401k vs. Rollover IRA

[blancalily]

Hi  :)

Thanks so much for this great forum!  I have been luking for the past month or so, trying to learn from your experience as I plan to implement the PP for my family.  For such a simple investment approach, there are so many details to work out!  I'm trying to build something similar to TripleB's Investment Plan Statement - http://gyroscopicinvesting.com/forum/ht ... 650#p16650. One thing I haven't been able to find is the relative merits of a 401k vs. Rollover IRA.

I currently have 2 401k accounts with former employers.  One is with Fidelity and offers a brokerage window with access to everything a retail investor could buy from Fidelity (stocks, funds, ETF, bonds, the works).  The other offers a unlimited brokerage window through Schwab.

Are there benefits of being in a 401k vs. a rollover IRA or vice versa?  I am under the impression that a 401k is superior to an IRA for asset protection, but I haven't been able to confirm how it might be superior, so I may be misremembering.

Thank you!

[MediumTex]

You are correct that if you can keep your money in a 401(k) plan you do enjoy slightly more favorable asset protection, depending upon the state you live in (IRA asset protection is a state law issue, while 401(k) asset protection is defined under the Internal Revenue Code and ERISA).

If I were you I would leave the money in the 401(k) plans if you are otherwise happy with them.  A 401(k) plan with a flexible brokerage window is hard to beat.  Just make sure that the 401(k) plan fees are within reason. 

[MachineGhost]

Are there benefits of being in a 401k vs. a rollover IRA or vice versa?  I am under the impression that a 401k is superior to an IRA for asset protection, but I haven't been able to confirm how it might be superior, so I may be misremembering.

401(k)'s have creditor protection under ERISA.  So when you want to rollover your 401(k) money, you want to do it to a Solo Roth 401(k) or company pension plan, as opposed to an IRA.

MG

[pershing83]

IRA's are usually better for heirs. Most 401's (but not all) do not allow the stretched out payment.

I think I am right about this. Anyone?

[blancalily]

Thanks!  I will consider this.

IRA's are usually better for heirs. Most 401's (but not all) do not allow the stretched out payment.

Based on this chart:
http://en.wikipedia.org/wiki/401k_ira_matrix
you are right.  Even a traditional IRA has minimum distribution requirements.

BL

[blancalily]

Thanks MT.

You are correct that if you can keep your money in a 401(k) plan you do enjoy slightly more favorable asset protection, depending upon the state you live in (IRA asset protection is a state law issue, while 401(k) asset protection is defined under the Internal Revenue Code and ERISA).

Do you know where I can go to learn more specifics about this?  For instance, in what scenarios would my money be protected in a 401(k), but not in an IRA?  I have searched the web and can't find this information.

Thank you,
BL

[blancalily]

Are there benefits of being in a 401k vs. a rollover IRA or vice versa?  I am under the impression that a 401k is superior to an IRA for asset protection, but I haven't been able to confirm how it might be superior, so I may be misremembering.

401(k)'s have creditor protection under ERISA.  So when you want to rollover your 401(k) money, you want to do it to a Solo Roth 401(k) or company pension plan, as opposed to an IRA.
MG

Thanks MG.  I hadn't thought about doing a Solo Roth 401(k).  That may give me the best combination of flexibility and asset protection.

Question - you say 401(k)s have creditor protection under ERISA.  Does that mean that an IRA would not have creditor protection?

Thank you,
BL

[MediumTex]

Thanks MT.

You are correct that if you can keep your money in a 401(k) plan you do enjoy slightly more favorable asset protection, depending upon the state you live in (IRA asset protection is a state law issue, while 401(k) asset protection is defined under the Internal Revenue Code and ERISA).

Do you know where I can go to learn more specifics about this?  For instance, in what scenarios would my money be protected in a 401(k), but not in an IRA?  I have searched the web and can't find this information.

Thank you,
BL

You would have to know the nuances of state law protection of IRAs in all 50 states to answer your question and I don't.

Most of the time state law protects IRAs in exactly that same way that federal law protects 401(k) plan accounts from seizure by creditors.

For most people most of the time, this isn't anything to worry about.  Plaintiffs attorneys typically don't think of IRAs or 401(k) accounts as reachable assets.

[MediumTex]

Question - you say 401(k)s have creditor protection under ERISA.  Does that mean that an IRA would not have creditor protection?

IRAs have creditor protection under state law.  401(k) accounts have creditor protection under federal law.

In most cases, it's just a different path to the same destination.

[jackely]

I've been reading a book called "The Retirement Savings Time Bomb" and the author pointed out some differences between 401ks and IRAs in regards to inheritance that I wasn't aware of. I've had this book sitting on the shelf for a while so it could be dated material but I believe I read that the tax on 401ks becomes due for your beneficiaries immediately upon your death whereas they can take yearly distributions from inherited IRA's during some defined draw-down period.

[MediumTex]

I've been reading a book called "The Retirement Savings Time Bomb" and the author pointed out some differences between 401ks and IRAs in regards to inheritance that I wasn't aware of. I've had this book sitting on the shelf for a while so it could be dated material but I believe I read that the tax on 401ks becomes due for your beneficiaries immediately upon your death whereas they can take yearly distributions from inherited IRA's during some defined draw-down period.

There is dramatically more flexibility with IRAs than 401(k) plans when it comes to non-spouse beneficiary designations and distribution options.