to fatten his own coffers at your expense. Or perhaps you misunderstood the advice being offerred.
I would never recommend rolling pre-tax assets (ie your 40k pension money) to a Roth IRA without a more complete understanding of your *current* and *future* tax brackets.
Making a recommendation to convert to Roth is generally *tax inefficient*, particularly during one's working life.
I generally recommend:
* Leave the money in the pension
* Roll to *Traditional* 401k if income limits will be high enough at some point that direct Roth IRA contributions cannot be made (because Backdoor Roth strategy for IRAs works better)
* Roll to *Traditional* IRA (or Rollover IRA) if Backdoor Roth strategy will not be a concern.
> convert to Roth is generally tax inefficient
The reason for this is that the entire balance of the pre-tax account becomes current taxable income which would go into the highest tax bracket for your AGI.
Let's say you're single and your AGI is $75,000. Your income above $47,151 would be taxed at 22%. In OP's example, the AGI suddenly increased by $40,000 to $115,000 -- pushing them into the next tax bracket. So the income in excess of $100,526 ($14,474) would be taxed at 24% ($3,473 in tax) while the rest is at 22% ($5,615). It will cost **$9,088** in tax *now* to make that $40,000 into a Roth.
> He suggested a Roth IRA account as an alternative. Was he just trying to make a sale I guess?
Make sure he fully understood the source and tax treatment of the money you're rolling over. Roth IRA is after-tax, if you're rolling over pre-tax money it may not be a good idea (a traditional IRA may be better)
There may be situations where doing that--converting pre-tax money to after-tax money is a good idea, but you want to think very hard about it, and make sure 100% that both he and you understand that is what's happening and you understand the reasoning behind the advice, not just taking the advice blindly
Is this specifically about the 401k from your previous employer?
If so there are two things to consider:
First, Opening up an IRA and rolling over your 401k to it may mean that you can VOO and chill for cheaper. Which means that you'll have more money for retirement. Converting it to a Roth account means that future earnings aren't taxed at withdrawal.
Second, 401k loans are a *terrible* idea 99% of the time, but if you NEED one then you can either borrow $10k if your account is less than $20k, or half of your balance. So if you rollover your previous employer's 401k into your current one's you'll have that as a benefit that you shouldn't take. Just put it in the cheapest S&P500 tracking or large cap fund and chill.
If your current 4O1K *is a Roth*, then yes, he's right...do not add that to a traditional 401K. If it's traditional...meh. Either way is OK.
Personally, I would roll over (transfer) your old 401K to a Rollover IRA at Fidelity (or Vanguard or Schwab) and keep it seperate from existing 401K. More control that way.
Well yes, you should put in what’s required to get the match. If you get matching on 8% then put in 8%. Then IRA then more in the 401k if you have it until you max out.
I would always recommend a rollover of non current employer 401ks into an in kind (traditional to traditional and roth to roth) IRA as this person suggests. You don't need to use their IRA offering. You can use any bank you choose. I use ally and they're free trades and fine. Lots of good brokerages.
Many 401k offerings have overinflated fees that you'd want to avoid if you can. Additionally IRA's offer immense flexibility to any security as opposed to just the small selection plan provider allows.
Having ANY traditional IRA will affect future backdoor conversions.
One could deal with that hand via pro-rata rule or at that time you could empty the IRAs of deductible contributions by rolling into an employer 401k at that point.
While that's a common talking point on this sub in practice most people aren't wading in to those waters.
Thanks both, for clarifying. I’m beyond the level that allows ROTH IRA contributions, so take advantage of backdoor yearly by funding trad IRA with post-tax dollars and converting (while ensuring my trad IRA balance is zero at year end). I also have a 401K from a previous employer (any eligible post-tax amts already megabackdoored). I have not done a rollover IRA for this reason, as that was my understanding as well (that it would affect, via pro rata rule, any future backdoor conversions and there would also be a taxable event if I tried to convert a rollover IRA to ROTH IRA, since the amt current consists only of pre-tax dollars. (Currently, my previous employer 401k has good earnings — as they decrease, I’ll likely roll into new employer 401K)
The general rule for the FOO is 401k to match > Roth IRA > max 401k. So, strictly speaking, he wasn't wrong in saying contribute enough to get the full match then shift to a Roth IRA, but his phrasing is definitely suspect.
As far as trying to make a sale, was he trying to pitch a specific company to you for the IRA or just generally saying go that route?
He's kind if right then. In my opinion you saving priority should be:
1. Max out Roth 401k match.
2. Max out yearly Roth IRA contribution.
3. Anything else you want to save (for retirement), go back to the Roth 401k.
The reason why I think IRA > 401k is that with an IRA you get the same tax advantages as you do with a 401k but your investment options aren't restricted AND you can take out your IRA contributions without penalty. To be more specific, say you put $5,000 into an IRA and that grows to $6,000. You can take out the original $5,000 without penalty.
In that case, that actually might be right. The general advice I've seen is put in enough in your 401k to get the company match. But then put money into an IRA or Roth IRA next. The reason is there are usually better investment options in the IRA but more especially there are usually lower fees. If you've maxed out your IRA then go back to the 401K for further investments.
I would do an IRA - either Roth or traditional both are still better than locking the funds up with an investment company.
More than likely the 401k has higher management fees and you have more control of it in an individual retirement account. He’s not wrong in his advice, putting aside his words are pretty dramatic - the advisor is probably just passionate.
He might have a poorly started but valid point in that an IRA could have better investment options than your company plan.
He also could be getting a commission on a new account.
Good advice is to do your homework, ask hard questions, and invest in things when you understand them.
Depending on your age, a ROTH may be a much better vehicle for your retirement funds. Make sure to review the management fees of what he’s suggesting though. He could be making more money off those funds vs others.
That was what the advisor suggested. He said to leave my 401K alone except for monthly contributions which my company will match. He suggested an IRA for dumping my other money into.
And then if you’re maxing the IRA go back to adding more to the 401k. Even with suboptimal choices, the tax advantages of a 401k are worth taking advantage of. You really need to understand the choices you have inside the 401k and the associated fees.
Is your previous account a pension or another 401k? Did you vest and what happens if you leave the 40k there? If it makes since to move it, I would roll it to a trad IRA and not the new 401k.
Man, it's hard to make recommendations unless you know the person. rolling your 401k into an IRA account is objectively better since you have more control and pay less maintenance fees.
However, there are too many people out there that if you let them have too much control over their retirement savings, they are likely to blow it on the next "need".
But like I said, objectively speaking, if you are a financially knowledgeable and responsible, an IRA account is better than a 401k. You only want the 401k account for the employer matching.
Now, if you work for the federal government and has TSP. Yes, keep it in there. The maintenance fee is almost nothing.
Is this an IRA or Roth IRA? Both have their own drawbacks.
With an IRA, you won't be able to do a backdoor Roth contribution anymore. If you think you might make more than $80k/yr some day, that could be a downside.
With a Roth IRA, you'll have to pay taxes if your rolling over from a t401K.
The full annual amount permitted. He's basically saying don't worry about your 401k until your Roth IRA is maxed out which is standard advice I believe.
So my company does a 401k 100% match of the first 3%. I have 12% of my paycheck going into my 401k since its just simpler to do it from there. Am I doing something wrong in this way? What advantage would I have of putting in 3% match and then the remaining 9% would come out of my already taxed income into a roth IRA?
Is the main reason because of possible tax savings in 30+ years when I retire?
I would not say what you are doing is wrong. The general sentiment of this sub is to do the match amount on 401k, then do Roth/HSA, then go back to 401k. But going all 401k is just fine as well.
IMO the unpredictability of future tax rates makes these decisions largely moot, from the standpoint that you may as well just flip a coin to decide whether to do traditional vs Roth.
Generally ROTH vs Traditional is a matter of do you think you'll be getting taxed more or less at the time you think you'll pull the money out. Using some extremes for a simple example, a broke college kid working part time will essentially pay minimal taxes on their income. Say the same kid retires and wants to withdraw $100k/year to support their lifestyle in retirement. If they put it into a ROTH IRA when they were working part time that money got taxed a whole lot less than if they got it taxed while "making" $100k/year.
ROTH IRA just provide some flexibility. You can withdraw contributions penalty free, and you can pick your investments. 401ks you get given a sheet of options typically, and it's not as simple and more costly to get the money out.
Assuming you max both, about 1/4th of your yearly retirement plan contribution amounts are freed up to be more liquid if you need it, and also to pad as to not get taxes as much when you retire.
If you don't care for the flexibility in investment options, feel you'll never need to touch the contributions, and feel you'll be drawing an "income" of a lot less in retirement than you are currently, traditional is better.
That all makes sense. I'm not at a point where I am putting a crazy amount away, only about 9k a year plus employer match, so not worth the hassle for me.
> Generally ROTH vs Traditional is a matter of do you think you'll be getting taxed more or less at the time you think you'll pull the money out.
This is a gross over-simplification. Roths provide other benefits, such as no RMDs once you hit retirement age, withdrawals not counting towards income, and the ability to make early-withdrawals and not be penalized on the portions that you originally contributed.
If you work in a field where you change jobs every few years this is less of an issue because you can roll your 401k over to vanguard every time you change employers.
But yeah this is a good point, some of the 401K providers used by employers have crappy options and high fees.
> There's no reason not to.
Most employers do not allow "in-service rollovers" which is rolling your 401k balance out of the employer sponsored plan while you are still an active employee.
Some 401ks straight up suck
You can’t choose the provider and they choose the investments
My last job had a terrible provider and offered like 4 funds with high expense ratios
IRA you can do anything you want
I think this might be a details thing. He said it is being moved from a pension account not a 401k.
If this is a pension payout his 401k would not be the best place for it to go. An IRA would be better.
Not if you do the back door Roth IRA every year right? In that case you don’t want money sitting in a traditional IRA, so instead it would be better to roll the pension into the 401k
Moving pension money to a 401k might not be the best idea, but it depends on the pension plan itself. Typically you lose all the accrued benefits of the pension that you’re going to get at retirement if you disperse those funds and don’t leave them with the plan. Without details of the plan and of your new 401k I don’t think anyone can answer this.
As for the 401k, the prime directive has the order of operations that makes most sense for most people: 401k contributions to employer match, IRA funding, back to 401k. I suggest reading through it to understand why.
As for “interest” you speak of: your 401k will be invested in selected funds which typically do not pay interest. They are investment funds that carry risk. Selecting a low cost target date fund or a low cost S&P 500 index fund is the typical advice you’ll get because it works.
