401(k) Rollover

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Tortoise
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401(k) Rollover

Post by Tortoise » Tue Aug 02, 2016 9:22 pm

I think this question was probably discussed here years ago, but a quick search didn't seem to turn up the relevant thread(s). Maybe one of our resident board historians can dig it up?

Basically, I have a Boglehead-style 401(k) with a previous employer (since it lacks a brokerage window), and I'm trying to decide between rolling it over into my current employer's 401(k) or my IRA. Either way, I'd be gaining access to a brokerage window and would thus be able to "PP-ify" the funds from my old Boglehead 401(k).

I seem to recall that there are certain pros and cons of 401(k)s vs. IRAs in terms of flexibility (required minimum distributions, etc.), vulnerability to lawsuits, and so on. I'll try looking this up in a couple of other places, but I figured I'd ask here, too, to hear what some of you smart folks think about the matter.
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Re: 401(k) Rollover

Post by Jack Jones » Wed Aug 03, 2016 7:30 am

Another thing to consider is that you might have access to funds in your 401k that have better expense ratios than you can get in an IRA. This is the case w/ my 401k.
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sophie
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Re: 401(k) Rollover

Post by sophie » Wed Aug 03, 2016 8:10 am

The fund choices and expenses of the different options will guide your choice, but I guess you're asking if there are any pitfalls to consider in rolling funds into an IRA. Two that come to mind:

- The legal protections for IRAs and 401ks are different. I don't know enough about it to comment but you can do your own research on that, and yes there have been some posts on this here (sorry don't remember which threads).

- If you roll over pre-tax funds into an IRA, you won't be able to make backdoor Roth IRA contributions without paying extra taxes. This one is the biggie. If it's a problem and you have self-employment income (even just a small amount), you can get around this by opening a solo 401K and rolling the funds into that. I'm not sure you can do it directly though, and once you roll money into an IRA it has to sit there for a year.

FWIW I went with the solo 401K option, and waited the year before rolling over funds from a rollover IRA. I much preferred having full control over as much of my retirement money as possible. If anything, the expenses on a privately held account are likely to be lower than on a company retirement plan. I did the solo 401K at Fidelity, and there are no fees. It's a bit annoying to transfer money into it, but a helpful Fidelity rep showed me how to set up the account for electronic billpay, so I don't have to send paper checks.
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Dieter
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Re: 401(k) Rollover

Post by Dieter » Wed Aug 03, 2016 12:10 pm

I think IRA legal protections are by state. But don't have any handy links.

Also, do NOT mingle rollover IRA monies with non-rollover monies. Might depend on state, but more protection for rollover IRAs.
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Tortoise
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Re: 401(k) Rollover

Post by Tortoise » Wed Aug 03, 2016 3:26 pm

Dieter wrote: Also, do NOT mingle rollover IRA monies with non-rollover monies. Might depend on state, but more protection for rollover IRAs.
Hmm, too late for that. A few years back I already rolled over a former employer's 401(k) into my IRA to consolidate and keep things simple.
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ochotona
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Re: 401(k) Rollover

Post by ochotona » Wed Aug 03, 2016 5:41 pm

You know this already, but I repeat it for any 401(k) newbies:

Request a DIRECT 401(k) to IRA ROLLOVER from the current custodian to the IRA company, do not take any kind of check or distribution from them. You have to open the Rollover IRA first, and have it waiting there empty to receive the funds. The funds need to go without your touching them, or else you have tax consequences. And an early withdrawal penalty.
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Re: 401(k) Rollover

Post by Tyler » Thu Aug 04, 2016 1:19 pm

ochotona wrote:You know this already, but I repeat it for any 401(k) newbies:

Request a DIRECT 401(k) to IRA ROLLOVER from the current custodian to the IRA company, do not take any kind of check or distribution from them. You have to open the Rollover IRA first, and have it waiting there empty to receive the funds. The funds need to go without your touching them, or else you have tax consequences. And an early withdrawal penalty.
I've switched jobs pretty often and rolled over 401k money into an IRA several times. I definitely prefer direct rollovers, as it's less work on your part. But in my experience receiving a check isn't an automatic tax hit -- you have a grace period to forward the money to the new account and still have it count as a rollover. I've done that as well, and never had an issue.

Unless the rules have changed since then, of course.
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Re: 401(k) Rollover

Post by clacy » Thu Aug 04, 2016 5:38 pm

TennPaGa wrote:
Dieter wrote:Also, do NOT mingle rollover IRA monies with non-rollover monies. Might depend on state, but more protection for rollover IRAs.
Any sense whether it is OK to mingle roll-over monies from different sources? I currently have a roll-over IRA at Vanguard, so if I left my current job and rolled over my 401k, can it go to the same account? Or is it better to set up a new rollover account?
I don't think co-mingling matters if they're all rollover funds. The distinction is that a rollover IRA, is basically viewed as a 401k from an ERISA standpoint, giving it more robust creditor protection.
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Re: 401(k) Rollover

Post by Mr Vacuum » Thu Aug 04, 2016 5:39 pm

TennPaGa wrote:
Dieter wrote:Also, do NOT mingle rollover IRA monies with non-rollover monies. Might depend on state, but more protection for rollover IRAs.
Any sense whether it is OK to mingle roll-over monies from different sources? I currently have a roll-over IRA at Vanguard, so if I left my current job and rolled over my 401k, can it go to the same account? Or is it better to set up a new rollover account?
Looks like you'll have to check your state code on that one, too. I rolled a couple Keogh accounts and a rollover IRA into a single SEP IRA. By my reading of the Indiana code current pre-tax retirement plans, pre-tax rollover money, and Roth IRAs are all the same, at least as far as bankruptcy exemptions go.
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Re: 401(k) Rollover

Post by Ugly_Bird » Thu Aug 04, 2016 8:23 pm

Tortoise wrote: I seem to recall that there are certain pros and cons of 401(k)s vs. IRAs in terms of flexibility (required minimum distributions, etc.), vulnerability to lawsuits, and so on. I'll try looking this up in a couple of other places, but I figured I'd ask here, too, to hear what some of you smart folks think about the matter.
There is a big downside of rolling over into the new employer 401(k). The more money you get there the faster the expense ratio starts chewing up the profits. I played with this in Excel and figured that if one starts from 0, then expenses ground the employer match in about 20-25 years (enough to change the job or retire). In case of rollover it might happen in as little as 3-5 years. Depends on how much you roll over. The more the worse.
Of course, IRAs also have expenses but those are much lower than 401(k) rip off funds.

Andrei.
Last edited by Ugly_Bird on Fri Aug 05, 2016 6:37 am, edited 1 time in total.
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KevinW
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Re: 401(k) Rollover

Post by KevinW » Fri Aug 05, 2016 1:27 am

I prefer to rollover into an IRA instead of the new employer's 401k. With an IRA you can choose the broker, and change brokers at a whim, so you will always have a PP-friendly custodian. Even 401k's with a brokerage window tend to gave a few "gotchas" that cause headaches. For example mine requires that I maintain at least $2500 in "core funds," so I have that $2500 permanently parked in a lame bond fund. Some 401k plans are entirely PP-incompatible. I've also seen employers switch from a PP-friendly custodian to a PP-unfriendly one, which is frustrating, and once your funds are rolled into the 401k, you can't get them back out until you separate from the employer.
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Re: 401(k) Rollover

Post by InsuranceGuy » Mon Aug 08, 2016 1:40 am

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