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Should I keep my money in my old 401(k) or move it to an IRA?

Posted by Cheryl Costa  August 23, 2008 10:36 AM

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Is it a smart move to move my 401(k) from my former employer into an IRA? I retired 6 months ago.

This is probably one of the top 10 questions asked of financial planners. Unfortunately, the answer is the dreaded "it depends." There are a lot of fine points to consider and that is probably why a third of all workers leave their money in their old 401(k) plan when they move on.

Probably the number one reason for leaving the money in the 401(k) is the top-notch creditor protection. Federal laws protect 401(k)s from being attached by creditors, but IRAs do not enjoy a similar level of protection. The protection afforded to IRAs has greatly improved since 2005 but the protection afforded to ERISA (401(k)) plans is still superior.

Also, there is a neat provision in 401(k) plans that allows terminated or retired workers to begin withdrawals at age 55 instead of age 591/2 with IRAs.

One notable advantage of moving to an IRA is the much larger pool of potential investment choices. 401(k) plans are famous for offering only a small number of investment choices and sometimes the choices they offer have extremely high fees. These fees can have a tremendous impact on the amount of money you will have at retirement.

If your money is invested in an IRA, you can assemble a low cost portfolio specifically tailored to your needs. Also, people tend to work for many different employers in the course of the working lives and consolidating into a single IRA can make everything much easier to manage. Who really wants to keep track of 6 or 7 old 401(k)s each with a relatively low balance? The odds are decent that you will forget about one or two along the way.

Finally, if the beneficiary of your account is someone other than your spouse and that person wants to spread any distributions over their lifetime, the IRA might be better. That is because 401(k) plans are not required to allow a non-spouse beneficiary to take distributions over their lifetime. They CAN allow this, but they are not REQUIRED to allow this. If this consideration is important to you, check with your plan to see what distribution options are permitted and be sure to check in with your advisor or accountant because there have been several "flip-flops" on this issue over the past two years. First, the option was thought to be mandatory, then it appeared to be discretionary, and the interpretations have gone back and forth since then.

If you decide to move the money into an IRA, open the IRA first and then tell your old employer that you want to do a direct rollover or a trustee to trustee transfer. When you do this, your employer transfers the 401(k) directly to your IRA.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of, a credit card and gift card marketplace, and, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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