Edit: you might not even be able to move a pension to a 401k; possibly an IRA. Refer to your pension plan before doing anything to understand what you can/can’t do.
The pension money was not vested, so I received no company contributions, nor will I.
What is this prime directive you speak of? Apologies if this is basic knowledge, this is my first time on this sub.
The prime directive is r/personalfinance’s guidance/flowchart on saving/investing for the average person. See below:
https://www.reddit.com/r/personalfinance/wiki/commontopics/
It offers a step by step guide and rationale for each step, plus a graphical flowchart to help make it more digestible. It’s meant to help set a framework for investing smartly, with the end goal of a comfortable retirement.
Don’t feel bad, I wish I’d started sooner too. This type of financial guidance should be taught in schools, instead we have to figure it out ourselves collectively!
After growing up poor, I had *no idea* what to do when our household reached an income level where I had to look up how to lower our taxable income.
I wasn’t getting tax benefits from putting money into my Traditional IRA because of our income.
So I put 25% of my gross income into a SEP-IRA.
The comment you're replying to is important. This situation is complicated enough that a lot of commenters here are misunderstanding your question and answering more common questions that you didn't ask.
The process of moving money from an old retirement account to a new one is called a rollover. [There's a page on this subreddit's wiki](https://www.reddit.com/r/personalfinance/wiki/retirementaccounts/rollovers/) about rollovers in general, but pensions are either unusual or nuanced enough that they're not addressed there. It is probably still worth reading.
Here's a **[link to the PF Wiki](/r/personalfinance/wiki/index)** for helpful guides and information.
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Your employer provided 401k will likely have higher fees than a broker like Fidelity, Vanguard or IBKR, so rolling your previous 401k into an IRA with one of those makes perfect sense. However, if you aspire to retire between 55 and 59.5, note that your 401k is the one source of tax protected investment vehicle that you can withdraw from without penalty.
>Your employer provided 401k will likely have higher fees than a broker like Fidelity...
This is likely true, but fortunately many employers do offer good 401k platforms. e.g. at my firm, we have a menu of Admiral-share Vanguard index funds, and 100% of the administration costs are paid by the employer. Also, lots of large employers use Vanguard or Fidelity and have very low-cost index funds with no employee-level costs. For consolidation purposes, it can just be a lot easier to keep retirement savings all in one place. Also, opening a Traditional IRA with pre-tax money will make future Backdoor Roth IRA contributions much less appealing due to the pro rata tax rule on conversions.
Bottom line for me is, if the 401k offers acceptable investment options and costs, then I'd consolidate everything there.
It seems like the FA is saying it is a waste to roll over prior money into a 401(k). That could be well-reasoned advice. That advice is different than saying, “don’t invest through a 401(k).”
That $40k from the prior account could be rolled into a different account managed by OP or their advisor. Likely there will be more options for investing in a diversified, low-cost portfolio by choosing an account type other than their current 401(k). Again, this is distinct from the advantages of making new investments through your 401(k).
I believe your financial advisor was trying to give you the very standard flowchart advice - invest 401k up to employer match, then Roth IRA up to legal max, then 401k again up to legal max. This is fairly standard advice and it is generally the one that best optimizes across a broad range of tax situations and potential retirement outcomes.
> invest 401k up to employer match, then Roth IRA up to legal max, then 401k again up to legal max.
Our flowchart doesn't say that exactly (and it shouldn't). The 401k match is an easy first step. Then Roth *or* Traditional *or* no IRA, because if you make >$75k with a 401k, the Traditional IRA has no deduction. It depends on your income and tax outlook.
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Others in this thread have already covered the benefits of funding a Roth IRA before funding beyond the match of a 401k so I won't go into that, but something you said here has me curious.
> it appears that the more money you have in your account, the more interest it will accrue
What do you mean by "interest" here? Whether or not a 401k plan will accrue interest entirely depends on what you have done with the 401k money and what you mean by "interest". A 401k plan may offer CDs, money market funds, U.S. treasury bonds, and corporate bonds all of which would provide interest. Generally speaking, however, most employees are going to put their 401k money into targeted date funds, mutual funds, ETFs, etc. things that have higher risk (may lose money) but are much more likely to earn above inflation.
I wanted to call this out because on /r/personalfinance you'll see tragic posts about folks who have been 'investing' into their 401k for years only to find out they never selected funds for the money taken pre-tax to be put into and have missed out on significant growth. So, if you haven't actually selected a fund for your 401k money to be invested into, please make sure you do so as soon as you can.
Probably. We are very specifically talking about what your best course of action is for the money from your old 401k. You have three main options for this money:
1) Move the money to an IRA: This is usually seen as the best option. You will have full control over the investment options for this money and can find lower cost investment options that what is offered in the 401k. 401k administrators also usually charge a lot more than brokers like Fidelity or Vangaurd
2) Move the money to your new 401k or leave the money in the existing 401k. This is an OK option. Much better than option 3, but it costs more than option 1. This is the option that the financial advisor was discouraging you from doing. You most likely will pay higher fees and will have fewer investment options in the 401k, but the main advantage is that all of your money is pooled together.
3) Cash it out. DO NOT DO THIS. You pay taxes and penalty. Just a bad option.
In summary, the financial advisor is giving you good information, but perhaps didn't explain in very well. It doesn't sound like he was trying to make a sale, as you can follow his advice by opening an account with any brokerage and move the money there.
Its a weird way for an advisor to word it, but I can see scenarios where what he is saying is essentially true.
It is dependent on the details of your pension and 401k plan -- they are not all made the same.
I think most commenters in this thread are assuming this is some nefarious or incompetent advice from this advisor, which I don’t understand.
My impression is what they’re telling you, correctly I’ll add, is that after you meet the threshold to receive your company’s match on your 401(k) there are other accounts that should prioritize maximizing, such as your HSA or Roth IRA.
It’s not necessarily a waste to maximize your 401(k) first, but it’s not the most efficient path. Hope this helps.
> I think most commenters in this thread are assuming this is some nefarious or incompetent advice from this advisor, which I don’t understand.
Probably a reflex reaction to 90% of the people that go around telling everybody that 401ks/IRAs are terrible end up selling you some Tiktok-tier managed portfolio, real estate or crypto investing strategy.
Wasting money isn't the right term, but you likely should not roll it from one traditional 401k into the next 401k when you have the option to roll it directly into a traditional IRA. With the IRA, you have full control of the investments you direct that money to, instead of a limited basket of options controlled by your company's 401k provider, and will never have to roll it over again the next time you leave a company.
As a young person new to their career, you should be doing in this order:
1. Contribute to your 401k just enough to maximize the company match.
2. Contribute to your Roth IRA to max it out. Currently $7,000 per year.
3. Once Roth is maxed, contribute to your 401k until it is maxed. Currently $23,000.
The reason you do #2 before #3 is due to the your lower income bracket in your early career. You should pay as many taxes on your retirement savings now when the tax is low. Rather than pay no taxes now (401k) and pay a likely higher tax bracket when you retire.
I dont include any mention of contributing to a HSA account, but if you have that, it would be #1b on this list. Contribute to that after company match.
Rolling over into a company sponsored 401k is normally a bad idea. You’re restricted to what that plan has available for investment choices. You can do a direct rollover into a rollover IRA which does essentially the same thing, except you have an all the options for investments instead of just plan approved ones. It’s also easier to move in and out of investments if you ever decide you need to.
I prefer to rollover an old 401k into an IRA that I have control over. Continue to contribute to your new 401k with your new company and take the matching.
This advisor is wrong.
1. You can take a loan from most 401k accounts. Up to 50% of the balance or $50k--whichever is lesser. Adding money to a 401k will immediately give you access to this option. Now whether you should take a loan in the first place is another conversation.
2. Depending on the type of pension account moving all your pre-tax money to a 401k allows you to do a mega-backdoor Roth conversion and not worry about falling victim to the pro-rata rule.
3. Depending on where the pension is invested you may have more options, better returns, and less chance of the pension going bankrupt by having it in a 401k.
4. If your pension has fees then consolidating all your retirement funds lessens those fees and makes your overall retirement fund management, visibility, and goals easier to manage.
Maybe what he is that there is no advantage to rolling that previous money into the new 401k because there will be no mat h from the company. Take the roll over money and start a separate retirement account with it that can be diversified into other markets. Typically you're pretty limited to your investment choices with 401k and though maybe safer, leave you with less return. Still contribute to 401k and if you're young enough contribute part of that to Roth, it will help in the end since you've already paid taxes on it. Take the rollover money to market and watch it grow there if you don't need it. Remember time in the market beats timing the market and it hasn't had a loss over a 20yr span. Let the other make money and max out your new 401k to get the full contribution from your company.
Any "financial advisor" who claims your are "wasting your money" when talking about any of the IRAs or other common investments is talking shit and shouldn't be trusted with money for the ice cream truck.
Each investment fund type has pros and cons and their efficacy is highly dependent on the individual. Sweeping statments like this always make me highly suspicious of the person giving the advice.
> I was told by an financial advisor at the company that the only benefit of having money in a 401K is the initial contribution, which my company will match. He went on to say “You’re wasting your other money by dumping it into a 401(k)”.
What does he suggest doing instead?
Oh I see now thanks. To convert $40k to Roth would give you a fairly big tax bill — unless you have particularly low income this year (such going back to school or something) I’d hesitate to convert that much to a Roth IRA.
Rolling it tax-deferred to your 401k or an IRA is likely the better move. I’m not sure where this FA is coming from saying 401ks are a waste of money. Now there’s certainly at times value in maxing a Roth IRA or HSA before maxing the 401k beyond the match. But rolling over a $40k balance is an entirely different story
There are two issues to consider:
1 - if you roll over your old 401K into a traditional IRA, that will make it more difficult to do backdoor Roth IRA conversions in the future (look up the pro rata rule).
2 - money in a 401K is afforded protection from bankruptcy, creditors, lawsuits etc. Money in an IRA may not have a s robust protections - but it is state dependent. I know that in Virginia and Florida money in an IRA and in a 401K are afforded the same protections.
