Personal Finance

My husband has $4.5 million in his IRA — should we roll it over into a 401(k)?

Marc Guberti

Published: December 31, 2024 10:36 am

Moving funds from one retirement plan to another can offer different tax advantages and protections. For instance, it’s popular for people to move funds from a traditional IRA to a Roth IRA to minimize their future taxes. 

However, a Redditor posed a question in the Fat FIRE group about converting an IRA to an individual 401(k) for better asset protection. I’ll share my thoughts, but it’s good to speak with a financial advisor if you can.

401(k) Plans Offer More Protection

You will enjoy more protection with a 401(k) plan in the event that you go bankrupt. IRA plans also offer a lot of protection, with a little over $1.5 million currently protected in these accounts. For most people, that’s enough protection, but the Redditor’s husband has $4.5 million in his IRA.

Therefore, the protections offered by the current IRA aren’t enough. Moving funds to a solo 401(k) plan will be beneficial if the couple ends up filing for bankruptcy.

Assess the Likelihood of Bankruptcy

Before making a big move, the Redditor should consider the likelihood of going bankrupt. A $4.5 million portfolio suggests that finances aren’t a problem, and withdrawals may start soon.

It’s a bit of extra work to move funds from an IRA to a solo 401(k), but the effort doesn’t present a downside. However, moving funds to a 401(k) plan leads to another advantage that can make bankruptcy less likely.

If necessary, the couple can take out a loan against their 401(k) to cover expenses. While this move doesn’t make much sense if they can withdraw funds, it is an option to consider if retirement is still more than a decade away. Furthermore, it only makes sense to take out a loan against a 401(k) plan as a last resort to keep up with living expenses or avoid bankruptcy.

However, it’s not possible to take out a loan against an IRA. While some people may never borrow against their retirement accounts, it’s good to know that you can do so. Borrowing against a retirement account can help you access the money you’ve accumulated while avoiding the 10% penalty fee. You’ll also temporarily avoid deferred taxes if you borrow against a traditional retirement account.

Compare Retirement Plans

Investors shouldn’t only look at asset protection before rolling over their retirement accounts. It’s also important to look at each retirement plan’s fees, investment options, expense ratios for each fund, and other details. 

Some couples may find that their preferred brokerage firm does not offer the best retirement plan. Rollover fees vary greatly, but some firms allow you to conduct free rollovers. 

Investors who want to follow this path should compare multiple solo 401(k) plans with each other. Then, once you choose the best one, compare it with your IRA. Comparing multiple retirement accounts will increase the likelihood of finding the optimal plan for your financial objectives.