Advantages of rolling 401k to IRA?

16 years ago

Hi,

I have a very small 401k sitting in my old employers plan, growing at 8+%

I had planned on moving it to a new employers plan when I get a new job, which will hopefully be within the next 6 months.

Other than more control over the investments (which I wouldn't really bother with now), would there be any advantage to rolling it over to an IRA with the same company? (Fidelity)

They keep 'suggesting' I do this, so there must be some advantages in it for them (investment / service fees etc).

(I don't want to put the $ into anything that isn't readily available in case I need it if I have problems getting a new job etc.)_

Any advice would be appreciated!

Comments (10)

zone_8grandma
16 years ago
Since you will have the opportunity within the next 6 months to move it to your new 401K, personally I'd leave it where it is.

8% isn't bad (even though right now the market is doing much better than that), but if you put it into an IRA with Fidelity, then you wouldn't be able to add it to your new 401K. Keep in mind that if you are under 50 1/2, the penalties for early withdrawal are the same.
missjulied
16 years ago
One advantage of having more control over the investments is that you could possibly find a fund with lower fees than you currently have. No need to be paying more fees than you have to.

Every time I've left jobs I've rolled the 401k into my IRA. You never know when you get a new job what their 401k administration is going to be like. I've had some where the websites were so poor that it was really hard to get clear information on how my account was doing.