- The rate of return is the same whether you have $3K or $300K in the account
- Don't worry about interest considerations; investment products in tax privileged accounts may grow either via asset appreciation or via interest which is automatically reinvested; the difference is immaterial
- If you make more than $77K and your employer offers a 401K plan, you are not able to claim a tax deduction on a traditional IRA, eliminating its biggest advantage. You can still contribute to a 401K
- If you make more than $146K, you are not able to contribute to a roth IRA, but can still contribute to a 401K
- 401Ks have a much higher contribution limit than IRAs, allowing you to shield up to at least $23K per year from taxes; if your employer offers a match and in-plan conversions are available, this number can go up to $69K. IRAs have a comparatively tiny $7K limit
- 401Ks may or may not have worse selections of investments/expense ratios available compared to an IRA; you have to look into your plan's available investments to determine that
- 401Ks have better protection in bankruptcy/if someone brings a suit against you
The above applies to new money coming in assuming you have access to a 401k. We don't know the details of your pension fund so it's hard to say if rolling it over to the 401k is advantageous or not. Rolling it over to an IRA should be a fine choice, but to say you'd be "wasting your money" by adding it to the 401k is probably incorrect
"The more money you have in your account, the more interest it will accrue" sounds to me like you need a refresher on math, sorry if you know this...
10% gain on 100,000 = 10,000
10% gain on two accounts with 50,000 each = 10,000
10% gain on ten accounts with 10,000 each = 10,000
So most people are right to point out that the quality of funds are generally better and fees are lower in an IRA. But if you go pre-tax 401K to post-tax Roth IRA you will need to count that conversion as income and pay taxes on it.
Your company 401K will have set number of options to invest your funds. Your private 401K you will have a much larger number of funds,ETF’s, individual stocks to invest your money. You are not wasting your money in the company sponsored 401 K. They are only limiting your options to invest your funds.
He is not acting independently but as a salesperson for the invest company. He could be spot on correct. But it’s like a car salesperson telling you getting the extended warranty is a good deal.
Sounds like he might be conflicted. Advisors don’t usually make money on 401ks unless they are the admin for the plan.
Most advisors outside of that don’t like 401ks because they don’t get the fees and commissions. Instead they might point you to an IRA or another product that they manage because they get commissions.
That financial advisor you speak about is probably not doing that job anymore. What an insane comment! I started a 401k when I was forty and dumped as much as I could into it. Now I am retired and the money is in an IRA account doing just fine. My rate of return on my 401k was averaged out at 17% over its lifetime. Not bad. I have not worked since I retired 5 years ago. Find another advisor.
You are absolutely not wasting your money in a 401k. It is better than sitting on it, or worse, spending it. The match option of a company is the best part of it.
A Roth IRA can only have $7k contributed to it yearly. But, they do out perform 401k's.
I contribute 5% to my 401k to get 4% matching. Then, Jan 1st, I roll over the Roth IRA maximum (now $7k). Any change I have left over goes into my Emergency HYSA or Fidelity ETFs.
He wants to sell you his financial and/or insurance products, likely working on commission.
The 401k isn't perfect, but it's a great way to divert your income into a retirement account. The tax deferral makes everything super simple.
The Roth IRA is similarly simple and good.
That could mean several different things:
1) The investment options in your 401k aren’t the best due to fees/loads/etc, so there are better options after you get the free company match.
2) At your income and tax bracket, you’re better off putting money after getting the match into a Roth style account.
3) The investment options he is offering you outside the 401k are better (for him).
Numbers 1 and 2 could be true depending on your company’s plan, and your income and tax bracket. He shouldn’t make a blanket statement like it’s a waste though.
Number 3 means he’s looking out for himself, and not for you.
A Roth IRA rollover is often considered the best option when switching jobs. Then max out 401(k) contributions to ensure you get the full company match.
I'd listen to the advisor if you don't understand why. In this case he's correct.
From what I understand a pension would not be eligible as a contribution to a Roth IRA. That leaves you with the options of an annuity, a traditional 401k, a traditional IRA or a lump sum. The income used to fund a Roth IRA must be “earned”, which in the eyes of the IRS, a pension is not earned income.
Roll it into an IRA. Do not put it your employer 401k
Employer plans are limited on what you can invest in. A normal IRA has more investment choices and freedom.
You would not want to roll any money from a former employer into your new 401(k). You will have more options and control by rolling it into an IRA. You can do this with any financial advisor or institution. I don’t think you are “wasting your money” but you are unnecessarily tying it to your employer and the options set forth in that plan.
I've been putting about $20k a year in my 401k. In less than 5 years, I have over $150k. I'm pretty sure it's not useless after the initial contribution.
You have more options if you roll it into an IRA. With an IRA you can invest into pretty much anything. You can buy government bonds. You can buy Nvidia stock. With a 401k account you are limited to the 15-20 mutual funds preselected for you by your employer. They are often not the best.
"the more money you have in your account, the more interest it will accrue."
You earn interest if the funds are invested in something that is interest earning.
Money in a 401(k) earns the exact same amount as money not in a 401(k) when the money in both accounts is invested in the same thing. It's the investment, not the account, that grows or loses.
Your existing funds, rolled into a new employer's 401(k) plan, is not contribution and doesn't get a match. This type of consolidation is for your convenience, but if the new 401(k) has more fees or fewer options that you would get through having an IRA (individual account, not through an employer plan), then you want to maximize the options and minimize your costs. Stay away from the new employer's 401(k) with any other funds. Let them have the payroll-based contribution only.
What would the advisor have you do with that money? I'd be willing to bet that he would recommend something to you that generates commission for him.
If you're putting money into a 401k, that's a good thing. You don't want to take it out of a qualified plan until you draw on it for retirement. So, 401k or IRA. There are advantages and disadvantages to both, but they are tax advantaged.
It sounds like this advisor wanted you to invest your 401k into one of his products. That product had better be an IRA or you'll be eating taxes. That is reprehensible on his part.
edit: typo
I agree with others, roll over to a self directed ira. Only contribute to the new 401k up to the match. So if your new company matches up to 5%, you put in 5% your up 10%!
Don’t leave money on the table.
You can't take money from a 401k account without rolling it into another qualifies account without incurring a huge tax bill. So what he's saying is nonsense?
You should talk to a financial advisor. I'd recommend one that charges a flat fee, 1% of managed assets is pretty standard as I understand ( someone correct me if I'm wrong) personally I'd contribute to my 401k to the limit of my employer match but not any more, anything else goes to an IRA. Just my 2 cents
I heard similar "advice" at a retirement seminar put on by our state employer. The guest speaker was, I guess, trying to rake in the lucrative state employee retirement bucks-- he said the same thing. Then talked about annuities. Ah. Fuck off, dude.
Anyway, he was NOT asked back.
If you have a 401K and are able to move it, move it over to one of the lower-cost options. We use Vanguard, but Fidelity and Schwab are some others that are recommended [(check out the Wiki).](https://www.reddit.com/r/personalfinance/wiki/401k_funds/) Much lower cost, usually, than employer-sponsored plans.
This is completely true. 401k's typically have higher expenses due to their regulatory requirements. Just roll them into a traditional ira with somebody like vanguard. I could write a novel on this, but tbh, I'm too tired right now.
You are probably better putting your money into your 401k plan over an IRA for a few reasons.
1. You have ERISA protection meaning the committee members have a Fiduciary duty to the plan participants. This is different than a financial advisor potentially who is out for his own interest. Also if your 401k plan has excessive fees or bad options the Fiduciaries could be on the hook for violation of prudence and participants could initiate a lawsuit. Most competent companies perform fee benchmark studies to document that the Fiduciaries are making sure their plan is competitive. Last year there were 48 lawsuits. In 2022 it was around 90. So attorneys are looking at this. You need to understand what funds are available and what the expenses are in those funds.
2. The funds you get in a 401k plan could be institutional share class. That is a special share class that requires a ton of money to get into and they will generally have lower expense ratios than the same fund if you were to call up Fidelity or American Funds or some other investment company and want to invest in the same fund. Lower expense ratios mean that better returns over time.
The only reason not to put money into the 401k is if you need emergency savings fund or you want to save money for some other purchase later. Some people will say you don’t want to lock up money into a 401k until 59 1/2 but there are other ways to get distributions out prior to that. But this goes to my earlier point not to continue dumping money into a 401k if you think you may need it prior to retirement.
RE Roth- the point no one ever addresses here is social security and taxes. If you are drawing social security, how much that social security is taxed depends on your income. And traditional 401k distributions are counted as taxable income which means your SS benefit is taxed at a higher rate. Roth is not counted as income and won’t increase the tax on SS.
This is true advise tho.
If you company matches up to (for example) 5%, then contribute 5% to get the match. Don’t do 6%. That extra 1% has better legs for you dumping into T bonds, or SPY, or some other investment.
But if you are a spend thrift or don’t max your investments, then doing extra in your 401k is better than pissing it away.
But none of that has anything to do with your requested rollover. I dont know the pros/cons of moving from a pension to a 401k. He might be indicating the 40k in a pension is better than 40k in a 401k. Maybe thats what he was talking about?
When I’ve changed jobs, I’ve rolled my old 401k’s into IRA’s. There’s no tax penalty but with an IRA you can invest in stocks. I’ve seen much bigger returns investing in stocks that mutual funds.
If your money is taxable, dump into IRA, 401k. Avoid the taxes now and watch it grow tax free.
If your money is not taxable, i.e. you have massive deductions, then you can dump it in a regular account and purchase stocks. You will be taxed when you sell the stock if there is a gain, but only on the gain. If you hold the stock longer than a year you get long term capital gains tax breaks.
So my company does a 1/2 match up to my contribution each percent up to 8% (so my 8 and they do 4).
Every year I’m given a raise of about 4%, so I usually take 1% and increased my contribution to this 401k. However, I would be at 10% and the company was still at 4 due to the cap.
So I took those extra percents and put it into my Roth IRA, because the company that does my Roth has had better returns than with my 401k.
I would recommend looking at both your 401(k) and the Roth of yours. Look at its history and see which one is performing better percentage-wise.
Not all 401ks are created equal even within the same recordkeeping institution. A lot is determined by the company you are working for (aka the plan sponsor}. My 401k is with Fidelity. My statements show about $35 a year in fees. I can do both Roth and Traditional in my 401k. I have access to just about any investment your want but there are some limitations that are just prudent to have. Afterall, 401ks are regulated and they need to try to keep you from losing your money on stupid investments.
Is this "advisor" an employee of the brokerage that runs the 401k for your new employer? A reasonable case could be made for why a person might want to seize the opportunity to roll a a previous company 401k to an IRA which you own and control. You then have many orders if magnitude more things to invest in instead of the dozen or so things offered by the new plan.
