Gyroscopic Investing

A couple of months ago I started a job at a new employer. Initially my plan was to just keep my old employer's 401(k)--a mixture of tax-deferred and Roth balances in a brokerage window--for some institutional diversification, but today I remembered that the plan has a $100 per year administrative fee.

So now I'm considering rolling over the 401(k) into my existing Vanguard IRAs (both traditional and Roth) to avoid that $100/year fee. Main pros would be lower cost (comparable fund ERs, but no yearly administrative fees) and simplification by consolidating everything in Vanguard. Main cons would be reduced institutional diversification and the potential hassle of filling out tax forms related to the rollover. Secondary pros/cons relate to subtle legal differences between 401(k)s and IRAs (inheritance taxation, creditor protection, bankruptcy treatment, etc.), but I'm not nearly as familiar with those and am not sure they are as important as the main pros/cons I listed.

I'm planning on calling a rollover expert at Vanguard this week to discuss specifics, but I figured I'd also see if any of you wise folks on this forum have any thoughts or tips to share regarding pros and cons of 401(k)-to-IRA rollovers. Especially for a 401(k) that has the added complication of consisting of (1) tax-deferred contributions, (2) Roth contributions, and (3) tax-deferred company match amounts. Not sure how those three categories are treated in a rollover.

401(k) accounts can be tapped at 55 (or 55 1/2?) without penalty.  Roll to an IRA and your penalty-free age jumps to 59 1/2.

As MangoMan says, you need to keep Roth and tax-deferred separate.  The tax-deferred amounts (whether from you or from company match) can be dumped into a single rollover IRA account.

If you ever anticipate un-rolling back into a 401(k) plan I believe you cannot co-mingle 401(k) funds with other IRA funds.

There is a lot to be said for simplifying accounts via the rollover.

I've done this many times. It's easy with Fidelity as they do all the paperwork. My company 401k even allows in-service rollovers after age 60 so I'm using it to accumulate stock in a low-cost fund and when I hit the re-balancing band, I can roll it over to my IRA. Just have to call and ask for a check made out to Fidelity, FBO my name and then mail it into them.

If you think you'll run into income limits on the Roth IRA contribution, consider keeping it in the 401(k) if you have good investment options.  If you have no money in a Traditional IRA, you can contribute to Non-deductible IRA's and immediately do a tax-free conversion to a Roth IRA.

If you have a bunch in a Traditional IRA, it significantly decreases the flexibility of this plan.  You have to do conversions pro-rata given the amount you have in an IRA vs N/D IRA?

moda0306 wrote: If you think you'll run into income limits on the Roth IRA contribution, consider keeping it in the 401(k) if you have good investment options.

Not sure what you mean by that. Why would I run into "income limits" when simply converting a Roth 401(k) balance to a Roth IRA balance? It's Roth-to-Roth.

moda0306 wrote: If you have no money in a Traditional IRA, you can contribute to Non-deductible IRA's and immediately do a tax-free conversion to a Roth IRA.

Not sure what you mean by "non-deductible IRA's." I was only aware of two main IRA types: traditional (tax-deferred) and Roth.

moda0306 wrote: If you have a bunch in a Traditional IRA, it significantly decreases the flexibility of this plan.  You have to do conversions pro-rata given the amount you have in an IRA vs N/D IRA?

Is that last sentence a statement or a question? Again, I'm not sure what you mean.

Tortoise wrote:

moda0306 wrote: If you think you'll run into income limits on the Roth IRA contribution, consider keeping it in the 401(k) if you have good investment options.

Not sure what you mean by that. Why would I run into "income limits" when simply converting a Roth 401(k) balance to a Roth IRA balance? It's Roth-to-Roth.

moda0306 wrote: If you have no money in a Traditional IRA, you can contribute to Non-deductible IRA's and immediately do a tax-free conversion to a Roth IRA.

Not sure what you mean by "non-deductible IRA's." I was only aware of two main IRA types: traditional (tax-deferred) and Roth.

moda0306 wrote: If you have a bunch in a Traditional IRA, it significantly decreases the flexibility of this plan.  You have to do conversions pro-rata given the amount you have in an IRA vs N/D IRA?

