1325: [Part 2] What To Do With Your 401k When You Change Jobs by Kevin Ha of Financial Panther on Backdoor Roth

[00:00:00] This is Optimal Work Daily, Episode 1325.

[00:00:03] What to do with your 401k when you change jobs?

[00:00:06] Part 2 by Kevin Ha of FinancialPanther.com

[00:00:10] And hey there! I am Dan, I am your narrator and your host here.

[00:00:14] And today's post is a continuation from yesterday.

[00:00:17] That's episode 1324.

[00:00:19] It's part 2 of a post that's a little on the longer side, so we broke it up for you.

[00:00:24] And if you haven't listened to the first half yet from yesterday,

[00:00:26] I would recommend going back and doing that first so you're all caught up.

[00:00:30] But if you're ready, let's get into part 2 and continue optimizing your life.

[00:00:38] What to do with your 401k when you change jobs?

[00:00:41] Part 2 by Kevin Ha of FinancialPanther.com

[00:00:46] Things to consider when deciding what to do with your old 401k

[00:00:50] Number 1. Simplicity

[00:00:53] This is pretty self-explanatory.

[00:00:55] The more retirement accounts you have, the harder it might be to keep track of everything.

[00:00:59] For many people, rolling over funds into their new employer's 401k makes sense

[00:01:04] simply because it keeps their money all in one spot.

[00:01:07] Two. Administrative fees

[00:01:10] I feel like this aspect of retirement plans doesn't get talked about enough.

[00:01:14] Most people I talk to don't even realize that

[00:01:16] their employer-sponsored retirement plan probably isn't free.

[00:01:19] I've now had three different employer-sponsored retirement plans,

[00:01:23] and all three plans charge some sort of administrative fee.

[00:01:26] It's possible that your employer paid your administrative fees for you when you were

[00:01:30] employed with them, but once you leave, you'll probably have to pay those fees yourself.

[00:01:35] Administrative fees will generally come in two types.

[00:01:38] Either a fixed fee, meaning the plan will charge you a fixed dollar amount each year,

[00:01:43] or a percentage-based fee, which means the plan will charge you a percentage of assets

[00:01:48] you have in the plan each year.

[00:01:50] The 401k at my law firm charged a fixed administrative fee of around $89 per year.

[00:01:55] My 457 plan with the state charges an annual administrative fee of 0.1%

[00:02:01] on the first $125,000 I have in the plan, while my state pension plan charges me $4

[00:02:07] per month on amounts over $10,000 and under $30,000.

[00:02:12] As you can probably tell, a fixed administrative fee can be problematic if you don't have a ton

[00:02:17] of money in your old 401k, which, if you change jobs often, can be pretty common.

[00:02:22] Fixed fees have less impact as your account grows.

[00:02:25] The bigger your account gets, the lower percentage of your account the fixed fee will be.

[00:02:30] However, if you're not contributing to the account anymore, your account can't grow as quickly.

[00:02:35] Thus, if you're paying a fixed administrative fee, it'll often make more sense to get your

[00:02:40] old 401ks into one plan in order to avoid paying multiple, unnecessary administrative fees.

[00:02:47] 3. Backdoor Roth Eligibility

[00:02:50] If you're a high-income earner, you'll want to consider whether you want to be able to

[00:02:53] make it easy for yourself to utilize a backdoor Roth.

[00:02:57] To take full advantage of a backdoor Roth, you'll need to make sure that you keep

[00:03:00] all of your pre-tax IRA space empty, otherwise you'll be stuck dealing with the pro-rata rule,

[00:03:06] which in many cases will basically make it impossible for you to use a backdoor Roth.

[00:03:11] This is why I think the conventional wisdom to roll over your 401k into a traditional IRA

[00:03:16] isn't necessarily right for everyone. Many of us current and future high-income earners are

[00:03:21] going to want to keep all of our IRA space empty. One thing to note is that if you do have money in

[00:03:26] a traditional IRA, it's not very hard to get it out of there. You can pretty much roll over any

[00:03:31] money you have in a traditional IRA into any pre-tax 401k type plan. You'll just have to

[00:03:38] check to see if your employer-sponsored plan allows you to roll over traditional IRA funds

[00:03:42] into it or if your solo 401k plan allows you to do the same.

[00:03:48] And four, any special characteristics of your old retirement plans. The final consideration to think

[00:03:54] about is whether your old retirement plans have any special characteristics to them that make

[00:03:59] keeping your money in them advantageous. The big thing that comes to mind is money that you have

[00:04:04] in a 457 plan. The amazing thing about a 457 plan is that any money you contribute to it can be

[00:04:10] withdrawn penalty-free once you leave your employer. In other words, a 457 is basically

[00:04:16] a tax-deferred account that you can take money from without penalty just like a regular taxable

[00:04:21] account. You basically get the best of all worlds with a 457 plan, tax-deferred growth and the

[00:04:27] ability to withdraw your money when you need it. You lose those advantages if you roll over your

[00:04:32] 457 funds into a different type of retirement plan. So before you do anything, make sure to check

[00:04:38] whether your old retirement plan has some sort of special benefit that makes you want to keep

[00:04:42] your money there. What I'll do with my accounts. So what's my retirement world look like? My new

[00:04:49] job only gives me access to one type of account, a 403b plan. It's a pretty c*** plan at least when

[00:04:55] compared to the plans that I had access to before. For sure I'm going to keep all of my 457

[00:05:01] contributions where they are. The administrative fee is only 0.1% which is completely reasonable

[00:05:07] and since the majority of my contributions in the 457 plan are invested in Vanguard funds,

[00:05:12] I'm only paying a few basis points per year in expenses. But most importantly, I don't want to

[00:05:17] move my 457 contributions out of that plan because I want to be able to have the possibility of

[00:05:22] accessing those funds later without an early withdrawal penalty. My state pension plan is

[00:05:28] another story. Our contributions were fixed by state law, 5.5% from me and 6% from the state,

[00:05:35] which means that I only have a little over $10,000 in the pension plan. A monthly fee of $4 on a

[00:05:41] $10,000 balance isn't ridiculous but it's also unnecessary and pretty duplicative of other

[00:05:47] administrative fees I'm already paying. Luckily, I found out that once I leave state service,

[00:05:52] I can roll over my state pension plan funds into my 457 which is what I'm going to do.

[00:05:57] Final thoughts. There's a bit of thought that goes into figuring out what to do with your old 401k's.

[00:06:03] I'd say the main things to think about are whether your old plans are any good,

[00:06:07] what sort of fees you're paying in them, and whether your new plans are good. Remember that

[00:06:12] the expense ratios of the funds you're invested in probably aren't the only fees you're paying.

[00:06:17] Don't be like most people who do nothing with their money and then forget where it is or how

[00:06:22] to even find it. Instead, put a little thought into what you want to do with all of that hard-earned

[00:06:27] money you've been saving away. You just listened to part 2 of the post titled What to Do With Your

[00:06:36] 401k When You Change Jobs by Kevin Ha of FinancialPanther.com. When it comes to hiring,

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[00:07:42] And again, thank you so much to Kevin who started this blog to share what he's learned about money

[00:07:46] and side hustling over the years, as well as to document his own journey towards financial

[00:07:51] independence. It's his hope that his experience and knowledge can help you out in some way.

[00:07:56] So come on and check out more from him at financial panther.com. And that's going to do it

[00:08:01] for this episode. Thank you so much for joining me and I do hope you'll be back here tomorrow

[00:08:05] where I'll have another installment and where your optimal life awaits.