However, it's not always in the person's best interest because sometimes the funds are so huge in a 401k that the fees are actually lower than you might get for the same fund on the open market. Huge companies negotiate these things. So for this advisor to try to offer generalized advise like "you're throwing money away" is really irresponsible. If they specifically said to convert it to Roth that is even more irresponsible. Given that it would generate a taxable event, it might make absolutely no sense without considering your overall financial picture. I'm almost certain this advise was *not* offered on your behalf.
This brings me to the most likely motivation, that the "advisors" likely have marching orders to keep the amount of investment on the books for that plan to a minimum. That means cajoling ex-employees to remove all their funds the second they're out the door, and doing the same to try to prevent new employees from rolling old plans over into it. As a recent retiree, I'm not super happy about that honestly. You have every legal right to keep it in that plan if you want to. But just make sure you're doing it for the right reasons. Do it because you've investigated the fund offerings, and expense ratios and decided that they fit with your investing goals. If not then it's time to consider either a rollover to Traditional IRA or conversion to Roth.
I have two retirement accounts, a IRA Roth and TSP Roth which is a 401k by the government. You are not wasting as long as you have done your homework and research on the stocks you invest in. I highly recommend everyone to study up on stocks because we are all in that now in order to have a retirement in the future. I have invested 140k my own money and I now have 230k plus. This is just with 6 years of contributions.
Time equals compounding interest.
Having a 401 k is great psychologically. Set your account to invest 70% stocks and 30% money market/vonds. Set it automatically to invest 15% of your paycheck every time. The key is you will invest automatically. And it will grow. The problem with not doing it that way is you will have to constantly make yourself invest over time and not spend over time. If you never see the money because if automatic contribution you won’t spend it on foolish stuff
If he was suggesting a Roth IRA, he’s not totally wrong. Roth accounts are in some sense a better deal because you pay taxes on the smaller amount you put into the account, rather than paying taxes on the growth of the account down the line.
Typically Roth accounts beat traditional accounts in that manner. However, your employer may offer a Roth401K, if so you’d get the benefit of the employer match plus the tax benefit of the Roth. If not, put up to the match in your traditional 401K and dump the rest in a Roth IRA.
need more details
if I hear someone telling me
>"You're wasting your money by dumping it into a 401K"
I'd immediately ask 2 questions: #1 what alternatives are you proposing and #2 if 401k is wasting money then giving it to gov in form of taxes isn't wasting money?
Your money is ALREADY in a 401K. Why would it be a waste to transfer it to your new account?
Your financial advisor might have been advising NOT to contribute (to the 401k) above the company match.
Was this financial advisor acting in a *fiduciary* advisory capacity to you? Or was this just a co-worker who happens to masquerade as a "financial advisor?" What alternative was this "financial advisor" offering as an alternative? Was it some sort of insurance product as an "investment?"
I guess I should've clarified. This advisor worked for the company who owns the 401K account. He suggested a Roth IRA account as an alternative. Was he just trying to make a sale I guess?
It’s hard to say what his intent was without more context. He could mean that your investment options are poor in your 401k, and he thinks you will see better returns with an IRA, where you have more freedom to choose your investments. But to say you’re “wasting your money” on a 401k is such a bold, blanket statement that your skepticism is definitely justified.
I have definitely heard people use that phrasing with rollover money that could instead go to an IRA. However that is contingent on the 401k having terrible options. If you have to pick between high fee funds for the 401k you would be better off putting that money into an IRA where you can pick your own broker. The whole Roth vs Traditional thing is weird though, the math is weird on that.
Roth vs. traditional is not that weird, it's different pots of money for different purposes. It's best to have money in both. Rule #1 - contribute as much to a 401k as your employer will match. That's 100% ROI right off the bat, you can't beat it. Rule #2 - prioritize roth contributions when you're younger and lower earning. more time to grow, and since you're lower earning you're not dodging a ton of taxes on the front end. Rule #3 - prioritize 401k/traditional dollars on mid-career and beyond when you're in your higher earning years. Fill up a roth and/or backdoor Roth after you've reduced your AGI as much as possible. You'll appreciate having both kind of money in the end. Assuming you own your own home by retirement, and the kids are out of the house and through college, you should need far less income than you did in your prime earning years. Use 401k/traditional money to augment social security and any pension dollars you have coming in. You're in a lower tax bracket anyway. For any major purchases, that's when you pull a lump sum out of the Roth. Your home's HVAC dies? Roth. Your car's engine blows up? Roth. It's your tax-free rainy day fund.
That’s a good way to look at it. For whatever reason I have always only contributed to 401k (have maxed it out my entire life). Now that I’m 45 I’m wondering if I should add some Roth contributions.
Calling traditional/pre-tax accounts 401k isn't right, because 401ks can have traditional and Roth components. Contributing to a 401k can be either pre or post tax, traditional or Roth.
Meh, 401k isn’t a bad option still. Depending on your income, some calculators recommend 401k before Roth for the tax breaks.
I prefer a bird in the hand so I put my money in a pre tax account. If I live long enough to be stuck paying RMD’s I may regret it. I know healthy people who have had fatal strokes before 62 so I’d rather have the benefit today.
It’s a crapshoot either way. You know your current tax rate but you don’t know your retirement tax rate. Things can change drastically (down or up) due to tax law changes by the time you retire.
> Assuming you own your own home by retirement That's a giant assumption. Like I'm in my 30s, and quickly approaching the point where with a 30 year mortgage, I would not have a house paid off. Then again, I also don't actually expect to reach retirement age. It's rare for men in my family to get that old, and I've got a chronic disease.
Even if it's not free and clear, you probably have it at a lower cost basis than market rate rent if you bought in your 40s unless everything has gone sideways.
Even if you don't have the house paid off, if you have the purchase price nailed down you can basically just subtract that number out of your savings for retirement planning. It's a bit harder to plan for rent changes.
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IDK, that's a judgement call. 22% bracket starts at $44k and 24% bracket goes up to $182k right now for single earners, and dollars below $44k are taxed at 12%. If you're married 22% starts at $89k so adjust your math accordingly. I'd say a good rule of thumb is that you benefit more from prioritizing pre-tax contributions if at least half your pre-contribution AGI would be over the 44k threshold. I'm just a regular dude though, not a fiduciary or any sort of finance professional.
This is what needs to be looked at. If the guy who runs the 401k is telling you the 401k is a waste, that tells me their options for investing the money within might not be that great. High fees, or bad compositions can make a 401k perform poorly. In the grand scheme of things a 401k is generally good for long term investing, but some 401k programs are much better than others, while a Roth IRA you have much more control over (which can be a blessing or a burden if you pick the right/wrong stocks, or just play it safe with major ETFs). The main reason people like Roth's on the lower income side, is it is safer to be more aggressive with it since the contributions can theoretically be used in an emergency, while the profits are subject to the same penalties as any other retirement account.
Having a trad IRA limits the usefulness of back door Roth though
I think he's talking about traditional money in a 401k vs Roth money in a 401k/IRA. People keep saying 401k like it means traditional, when it can be both traditional and Roth.
It's possible that the 401k had ridiculous fees and he meant it should be rolled into an IRA outside of work.
I had a job once where the 401k had a a whole ass 1% admin fee. Probably a situation like that.
How does one get a more complete understanding of the tax brackets one will be in in 40 years from now? edit: looks like the person I replied to ninja-edited their comment. They made a comment along the lines that you needed to have a complete understanding of the future before being able to determine the best strategy.
You really can’t know for sure especially because tax laws can and do change. IMO it’s best to have some pre and post tax investments. That said, most people will be in a lower tax bracket when retired.
I have pre and post tax investments. I have a Roth, but can no longer pay into it because the combined income of my wife and I exceeds 200k, It's always good to diversify A tech mutual fund with the Magnificent 7 in it ,for example
How is a tech mutual fund with mag 7 anywhere close to diversified? If you’re holding the s&p 500 you already have plenty of exposure there.
Yeah - every time I think I should buy \[insert tech stock name here\] I'm reminded that I already hold that in my index funds :)
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Even if taxes are higher, you're likely to be in a lower tax bracket because your taxes are based on your withdrawals, not your income in retirement, and you're likely not going to be spending as much. There's nuance to it and I'm kinda sick of the fear mongering "oh the government is going to tax you to death, better roth it up" I think retirement age individuals are one of the most protected classes historically from a policy perspective. At this point it seems like we're never going to pay our federal debt down, mostly because the economy depends on it too much, so let's all just ride it out
Roth contribution income limit for MFJ is 230k and you can contribute partial (ie less than the $8k max) if you’re in the $230-239,999 range. Not sure how far over 200k you are but just an fyi for 2024 in case it applies
I was gonna say I thought the income limits were related to MAGI, so you’d have to gross closer to 300K as MFJ if you’re maxing out two traditional retirement accounts in addition to the standard deduction.
Check into your 401k account. I just recently realized mine is offering Roth401k. A lot started offering that as well. No income limit and same contribution limit as traditional. I’m going to switch my full contribution to Roth 401k going forward since i have a decent amount in traditional now
If you are above the income limit to contribute to a Roth IRA you are at a high enough tax rate that a Roth 401K doesn’t make sense
**Underappreciated post should be upvoted.** You have to put more money into the Roth because it's post tax contribution to make up the difference. So you lose todays tax benefit, and have lower take-home, to save (very likely) tax at a lower rate in the future.
That's situational. I would agree that you should max the trad-401k and HSA first. After those are maxxed though, there's a point when the Roth 401k looks a bit more appealing: there's no RMDs, they are inherited tax-free, and it's a great hedge if future tax rates/brackets increase or we just end up staying in a high tax bracket.
Fund a fully functional crystal ball
1. Take all of your expenses today and sort it into categories 2. Calculate how much your lifestyle will increase in each category over the next 40 years 3. Calculate how much inflation will affect each category over the next 40 years 4. Multiply your expenses today by the lifestyle increase and the inflation increase 5. Sum up all the expenses 6. Calculate what percentage of your income comes from each income source (earned, pension, capital gains, dividends, etc.) 7. Figure out what state you will live in after 40 years 8. Figure out how the tax brackets will change over the next 40 years
Generally when you have no (earned) income your tax bracket will be lower, unless your investments are so wildly successful that your tax liability from long term capital gains produce more liability than your salary did. If so, consider yourself to be very, very lucky.
There's no way to do so unless you have a crystal ball. Any Roth conversion is a gamble, ultimately.
Correct, but having some in Roth and some in traditional helps you to control how much taxes you’ll have to pay.
Maybe (and probably for those age 40-ish and younger), but for anyone within 10-15 years of retirement, I think it's a gamble. You're generally in your peak earning years at that point and taking on the tax liability at that point may not be your best option.
