Personal Finance

Should I move my personal 401(k) to a traditional IRA or to my new work's 401(k)?

Chris MacDonald

Published: January 7, 2025 5:03 pm

For many couples, making decisions about whether to put their existing personal 401(k) funds into a new job’s 401(k) plan can be an interesting one to dive into. For one Reddit user who sold their company and is now grappling with a similar choice, the path forward is paved with some uncertainty.

For one, this couple (a 39-year-old male and a 36-year-old female) are looking to retire early. Taking a page out of the “FIRE” (financially independent retire early) movement, this couple is looking to choose the early retirement route, and presumably spend the rest of their lives enjoying the capital they’ve built up thus far in their lives.

Now, this couple is far from the median American household, having amassed a total net worth of around $4.5 million (excluding their home). Thus, this is a couple that does appear to have the ability to live off their retirement income moving forward. But with around $700,000 in a personal IRA, the question this user has posed to the Reddit community is whether to port the $700,000 over to a Traditional 401(k) now or wait the 15 months until retirement (their target FIRE age).

Let’s dive into what to make of this question, and where this couple may choose to go from here.

Key Points About This Article:

• For young investors looking to become part of the “FIRE” (financially independent retire early) crowd, there can often be more questions than answers.
• Let’s dive into one couple’s journey and see if we can make sense of which direction may be best for these two to move in.
• Retiring early is possible, and may be easier than you think. Click here now to see if you’re ahead, or behind. ^(Sponsor)

Understanding the Two Options

When it comes to deciding between a Traditional IRA and a new employer’s 401(k), there are a few key differences this couple may want to take into consideration. For one, there’s the level of control and investment options this couple may have at their disposal with putting these funds into an employer’s 401(k) plan.

As the user notes, there are more restrictions within the new employer’s plan. Whereas this couple may want to invest in SPY or other simple index funds, some 401(k) plans only offer a small subset of similar index funds, often with higher fees. So, for a couple like this who presumably has many more decades ahead of them to enjoy the compounding effects of investing, even small percentages can mean a big deal when it comes time to start taking required distributions.

That said, having the funds within a 401(k) plan can come with some advantages, such as simplified management and higher creditor protections under ERISA laws. The temptation is to keep one’s funds in one place with the added simplicity, but the tradeoffs with potentially higher fees and limited fund choices are weighing on this decision.

As mentioned, these considerations become even more critical when FIRE (Financial Independence, Retire Early) is part of the equation, as the right choice can significantly impact your withdrawal strategies and tax efficiencies.

Key Factors to Consider

Several factors may guide this couple’s decision making process. I think the three most important factors this couple may certainly want to put front and center are the range of investment options, the fee structures of the funds offered, and the flexibility of pulling capital out (if needed) along one’s retirement journey. 

Investment options are crucial up front (and over the long-term), as being able to put one’s capital to work in the right investing vehicle for decades ought to be the most important factor to consider. While Traditional IRAs generally offer the lowest-cost funds with a broader range of choices, such options don’t appear to be as readily available in this particular employer’s plan. Thus, this couple may choose to forego porting their capital over to the new employer’s plan and instead choose to hold two separate accounts.

Of course, the question of whether this couple would get more utility from having all their funds in one place and simplifying the withdrawal structure when the time comes really is the main question that should be asked moving forward. Having the flexibility of not only choosing one’s investments, but how easy it is to take distributions down the road, are things to be considered.

For example, Traditional IRAs allow for tailored withdrawal strategies, while 401(k)s have unique benefits, such as penalty-free access at age 55 if you leave your job. The choice isn’t straightforward and should align with each individual’s long-term goals and immediate needs. For someone like the Redditor, it’s about striking a balance between ease of management and the potential for optimized growth.

Consider Low-Cost Index Funds

Index funds like Fidelity’s FXAIX are popular for their low fees and market-mirroring performance. In the Reddit user’s case, FXAIX resembles widely loved funds like SPY and VTSAX, but it’s not the only option to consider. 

A Traditional IRA might provide access to comparable funds with similarly low expense ratios, allowing for even more portfolio customization. This flexibility can be a game-changer, particularly if you want to diversify across multiple asset classes or tweak your strategy as you approach FIRE. 

On the flip side, keeping the funds in the new 401(k) simplifies management but may limit growth potential if FXAIX is the only appealing option. This example underscores the importance of examining the fund lineup in your employer’s plan. Key questions this couple (and those reading this article interested in the FIRE movement) may want to consider is whether transferring these funds will help contribute to hitting one’s retirement targets, or if the added brain damage of having two accounts isn’t worth the benefit. 

Every Situation Is Unique

No two financial journeys are the same. For this couple, which really represents an edge case in my view, that’s more true than for most households. 

However, I do think the FIRE movement is catching on for a reason. Those looking to retire early will want to be even more dialed in with their planning process, as they’ll have to rely on the funds they put away today for a much longer time frame than the average retiree.

If the market hits a snag, or this couple decides they’re too bored and want something to do, going back to work is an option. But if they’re looking to take this all the way and truly retire, finding the path that best suits their long-term needs is optimal. In this case, it appears holding the two accounts may be the better road to go down, but to each their own.