Is that last sentence a statement or a question? Again, I'm not sure what you mean.

Sorry. Ill clarify in a bit. Too busy .

Thanks for the tips, everyone.

I decided to pull the trigger and do the rollover. (Actually, since the assets are going directly to Vanguard instead of through me, I think it's technically called a "transfer," not a rollover.)

The transfer requires me to first liquidate all of the assets in my Schwab brokerage window, which I have done and am now just waiting for the trades to settle. Unfortunately, my brokerage holdings included four different T-bonds, so Schwab charged me $25 for each of the four bonds to sell them. (Schwab doesn't let investors sell their own Treasuries; the sale has to go through a fixed-income broker, carrying a $25 fee for each transaction.) So basically I had to shell out $100 just to liquidate my bond holdings. Good thing I didn't yet have a full 10-year ladder with 10 different bonds!

Good riddance, Schwab

That's outrageous! $25 per bond? Yikes!

MangoMan wrote: I can't imagine why this couldn't be done by ACAT, leaving all holdings intact. I've personally done this many times. Are you sure that was not an option?

Interesting, I had never heard of ACAT--if I had, I would have asked about it. If ACAT was an option to me, nobody said so. Not the person from Vanguard, not the person from my company's benefits center, and not the person from Schwab.

In fact, the lady from my company's benefits center specifically said that I couldn't transfer anything to Vanguard until I first liquidated all of my Schwab brokerage holdings and transferred the balance into one or more of my company's "core funds." Then the company would be able to write the check to Vanguard. That was the only option they presented to me.

The person from Schwab said they couldn't transfer anything directly--they said it was up to my company to transfer the funds out of Schwab and then into the appropriate IRAs.

Of course, maybe none of these people knew what they were talking about. The guy from Vanguard accidentally opened up a completely new IRA when I specifically told him I wanted the funds deposited into my existing IRA. He caught his mistake immediately after making it, but it's going to take about a week for some other department within Vanguard to review his mistake and reverse the action.

Sometimes I think I'm too trusting when speaking with customer service. I tend to assume they know exactly what they're doing and what they're talking about, when quite frequently they do not.

the trick to customer service is often just knowing the right questions to ask. i have had pretty good luck with vanguard talking me through operations i was new to, not because i had the slightest clue what i was doing but i have a pretty good heuristic for asking questions that help get me (and sometimes customer service guys that need to find an answer they don't know) to where we need to be.

if i recall from posts by others here in the past, one of the really big questions to ask is to push VS pull when it comes to transfers, one is almost always easier/a better option than the other...

I received a rollover confirmation form from my former employer the other day, and for some reason it came with a copy of an IRS document called a "Favorable Determination Letter," along with a few pages of general IRS information regarding Favorable Determination Letters.

After attempting to read the document, I have no clue what its purpose is or why it was sent to me. The legalese is so dense that I can't decipher it.

I plan to call my former employer's benefits office to ask them about this, but I figured I'm more likely to get a well-informed answer here. Has anyone else here gotten a Favorable Determination Letter as part of their rollover documentation? If so, what is its purpose in layman's terms?

I believe this is just a letter indicating that the 401k plan has the seal of approval by the government. I have seen them before but never bothered to read it. I suppose it might be a good thing to save if a question ever arises but I've always thrown them away.

Tortoise wrote: I received a rollover confirmation form from my former employer the other day, and for some reason it came with a copy of an IRS document called a "Favorable Determination Letter," along with a few pages of general IRS information regarding Favorable Determination Letters.

After attempting to read the document, I have no clue what its purpose is or why it was sent to me. The legalese is so dense that I can't decipher it.

I plan to call my former employer's benefits office to ask them about this, but I figured I'm more likely to get a well-informed answer here. Has anyone else here gotten a Favorable Determination Letter as part of their rollover documentation? If so, what is its purpose in layman's terms?