That kind of goes without saying though, *any* investment "is a gamble." It's also important to note that there are hard limits to yearly contributions for both 401k and IRA, if you're hitting one and still have money to invest towards retirement, it's gotta go somewhere.
Agreed. I have the option at present employer for Roth401k so I’m presently doing that. I’m (hopefully) not at peak earning so I can make adjustments as my situation changes. Already have a decent nest egg in traditional.
It really boils down to your incremental tax bracket. If in one of the highest tax brackets, it’s better off to assume during retirement withdrawals of regular 401k, you’ll be in a lower bracket.
My logic has always been to go traditional as if I am in a higher tax bracket then I can afford the taxes and if I am in a lower bracket(due to under performing investments) I'll be in a lower bracket. This obviously assumes similar tax brackets.
Valid advice from advisor. I recommend OP make another appointment, so you can ask for clarification and recommendations on education materials. This will help you to increase your understanding on investing. Here is what I had discovered over time and wished I had learned it sooner. Only invest in your 401K to the company match. Next contribute to a Roth IRA until you can max out that contribution. Once you can do this return to contributing to your 401K (pre tax or post tax if offered) until you can eventually max that out. Eventually open a brokerage account to take your savings to the next level. You don’t want all your retirement savings tied up to 59 1/2 year of age. You never know what life will bring. It’s also important to have a nice mix of pre and post tax dollars saved for tax planning purposes when RMD’s start in retirement. This is only scratching the surface, but hopes it helps. Please take the time to educate yourself because no one will care more about your money than you.
It depends on your goals and specific situation. For a lot of people it makes sense to max out the 401k first to maximize the amount of income you can deduct before contributing to a roth. There are ways to access that money earlier if you really want to but for a significant amount of people your tax rate in retirement will be lower than your working years. And even if post-tax retirement accounts make more sense to your situation, it still might make more sense to max a roth 401k before moving to IRA if your 401k plan offers lower fee funds than what you have available in an IRA. You can always rollover a roth 401k into a roth IRA if you want.
This is the way - the RMD component is so important here and not many people think/ consider it.
Open an IRA. It's where you want to be long term. The chance of your 401k having better options is basically NIL.
Totally agree, although my last employer had VITSX in their 401k plan: 0.03% expense ratio. I was really happy with that!
It varies a lot and depends on what you’re looking for. My 401k has TDFs that are ~~cheaper than I can get anywhere else~~ very competitive. Some employers are really bad about offering competitive options, though. In those cases, yeah it’s probably better to use an IRA.
I would be surprised if you couldn't find a cheaper TDF ETF with someone like Vanguard. VFIFX expense ratio is .08%. Not saying it isn't possible, I would just be surprised. 😁
Fair point, I was thinking my current brokerage (Fidelity). I can’t get vanguard mutual funds there. The 0.12% I’m paying on my employer’s TDF is extremely competitive, from what I’ve heard online. But you are right.
I think you hinted at it, but EVERY companies 401k is different and how they add to is also different at every company. I worked at a small company that had a 401k and they reserved the right to match up to 3% but did not guarantee it. In my 4 years there they never matched so my money in my 401k was just that, my money with no1 else contributing and in that case a Roth IRA would have been better. If this is the company managing OPs 401k this might just be the guy doing him a solid and saying hey you're company has a 401k but it doesn't do anything, you'd have better returns in a Roth IRA, may just be him pointing out the companies lack of matching outside initial investment. All that to say, really depends on the 401k package.
Lol I was in this role previously. We were measured on account openings and money flows into personal accounts. The man's just trying to make money. If the account is free, the fund selection is good, you don't need the extra legal protection of the 401k, AND the IRA aligns with your own goals. Do it. I didn't go so blunt because the plan is hiring me to advise their participants, saying the plan is a waste of money is just bad business. If HR/Benefits department hears them saying the plan is a waste of money, they would get fired.
I work with 401k accounts and this was my take also. The dude's trying to get sales charges and higher ongoing commissions as well as a account numbers under direct management bump from selling the participant on a direct IRA with them instead. Normally they're able to keep it in their pants until the participant retires with two pennies to rub together when it would make sense to consolidate all of a person's scattered retirement funds into a consolidated IRA not directly under the control of their employer anymore, but I guess jumping and snatching an incoming rollover out of the air happens too.
> the extra legal protection of the 401k What extra protections exist for 401(k)s? I had assumed that an IRA was virtually the same except set up outside of an employer (and with different contribution limits) I was planning to roll my 401k into an IRA with lower fees when I next change jobs, but is there a reason to avoid this?
Depends on your state. Some states they let people sue you for your ira money
Wow, I never would have thought of that. It looks like my state (California) exempts IRA assets but only to the amount that a judge determines you would need to retire and support any dependents
> He suggested a Roth IRA account as an alternative. Well then perhaps the financial advisor had less nefarious intent. Perhaps the advisor is still an idiot, but at least not an idiot that is looking to fatten his own coffers at your expense. Or perhaps you misunderstood the advice being offerred. I would never recommend rolling pre-tax assets (ie your 40k pension money) to a Roth IRA without a more complete understanding of your *current* and *future* tax brackets. Making a recommendation to convert to Roth is generally *tax inefficient*, particularly during one's working life. I generally recommend: * Leave the money in the pension * Roll to *Traditional* 401k if income limits will be high enough at some point that direct Roth IRA contributions cannot be made (because Backdoor Roth strategy for IRAs works better) * Roll to *Traditional* IRA (or Rollover IRA) if Backdoor Roth strategy will not be a concern.
> convert to Roth is generally tax inefficient The reason for this is that the entire balance of the pre-tax account becomes current taxable income which would go into the highest tax bracket for your AGI. Let's say you're single and your AGI is $75,000. Your income above $47,151 would be taxed at 22%. In OP's example, the AGI suddenly increased by $40,000 to $115,000 -- pushing them into the next tax bracket. So the income in excess of $100,526 ($14,474) would be taxed at 24% ($3,473 in tax) while the rest is at 22% ($5,615). It will cost **$9,088** in tax *now* to make that $40,000 into a Roth.
> He suggested a Roth IRA account as an alternative. Was he just trying to make a sale I guess? Make sure he fully understood the source and tax treatment of the money you're rolling over. Roth IRA is after-tax, if you're rolling over pre-tax money it may not be a good idea (a traditional IRA may be better) There may be situations where doing that--converting pre-tax money to after-tax money is a good idea, but you want to think very hard about it, and make sure 100% that both he and you understand that is what's happening and you understand the reasoning behind the advice, not just taking the advice blindly
Is this specifically about the 401k from your previous employer? If so there are two things to consider: First, Opening up an IRA and rolling over your 401k to it may mean that you can VOO and chill for cheaper. Which means that you'll have more money for retirement. Converting it to a Roth account means that future earnings aren't taxed at withdrawal. Second, 401k loans are a *terrible* idea 99% of the time, but if you NEED one then you can either borrow $10k if your account is less than $20k, or half of your balance. So if you rollover your previous employer's 401k into your current one's you'll have that as a benefit that you shouldn't take. Just put it in the cheapest S&P500 tracking or large cap fund and chill.
If your current 4O1K *is a Roth*, then yes, he's right...do not add that to a traditional 401K. If it's traditional...meh. Either way is OK. Personally, I would roll over (transfer) your old 401K to a Rollover IRA at Fidelity (or Vanguard or Schwab) and keep it seperate from existing 401K. More control that way.
Well yes, you should put in what’s required to get the match. If you get matching on 8% then put in 8%. Then IRA then more in the 401k if you have it until you max out.
I would always recommend a rollover of non current employer 401ks into an in kind (traditional to traditional and roth to roth) IRA as this person suggests. You don't need to use their IRA offering. You can use any bank you choose. I use ally and they're free trades and fine. Lots of good brokerages. Many 401k offerings have overinflated fees that you'd want to avoid if you can. Additionally IRA's offer immense flexibility to any security as opposed to just the small selection plan provider allows.
Might work for you, but anyone thinking about this needs to research the pro rata rule first.
Pro rata rule would not apply to an *in kind* rollover. Only to a traditional to roth conversion.
Wouldn’t having a rollover (traditional) IRA affect any future backdoor ROTH IRA conversions via the pro rata rule though?
Having ANY traditional IRA will affect future backdoor conversions. One could deal with that hand via pro-rata rule or at that time you could empty the IRAs of deductible contributions by rolling into an employer 401k at that point. While that's a common talking point on this sub in practice most people aren't wading in to those waters.
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Thanks both, for clarifying. I’m beyond the level that allows ROTH IRA contributions, so take advantage of backdoor yearly by funding trad IRA with post-tax dollars and converting (while ensuring my trad IRA balance is zero at year end). I also have a 401K from a previous employer (any eligible post-tax amts already megabackdoored). I have not done a rollover IRA for this reason, as that was my understanding as well (that it would affect, via pro rata rule, any future backdoor conversions and there would also be a taxable event if I tried to convert a rollover IRA to ROTH IRA, since the amt current consists only of pre-tax dollars. (Currently, my previous employer 401k has good earnings — as they decrease, I’ll likely roll into new employer 401K)
It limits your backdoor Roth IRA pretty substantially
The general rule for the FOO is 401k to match > Roth IRA > max 401k. So, strictly speaking, he wasn't wrong in saying contribute enough to get the full match then shift to a Roth IRA, but his phrasing is definitely suspect. As far as trying to make a sale, was he trying to pitch a specific company to you for the IRA or just generally saying go that route?
He's kind if right then. In my opinion you saving priority should be: 1. Max out Roth 401k match. 2. Max out yearly Roth IRA contribution. 3. Anything else you want to save (for retirement), go back to the Roth 401k. The reason why I think IRA > 401k is that with an IRA you get the same tax advantages as you do with a 401k but your investment options aren't restricted AND you can take out your IRA contributions without penalty. To be more specific, say you put $5,000 into an IRA and that grows to $6,000. You can take out the original $5,000 without penalty.
In that case, that actually might be right. The general advice I've seen is put in enough in your 401k to get the company match. But then put money into an IRA or Roth IRA next. The reason is there are usually better investment options in the IRA but more especially there are usually lower fees. If you've maxed out your IRA then go back to the 401K for further investments.
I would do an IRA - either Roth or traditional both are still better than locking the funds up with an investment company. More than likely the 401k has higher management fees and you have more control of it in an individual retirement account. He’s not wrong in his advice, putting aside his words are pretty dramatic - the advisor is probably just passionate.
He might have a poorly started but valid point in that an IRA could have better investment options than your company plan. He also could be getting a commission on a new account. Good advice is to do your homework, ask hard questions, and invest in things when you understand them.
Depending on your age, a ROTH may be a much better vehicle for your retirement funds. Make sure to review the management fees of what he’s suggesting though. He could be making more money off those funds vs others.
Sounds like they’re just saying fees are less in an IRA and you can pick better options
If the argument is you're wasting money because you should be putting it into an IRA instead, that's fair. That's literally the flow chart suggestion.
That was what the advisor suggested. He said to leave my 401K alone except for monthly contributions which my company will match. He suggested an IRA for dumping my other money into.
And then if you’re maxing the IRA go back to adding more to the 401k. Even with suboptimal choices, the tax advantages of a 401k are worth taking advantage of. You really need to understand the choices you have inside the 401k and the associated fees. Is your previous account a pension or another 401k? Did you vest and what happens if you leave the 40k there? If it makes since to move it, I would roll it to a trad IRA and not the new 401k.
Man, it's hard to make recommendations unless you know the person. rolling your 401k into an IRA account is objectively better since you have more control and pay less maintenance fees. However, there are too many people out there that if you let them have too much control over their retirement savings, they are likely to blow it on the next "need". But like I said, objectively speaking, if you are a financially knowledgeable and responsible, an IRA account is better than a 401k. You only want the 401k account for the employer matching. Now, if you work for the federal government and has TSP. Yes, keep it in there. The maintenance fee is almost nothing.
Is this an IRA or Roth IRA? Both have their own drawbacks. With an IRA, you won't be able to do a backdoor Roth contribution anymore. If you think you might make more than $80k/yr some day, that could be a downside. With a Roth IRA, you'll have to pay taxes if your rolling over from a t401K.
>He said to leave my 401K alone except for monthly contributions which my company will match. As opposed to what?
The full annual amount permitted. He's basically saying don't worry about your 401k until your Roth IRA is maxed out which is standard advice I believe.
But doesn’t the income level matter ? I thought for high earners that can not Roth IRA that 401k is better for the tax break now
That, plus also the ability to do backdoor conversions from excess 401k contributions (up to something like 66k/yr).
Well this person works with OP so I’m guessing they know how much they make and that isn’t an issue.
So my company does a 401k 100% match of the first 3%. I have 12% of my paycheck going into my 401k since its just simpler to do it from there. Am I doing something wrong in this way? What advantage would I have of putting in 3% match and then the remaining 9% would come out of my already taxed income into a roth IRA? Is the main reason because of possible tax savings in 30+ years when I retire?
I would not say what you are doing is wrong. The general sentiment of this sub is to do the match amount on 401k, then do Roth/HSA, then go back to 401k. But going all 401k is just fine as well. IMO the unpredictability of future tax rates makes these decisions largely moot, from the standpoint that you may as well just flip a coin to decide whether to do traditional vs Roth.
Generally ROTH vs Traditional is a matter of do you think you'll be getting taxed more or less at the time you think you'll pull the money out. Using some extremes for a simple example, a broke college kid working part time will essentially pay minimal taxes on their income. Say the same kid retires and wants to withdraw $100k/year to support their lifestyle in retirement. If they put it into a ROTH IRA when they were working part time that money got taxed a whole lot less than if they got it taxed while "making" $100k/year. ROTH IRA just provide some flexibility. You can withdraw contributions penalty free, and you can pick your investments. 401ks you get given a sheet of options typically, and it's not as simple and more costly to get the money out. Assuming you max both, about 1/4th of your yearly retirement plan contribution amounts are freed up to be more liquid if you need it, and also to pad as to not get taxes as much when you retire. If you don't care for the flexibility in investment options, feel you'll never need to touch the contributions, and feel you'll be drawing an "income" of a lot less in retirement than you are currently, traditional is better.
That all makes sense. I'm not at a point where I am putting a crazy amount away, only about 9k a year plus employer match, so not worth the hassle for me.
> Generally ROTH vs Traditional is a matter of do you think you'll be getting taxed more or less at the time you think you'll pull the money out. This is a gross over-simplification. Roths provide other benefits, such as no RMDs once you hit retirement age, withdrawals not counting towards income, and the ability to make early-withdrawals and not be penalized on the portions that you originally contributed.
Curious about the reasons behind why an IRA is better than a 401k after you've met the company match?
Generally more options & lower expense ratios than 401ks funds
If you work in a field where you change jobs every few years this is less of an issue because you can roll your 401k over to vanguard every time you change employers. But yeah this is a good point, some of the 401K providers used by employers have crappy options and high fees.
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> There's no reason not to. Most employers do not allow "in-service rollovers" which is rolling your 401k balance out of the employer sponsored plan while you are still an active employee.
Some 401ks straight up suck You can’t choose the provider and they choose the investments My last job had a terrible provider and offered like 4 funds with high expense ratios IRA you can do anything you want
I think this might be a details thing. He said it is being moved from a pension account not a 401k. If this is a pension payout his 401k would not be the best place for it to go. An IRA would be better.
Not if you do the back door Roth IRA every year right? In that case you don’t want money sitting in a traditional IRA, so instead it would be better to roll the pension into the 401k
Some 401k providers have high fees that will reduce gains. In that case, it’s better to get the match and invest in a Roth IRA.
Moving pension money to a 401k might not be the best idea, but it depends on the pension plan itself. Typically you lose all the accrued benefits of the pension that you’re going to get at retirement if you disperse those funds and don’t leave them with the plan. Without details of the plan and of your new 401k I don’t think anyone can answer this. As for the 401k, the prime directive has the order of operations that makes most sense for most people: 401k contributions to employer match, IRA funding, back to 401k. I suggest reading through it to understand why. As for “interest” you speak of: your 401k will be invested in selected funds which typically do not pay interest. They are investment funds that carry risk. Selecting a low cost target date fund or a low cost S&P 500 index fund is the typical advice you’ll get because it works. Edit: you might not even be able to move a pension to a 401k; possibly an IRA. Refer to your pension plan before doing anything to understand what you can/can’t do.
The pension money was not vested, so I received no company contributions, nor will I. What is this prime directive you speak of? Apologies if this is basic knowledge, this is my first time on this sub.
The prime directive is r/personalfinance’s guidance/flowchart on saving/investing for the average person. See below: https://www.reddit.com/r/personalfinance/wiki/commontopics/ It offers a step by step guide and rationale for each step, plus a graphical flowchart to help make it more digestible. It’s meant to help set a framework for investing smartly, with the end goal of a comfortable retirement.
Well damn. I wish I had read that sooner. I wouldn’t have waited so long to open a SEP-IRA
Don’t feel bad, I wish I’d started sooner too. This type of financial guidance should be taught in schools, instead we have to figure it out ourselves collectively!
What is the situation to open a SEP-IRA? That doesn't sound like it's in the typical flow.
After growing up poor, I had *no idea* what to do when our household reached an income level where I had to look up how to lower our taxable income. I wasn’t getting tax benefits from putting money into my Traditional IRA because of our income. So I put 25% of my gross income into a SEP-IRA.
The comment you're replying to is important. This situation is complicated enough that a lot of commenters here are misunderstanding your question and answering more common questions that you didn't ask. The process of moving money from an old retirement account to a new one is called a rollover. [There's a page on this subreddit's wiki](https://www.reddit.com/r/personalfinance/wiki/retirementaccounts/rollovers/) about rollovers in general, but pensions are either unusual or nuanced enough that they're not addressed there. It is probably still worth reading.
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If my company matches 30% up to the 401k limit of $23,500, I should max it out, correct?
Yeah you should if you can. Doing otherwise would leave a bit over $7000 of free money on the table.
Your employer provided 401k will likely have higher fees than a broker like Fidelity, Vanguard or IBKR, so rolling your previous 401k into an IRA with one of those makes perfect sense. However, if you aspire to retire between 55 and 59.5, note that your 401k is the one source of tax protected investment vehicle that you can withdraw from without penalty.
>Your employer provided 401k will likely have higher fees than a broker like Fidelity... This is likely true, but fortunately many employers do offer good 401k platforms. e.g. at my firm, we have a menu of Admiral-share Vanguard index funds, and 100% of the administration costs are paid by the employer. Also, lots of large employers use Vanguard or Fidelity and have very low-cost index funds with no employee-level costs. For consolidation purposes, it can just be a lot easier to keep retirement savings all in one place. Also, opening a Traditional IRA with pre-tax money will make future Backdoor Roth IRA contributions much less appealing due to the pro rata tax rule on conversions. Bottom line for me is, if the 401k offers acceptable investment options and costs, then I'd consolidate everything there.
It seems like the FA is saying it is a waste to roll over prior money into a 401(k). That could be well-reasoned advice. That advice is different than saying, “don’t invest through a 401(k).” That $40k from the prior account could be rolled into a different account managed by OP or their advisor. Likely there will be more options for investing in a diversified, low-cost portfolio by choosing an account type other than their current 401(k). Again, this is distinct from the advantages of making new investments through your 401(k).
This is exactly how I read it. The advisor was not saying don't go with a 401(k). Just no reason to bring in money from elsewhere.
I believe your financial advisor was trying to give you the very standard flowchart advice - invest 401k up to employer match, then Roth IRA up to legal max, then 401k again up to legal max. This is fairly standard advice and it is generally the one that best optimizes across a broad range of tax situations and potential retirement outcomes.
> invest 401k up to employer match, then Roth IRA up to legal max, then 401k again up to legal max. Our flowchart doesn't say that exactly (and it shouldn't). The 401k match is an easy first step. Then Roth *or* Traditional *or* no IRA, because if you make >$75k with a 401k, the Traditional IRA has no deduction. It depends on your income and tax outlook.
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Others in this thread have already covered the benefits of funding a Roth IRA before funding beyond the match of a 401k so I won't go into that, but something you said here has me curious. > it appears that the more money you have in your account, the more interest it will accrue What do you mean by "interest" here? Whether or not a 401k plan will accrue interest entirely depends on what you have done with the 401k money and what you mean by "interest". A 401k plan may offer CDs, money market funds, U.S. treasury bonds, and corporate bonds all of which would provide interest. Generally speaking, however, most employees are going to put their 401k money into targeted date funds, mutual funds, ETFs, etc. things that have higher risk (may lose money) but are much more likely to earn above inflation. I wanted to call this out because on /r/personalfinance you'll see tragic posts about folks who have been 'investing' into their 401k for years only to find out they never selected funds for the money taken pre-tax to be put into and have missed out on significant growth. So, if you haven't actually selected a fund for your 401k money to be invested into, please make sure you do so as soon as you can.
Wow, I’ve never imagined the scenario in your last paragraph, but that is definitely something very worth calling out here to nip in the bud.
Agree, mentioning earning interest concerned me as well. Good job explaining it to OP.
Probably. We are very specifically talking about what your best course of action is for the money from your old 401k. You have three main options for this money: 1) Move the money to an IRA: This is usually seen as the best option. You will have full control over the investment options for this money and can find lower cost investment options that what is offered in the 401k. 401k administrators also usually charge a lot more than brokers like Fidelity or Vangaurd 2) Move the money to your new 401k or leave the money in the existing 401k. This is an OK option. Much better than option 3, but it costs more than option 1. This is the option that the financial advisor was discouraging you from doing. You most likely will pay higher fees and will have fewer investment options in the 401k, but the main advantage is that all of your money is pooled together. 3) Cash it out. DO NOT DO THIS. You pay taxes and penalty. Just a bad option. In summary, the financial advisor is giving you good information, but perhaps didn't explain in very well. It doesn't sound like he was trying to make a sale, as you can follow his advice by opening an account with any brokerage and move the money there.
Keep in mind that moving money to an IRA has tax implications for a backdoor Roth contribution
Its a weird way for an advisor to word it, but I can see scenarios where what he is saying is essentially true. It is dependent on the details of your pension and 401k plan -- they are not all made the same.
I think most commenters in this thread are assuming this is some nefarious or incompetent advice from this advisor, which I don’t understand. My impression is what they’re telling you, correctly I’ll add, is that after you meet the threshold to receive your company’s match on your 401(k) there are other accounts that should prioritize maximizing, such as your HSA or Roth IRA. It’s not necessarily a waste to maximize your 401(k) first, but it’s not the most efficient path. Hope this helps.
> I think most commenters in this thread are assuming this is some nefarious or incompetent advice from this advisor, which I don’t understand. Probably a reflex reaction to 90% of the people that go around telling everybody that 401ks/IRAs are terrible end up selling you some Tiktok-tier managed portfolio, real estate or crypto investing strategy.
Yep. Also whole life insurance "investments" / "infinite banking" that are not good ideas
Wasting money isn't the right term, but you likely should not roll it from one traditional 401k into the next 401k when you have the option to roll it directly into a traditional IRA. With the IRA, you have full control of the investments you direct that money to, instead of a limited basket of options controlled by your company's 401k provider, and will never have to roll it over again the next time you leave a company.
also even the best 401ks have admin fees that the major IRA providers don't charge.
As a young person new to their career, you should be doing in this order: 1. Contribute to your 401k just enough to maximize the company match. 2. Contribute to your Roth IRA to max it out. Currently $7,000 per year. 3. Once Roth is maxed, contribute to your 401k until it is maxed. Currently $23,000. The reason you do #2 before #3 is due to the your lower income bracket in your early career. You should pay as many taxes on your retirement savings now when the tax is low. Rather than pay no taxes now (401k) and pay a likely higher tax bracket when you retire. I dont include any mention of contributing to a HSA account, but if you have that, it would be #1b on this list. Contribute to that after company match.
Put HSA before Roth IRA and you're 100% right. Assuming your health plan supports an HSA.
Thats already included in my comment ... But yes
Rolling over into a company sponsored 401k is normally a bad idea. You’re restricted to what that plan has available for investment choices. You can do a direct rollover into a rollover IRA which does essentially the same thing, except you have an all the options for investments instead of just plan approved ones. It’s also easier to move in and out of investments if you ever decide you need to.
I prefer to rollover an old 401k into an IRA that I have control over. Continue to contribute to your new 401k with your new company and take the matching.
I moved a 401k into an IRA. It allowed me to buy things not available in a new 401k, google, apple, amazon, BRK, etc.
yes, hes right moving to a ira is probably the better idea
Let me guess: he wants you to transfer it to him so you can waste your money on management fees instead.
This advisor is wrong. 1. You can take a loan from most 401k accounts. Up to 50% of the balance or $50k--whichever is lesser. Adding money to a 401k will immediately give you access to this option. Now whether you should take a loan in the first place is another conversation. 2. Depending on the type of pension account moving all your pre-tax money to a 401k allows you to do a mega-backdoor Roth conversion and not worry about falling victim to the pro-rata rule. 3. Depending on where the pension is invested you may have more options, better returns, and less chance of the pension going bankrupt by having it in a 401k. 4. If your pension has fees then consolidating all your retirement funds lessens those fees and makes your overall retirement fund management, visibility, and goals easier to manage.
Maybe what he is that there is no advantage to rolling that previous money into the new 401k because there will be no mat h from the company. Take the roll over money and start a separate retirement account with it that can be diversified into other markets. Typically you're pretty limited to your investment choices with 401k and though maybe safer, leave you with less return. Still contribute to 401k and if you're young enough contribute part of that to Roth, it will help in the end since you've already paid taxes on it. Take the rollover money to market and watch it grow there if you don't need it. Remember time in the market beats timing the market and it hasn't had a loss over a 20yr span. Let the other make money and max out your new 401k to get the full contribution from your company.
Any "financial advisor" who claims your are "wasting your money" when talking about any of the IRAs or other common investments is talking shit and shouldn't be trusted with money for the ice cream truck. Each investment fund type has pros and cons and their efficacy is highly dependent on the individual. Sweeping statments like this always make me highly suspicious of the person giving the advice.
Imagine being a financial advisor and having no understanding of personal finance.
My 401k is why I was able to retire in my late 40s. Whomever told you it is a waste is an idiot.
this question is about rolling his previous 401k into his new 401k company.
> I was told by an financial advisor at the company that the only benefit of having money in a 401K is the initial contribution, which my company will match. He went on to say “You’re wasting your other money by dumping it into a 401(k)”. What does he suggest doing instead?
I answered this in other comments. He suggested putting it into a Roth IRA account and leaving my 401K alone except for monthly contributions.
Oh I see now thanks. To convert $40k to Roth would give you a fairly big tax bill — unless you have particularly low income this year (such going back to school or something) I’d hesitate to convert that much to a Roth IRA. Rolling it tax-deferred to your 401k or an IRA is likely the better move. I’m not sure where this FA is coming from saying 401ks are a waste of money. Now there’s certainly at times value in maxing a Roth IRA or HSA before maxing the 401k beyond the match. But rolling over a $40k balance is an entirely different story
There are two issues to consider: 1 - if you roll over your old 401K into a traditional IRA, that will make it more difficult to do backdoor Roth IRA conversions in the future (look up the pro rata rule). 2 - money in a 401K is afforded protection from bankruptcy, creditors, lawsuits etc. Money in an IRA may not have a s robust protections - but it is state dependent. I know that in Virginia and Florida money in an IRA and in a 401K are afforded the same protections.
You’re saying 401k, but do you work for a nonprofit organization?
Fill the pre-tax bucket first. This is personal finance 101. Take the lower AGI and lower tax burden now.
There is some merit to only putting the matching max into a 401k because there are often other products not tied to your employer that perform better.
- The rate of return is the same whether you have $3K or $300K in the account - Don't worry about interest considerations; investment products in tax privileged accounts may grow either via asset appreciation or via interest which is automatically reinvested; the difference is immaterial - If you make more than $77K and your employer offers a 401K plan, you are not able to claim a tax deduction on a traditional IRA, eliminating its biggest advantage. You can still contribute to a 401K - If you make more than $146K, you are not able to contribute to a roth IRA, but can still contribute to a 401K - 401Ks have a much higher contribution limit than IRAs, allowing you to shield up to at least $23K per year from taxes; if your employer offers a match and in-plan conversions are available, this number can go up to $69K. IRAs have a comparatively tiny $7K limit - 401Ks may or may not have worse selections of investments/expense ratios available compared to an IRA; you have to look into your plan's available investments to determine that - 401Ks have better protection in bankruptcy/if someone brings a suit against you The above applies to new money coming in assuming you have access to a 401k. We don't know the details of your pension fund so it's hard to say if rolling it over to the 401k is advantageous or not. Rolling it over to an IRA should be a fine choice, but to say you'd be "wasting your money" by adding it to the 401k is probably incorrect
I normally roll my 401k over to the new employer so I don't have to track multiple retirement accounts. That's the real benefit I think.
"The more money you have in your account, the more interest it will accrue" sounds to me like you need a refresher on math, sorry if you know this... 10% gain on 100,000 = 10,000 10% gain on two accounts with 50,000 each = 10,000 10% gain on ten accounts with 10,000 each = 10,000 So most people are right to point out that the quality of funds are generally better and fees are lower in an IRA. But if you go pre-tax 401K to post-tax Roth IRA you will need to count that conversion as income and pay taxes on it.
Your company 401K will have set number of options to invest your funds. Your private 401K you will have a much larger number of funds,ETF’s, individual stocks to invest your money. You are not wasting your money in the company sponsored 401 K. They are only limiting your options to invest your funds.
Let me guess, this financial adviser would be happy to help you invest that money with him instead?
He is not acting independently but as a salesperson for the invest company. He could be spot on correct. But it’s like a car salesperson telling you getting the extended warranty is a good deal.
Sounds like he might be conflicted. Advisors don’t usually make money on 401ks unless they are the admin for the plan. Most advisors outside of that don’t like 401ks because they don’t get the fees and commissions. Instead they might point you to an IRA or another product that they manage because they get commissions.
That financial advisor you speak about is probably not doing that job anymore. What an insane comment! I started a 401k when I was forty and dumped as much as I could into it. Now I am retired and the money is in an IRA account doing just fine. My rate of return on my 401k was averaged out at 17% over its lifetime. Not bad. I have not worked since I retired 5 years ago. Find another advisor.
401K has more protections than IRA. Did he forget to mention that?
You are absolutely not wasting your money in a 401k. It is better than sitting on it, or worse, spending it. The match option of a company is the best part of it. A Roth IRA can only have $7k contributed to it yearly. But, they do out perform 401k's. I contribute 5% to my 401k to get 4% matching. Then, Jan 1st, I roll over the Roth IRA maximum (now $7k). Any change I have left over goes into my Emergency HYSA or Fidelity ETFs.
If this person is advising the company on finances the company may not be around long or this person might not be. This is an ignorant statement.
He wants to sell you his financial and/or insurance products, likely working on commission. The 401k isn't perfect, but it's a great way to divert your income into a retirement account. The tax deferral makes everything super simple. The Roth IRA is similarly simple and good.
That could mean several different things: 1) The investment options in your 401k aren’t the best due to fees/loads/etc, so there are better options after you get the free company match. 2) At your income and tax bracket, you’re better off putting money after getting the match into a Roth style account. 3) The investment options he is offering you outside the 401k are better (for him). Numbers 1 and 2 could be true depending on your company’s plan, and your income and tax bracket. He shouldn’t make a blanket statement like it’s a waste though. Number 3 means he’s looking out for himself, and not for you.
A Roth IRA rollover is often considered the best option when switching jobs. Then max out 401(k) contributions to ensure you get the full company match. I'd listen to the advisor if you don't understand why. In this case he's correct.
My wife's MATCH money has added up to a couple hundred grand over the years. We'll take it.
From what I understand a pension would not be eligible as a contribution to a Roth IRA. That leaves you with the options of an annuity, a traditional 401k, a traditional IRA or a lump sum. The income used to fund a Roth IRA must be “earned”, which in the eyes of the IRS, a pension is not earned income.
Roll it into an IRA. Do not put it your employer 401k Employer plans are limited on what you can invest in. A normal IRA has more investment choices and freedom.
You would not want to roll any money from a former employer into your new 401(k). You will have more options and control by rolling it into an IRA. You can do this with any financial advisor or institution. I don’t think you are “wasting your money” but you are unnecessarily tying it to your employer and the options set forth in that plan.
I would start looking for a different financial advisor
I've been putting about $20k a year in my 401k. In less than 5 years, I have over $150k. I'm pretty sure it's not useless after the initial contribution.
You have more options if you roll it into an IRA. With an IRA you can invest into pretty much anything. You can buy government bonds. You can buy Nvidia stock. With a 401k account you are limited to the 15-20 mutual funds preselected for you by your employer. They are often not the best.
"the more money you have in your account, the more interest it will accrue." You earn interest if the funds are invested in something that is interest earning. Money in a 401(k) earns the exact same amount as money not in a 401(k) when the money in both accounts is invested in the same thing. It's the investment, not the account, that grows or loses. Your existing funds, rolled into a new employer's 401(k) plan, is not contribution and doesn't get a match. This type of consolidation is for your convenience, but if the new 401(k) has more fees or fewer options that you would get through having an IRA (individual account, not through an employer plan), then you want to maximize the options and minimize your costs. Stay away from the new employer's 401(k) with any other funds. Let them have the payroll-based contribution only.
What would the advisor have you do with that money? I'd be willing to bet that he would recommend something to you that generates commission for him. If you're putting money into a 401k, that's a good thing. You don't want to take it out of a qualified plan until you draw on it for retirement. So, 401k or IRA. There are advantages and disadvantages to both, but they are tax advantaged. It sounds like this advisor wanted you to invest your 401k into one of his products. That product had better be an IRA or you'll be eating taxes. That is reprehensible on his part. edit: typo
It sounds like he has a conflicting plan that he wants you to consider. I would run away from him.
I agree with others, roll over to a self directed ira. Only contribute to the new 401k up to the match. So if your new company matches up to 5%, you put in 5% your up 10%! Don’t leave money on the table.
I prefer to roll old retirement benefits into my own IRA so I have better control over the investments.
You can't take money from a 401k account without rolling it into another qualifies account without incurring a huge tax bill. So what he's saying is nonsense?
You should talk to a financial advisor. I'd recommend one that charges a flat fee, 1% of managed assets is pretty standard as I understand ( someone correct me if I'm wrong) personally I'd contribute to my 401k to the limit of my employer match but not any more, anything else goes to an IRA. Just my 2 cents
You minimally want the company match
I heard similar "advice" at a retirement seminar put on by our state employer. The guest speaker was, I guess, trying to rake in the lucrative state employee retirement bucks-- he said the same thing. Then talked about annuities. Ah. Fuck off, dude. Anyway, he was NOT asked back. If you have a 401K and are able to move it, move it over to one of the lower-cost options. We use Vanguard, but Fidelity and Schwab are some others that are recommended [(check out the Wiki).](https://www.reddit.com/r/personalfinance/wiki/401k_funds/) Much lower cost, usually, than employer-sponsored plans.
This is completely true. 401k's typically have higher expenses due to their regulatory requirements. Just roll them into a traditional ira with somebody like vanguard. I could write a novel on this, but tbh, I'm too tired right now.
You are probably better putting your money into your 401k plan over an IRA for a few reasons. 1. You have ERISA protection meaning the committee members have a Fiduciary duty to the plan participants. This is different than a financial advisor potentially who is out for his own interest. Also if your 401k plan has excessive fees or bad options the Fiduciaries could be on the hook for violation of prudence and participants could initiate a lawsuit. Most competent companies perform fee benchmark studies to document that the Fiduciaries are making sure their plan is competitive. Last year there were 48 lawsuits. In 2022 it was around 90. So attorneys are looking at this. You need to understand what funds are available and what the expenses are in those funds. 2. The funds you get in a 401k plan could be institutional share class. That is a special share class that requires a ton of money to get into and they will generally have lower expense ratios than the same fund if you were to call up Fidelity or American Funds or some other investment company and want to invest in the same fund. Lower expense ratios mean that better returns over time. The only reason not to put money into the 401k is if you need emergency savings fund or you want to save money for some other purchase later. Some people will say you don’t want to lock up money into a 401k until 59 1/2 but there are other ways to get distributions out prior to that. But this goes to my earlier point not to continue dumping money into a 401k if you think you may need it prior to retirement. RE Roth- the point no one ever addresses here is social security and taxes. If you are drawing social security, how much that social security is taxed depends on your income. And traditional 401k distributions are counted as taxable income which means your SS benefit is taxed at a higher rate. Roth is not counted as income and won’t increase the tax on SS.
This is true advise tho. If you company matches up to (for example) 5%, then contribute 5% to get the match. Don’t do 6%. That extra 1% has better legs for you dumping into T bonds, or SPY, or some other investment. But if you are a spend thrift or don’t max your investments, then doing extra in your 401k is better than pissing it away. But none of that has anything to do with your requested rollover. I dont know the pros/cons of moving from a pension to a 401k. He might be indicating the 40k in a pension is better than 40k in a 401k. Maybe thats what he was talking about?
When I’ve changed jobs, I’ve rolled my old 401k’s into IRA’s. There’s no tax penalty but with an IRA you can invest in stocks. I’ve seen much bigger returns investing in stocks that mutual funds.
If your money is taxable, dump into IRA, 401k. Avoid the taxes now and watch it grow tax free. If your money is not taxable, i.e. you have massive deductions, then you can dump it in a regular account and purchase stocks. You will be taxed when you sell the stock if there is a gain, but only on the gain. If you hold the stock longer than a year you get long term capital gains tax breaks.
So my company does a 1/2 match up to my contribution each percent up to 8% (so my 8 and they do 4). Every year I’m given a raise of about 4%, so I usually take 1% and increased my contribution to this 401k. However, I would be at 10% and the company was still at 4 due to the cap. So I took those extra percents and put it into my Roth IRA, because the company that does my Roth has had better returns than with my 401k. I would recommend looking at both your 401(k) and the Roth of yours. Look at its history and see which one is performing better percentage-wise.
Not all 401ks are created equal even within the same recordkeeping institution. A lot is determined by the company you are working for (aka the plan sponsor}. My 401k is with Fidelity. My statements show about $35 a year in fees. I can do both Roth and Traditional in my 401k. I have access to just about any investment your want but there are some limitations that are just prudent to have. Afterall, 401ks are regulated and they need to try to keep you from losing your money on stupid investments.
Is this "advisor" an employee of the brokerage that runs the 401k for your new employer? A reasonable case could be made for why a person might want to seize the opportunity to roll a a previous company 401k to an IRA which you own and control. You then have many orders if magnitude more things to invest in instead of the dozen or so things offered by the new plan. However, it's not always in the person's best interest because sometimes the funds are so huge in a 401k that the fees are actually lower than you might get for the same fund on the open market. Huge companies negotiate these things. So for this advisor to try to offer generalized advise like "you're throwing money away" is really irresponsible. If they specifically said to convert it to Roth that is even more irresponsible. Given that it would generate a taxable event, it might make absolutely no sense without considering your overall financial picture. I'm almost certain this advise was *not* offered on your behalf. This brings me to the most likely motivation, that the "advisors" likely have marching orders to keep the amount of investment on the books for that plan to a minimum. That means cajoling ex-employees to remove all their funds the second they're out the door, and doing the same to try to prevent new employees from rolling old plans over into it. As a recent retiree, I'm not super happy about that honestly. You have every legal right to keep it in that plan if you want to. But just make sure you're doing it for the right reasons. Do it because you've investigated the fund offerings, and expense ratios and decided that they fit with your investing goals. If not then it's time to consider either a rollover to Traditional IRA or conversion to Roth.
I have two retirement accounts, a IRA Roth and TSP Roth which is a 401k by the government. You are not wasting as long as you have done your homework and research on the stocks you invest in. I highly recommend everyone to study up on stocks because we are all in that now in order to have a retirement in the future. I have invested 140k my own money and I now have 230k plus. This is just with 6 years of contributions. Time equals compounding interest.
Having a 401 k is great psychologically. Set your account to invest 70% stocks and 30% money market/vonds. Set it automatically to invest 15% of your paycheck every time. The key is you will invest automatically. And it will grow. The problem with not doing it that way is you will have to constantly make yourself invest over time and not spend over time. If you never see the money because if automatic contribution you won’t spend it on foolish stuff
If he was suggesting a Roth IRA, he’s not totally wrong. Roth accounts are in some sense a better deal because you pay taxes on the smaller amount you put into the account, rather than paying taxes on the growth of the account down the line. Typically Roth accounts beat traditional accounts in that manner. However, your employer may offer a Roth401K, if so you’d get the benefit of the employer match plus the tax benefit of the Roth. If not, put up to the match in your traditional 401K and dump the rest in a Roth IRA.
need more details if I hear someone telling me >"You're wasting your money by dumping it into a 401K" I'd immediately ask 2 questions: #1 what alternatives are you proposing and #2 if 401k is wasting money then giving it to gov in form of taxes isn't wasting money?
Your money is ALREADY in a 401K. Why would it be a waste to transfer it to your new account? Your financial advisor might have been advising NOT to contribute (to the 401k) above the company match.