Hope that helps -
jd
Related Discussions
Question about 529 v 401K
Q
Comments (6)
Hi Christine, I know Dave is a well respected advisor on these boards, but I have to say I have always been told to steer clear of anything other than Term Life. Thanks... uhh, I think? Hopefully I'm not losing any respect from the lack of financial planning experience from whoever 'always' told you to steer clear of anything other than Term Life. Many people here have also "always" been told to pay off their mortgage as fast as possible, "period," regardless of the risks & harm it can create too. What many have "always" heard is not always so valid. Dave perhaps you could clarify why Universal Life is a good option in general and also specifically in this case? I have been on this site off and on for a very long time, however, I have not read that many posts on this particilar board to know your general philosophy on this. Sure. FIRST off, it is most likely the case that "everyone" who "always" advised you to avoid anything but "term" was specifically talking about buying life insurance for the purpose of the insurance DEATH benefits... not the financial planning features available within certain types of it. For the best death benefits "bang for the buck"... Term life premiums are state regulated, so for the most part you pay for the benefit coverage you get, and nothing more, regardless of the carrier (which is GOOD if what you want is a payoff at death.) Differences in term life premiums are generally quite small, and when one carrier appears to be "cheaper" per $1,000 of benefit than another (i.e. if you Google for 'cheapest term insurance' etc.) its generally because that carrier has less capital reserves to protect its policy-holders, thus less costs... and is thus more at risk of being illiquid... *OR* it fights harder NOT to pay all of the benefits expected when its policies mature, and thereby it has less costs of fulfillment. There are OTHER very important financial benefits to life insurance contracts, however, OTHER than the ultimate payoff of a death benefit at policy maturity. Congress has written legal "tax-shelter" features into the IRS code such that cash values sheltered within properly structured life insurance contracts grow and are harvestable UN-TAXED. Universal Life *IS* a term life policy (underwritten through age 100,) that offers a SEPERATE (un-comingled) cash accumulation account with the unique tax sheltered benefits only available inside cash-value life contracts. (NOTE that this is distictively different from old-fashioned "whole life" contracts that inseperably comingle insurance costs with their cash-values.) For FINANCIAL PLANNING purposes we want the maximum shelter benefits with the LEAST actual insurance coverage we can get away with (since, for this particular purpose, we don't care about death benefits.) The cash account within a Universal policy is allowed to grow tax free (no annual capital gains nor income taxes,) and is allowed to be accessed for spending tax free (via zero-interest policy "loans" which have no repayment requirement until the policy "matures"... aka when the insured dies.) Our OP is concerned about college tuition fund planning. The general strategy with college funding is to take advantage of *ALL* external funding resources (public assistance, grants, loans, and public/private scholarships) *BEFORE* dipping into the family-accumulated funds. THe catch-22 is that *MANY* external funding sources are "means tested." This means that they look at the student's fmaily's financial profile 1st... and if the family has funds in reserves, the external sources DEDUCT those from the support calculations (in essence saying "you guys drain your OWN accounts before we'll offer you any support!") Of course, this is completely contrary to the idea of rewarding those who are responsible... which is the whole point of using Universal Life insurance contracts to accumulate college tuition (and subsequently retirement funding for the parents.) Universal Life policies can also be "owned" by someone other than the person that the policy is insuring (the "insured.") The owner can be grandparents, uncles/aunts, god-parents, seperate trusts, or simply trusted friends. Because the ownership of this accumulation asset can be legally seperated from the student's family balance sheet, the student's family does NOT have to drain all of their own reserves before taking advantage of external educational support resources. PERSONALLY (and professionally,) in regards to actual death benefits... I would probably almost "always" harmonize with whoever else was "always" telling you to avoid anything other than term life. For death benefits (replacement of a parent's income for family support, most commonly,) term is generally the best way to go. For FINANCIAL PLANNING, however... age-100 term life coupled with cash values (in the form of Universal Life,) can be a very sharp strategy from both the tax-shelter perspective, and the avoidance of means-testing punishment of the more financially responsbile. Cheers, Dave Donhoff Leverage Planner
...See More
convert ira to roth ira?
Q
Comments (8)
I had seen an article on this subject in the WSJ, so I needed to do a search to pull it up again. Here's the pros and cons: WSJournal Investing, November 2, 2008 IRAs May Be Ripe For Shift to Roth One of the simplest ways to take advantage of the continuing market turmoil: Convert your battered investments from a traditional individual retirement account to a Roth IRA. When you convert traditional IRA assets to a Roth, you have to pay the income taxes upfront on the account's value -- and in some cases, those values may be next to nothing at the moment. With a Roth IRA, there are generally no taxes on withdrawals or any future earnings, unlike with traditional IRAs. There's also no mandatory distribution schedule -- again in contrast with traditional IRAs, from which account holders must begin taking minimum distributions by April 1 of the year following the year they turn 70 years old. Plus, you can leave a Roth account intact for your heirs. (Heirs other than your spouse would have to take required withdrawals each year, but they generally wouldn't owe any tax on them.) To be eligible to convert traditional IRA assets to a Roth, your income must be $100,000 or less. So any hit that your paycheck has taken from the economic downturn might help you do a Roth conversion. (Starting in 2010, there is no longer an income limit for Roth conversions.) Neither a required IRA distribution nor the converted amount would count against the $100,000 income limit. If you are 70Â½ or older, you have to take this year's required distribution before converting any traditional IRA assets to a Roth. Withdrawal Rules Many IRA holders get tangled up in the "five-year" rule when they convert IRA assets to a Roth IRA: You have to hold those assets in a Roth for five years or until you turn 59Â½, whichever comes first, to make penalty-free withdrawals of converted amounts. Each conversion has its own five-year clock. But if you have already reached age 59Â½ and you convert traditional IRA assets to a Roth, you can withdraw the actual assets you convert at any time without worrying about a five-year deadline or penalties. It's a different story with any earnings on those assets: Again, you must have held a Roth account for five years to withdraw any earnings tax-free. But you don't need to worry about separating the converted funds from the earnings; that's because the withdrawal rules for Roth IRAs say that any distributions first come from contributions, then from conversions, and finally from earnings, says Ed Slott, an IRA consultant in Rockville Centre, N.Y. Chuck Bauer, a 62-year-old manager in Pittsburgh for Aker Solutions, an engineering and construction company, has a combination of market losses and lower-than-normal income this year. So he is taking the advice of a local financial planner, Bud Kahn, and converting his IRA to a Roth, he says. Mr. Bauer will have to pay about $29,000 in income tax on the conversion, but "we think the account has gone down about $32,000," says Mr. Kahn. "When the account recoups its losses, he will have made up the taxes that he paid. And then that recoupment is never going to be taxed again." Changing Your Mind What if you converted traditional IRA assets to a Roth earlier this year, and those assets have declined in value? In that case, you may want to "recharacterize" the Roth as a traditional IRA. It's a way, says Mr. Slott, to "erase the taxes" on value that has since disappeared. Frank Russo, a 66-year-old Verizon Communications retiree in Port Washington, N.Y., recharacterized IRA investments that he had converted to a Roth after watching their value fall at least 15%. "I don't have to pay tax on an amount that no longer exists," he says. To do a recharacterization,you have to use a "trustee-to-trustee" transfer, also called a direct rollover or direct transfer, to move the contribution from one IRA to another. Don't touch the money yourself, and make sure no checks get made out directly to you or deposited in your bank account. The assets are treated as if they never left the traditional IRA, Mr. Slott says. If you recharacterize your Roth as a traditional IRA by Nov. 30, you could then convert the lower-value assets to a Roth again as soon as Jan. 1, he adds. See IRS Publication 590, at www.irs.gov, for information about traditional and Roth IRAs.
...See More
Memo to participants/considerers of 401(k) investments
Q
Comments (8)
As sable said above, it is a choice if mutual funds offered under the 401k plan and often stock with the company (employer). When I was working, my employer contributed 50 cents for every dollar I chose to put into my 401k, up to 6% of my salary. Bingo...I immediately made 50% on my money, but there were stipulations. That 50% was not really mine until I had my account for 5 years I believe and became fully vested. The 50% that they 'gave' me was in the form of company stock, GTE or Contel at the time. These funds are NOT in the investor's control. Once your money is in, you're allowing someone else to make decisions for you--and trusting that they're as concerned about your future as you are (unreasonable, right?). Not to mention--they aren't as safe as we've been led to believe. There are people already who have LOST their investments in these instruments. Not a common thing, but it is possible. Are you speaking of 401Ks? Did those who lost everything maybe choose to put all their eggs into one basket, by just holding company stock in their 401?...not a good thing at all. All 401k that I know of, have a choice of investments to choose from...see link from my post above. The employee controls what funds their money is in within the 401, and can change the allocation at any time. Some employees just choose to do an equal mix of things...say 10 funds, putting 10% into each of them. Others maybe choose a 1/3 mix of aggressive, moderate, and conservative. Placing one's savings, whatever it is, 401, sep, IRA, is not for those who do not understand the market and its many ups and downs. Because of that, some will lose sleep over what appears to be lost, even if it is just temporarily. About 30 years years ago, I remember my (company) stock climbing a good bit in one day. I made $5,000 in one day! Boy was I ecstatic! When it later came down, did I lose money? No. Did I really make $5000 that day it climbed so much? No. I only would have made the money if I had chosen to sell it while it was up. It later came down some, went up some, came down some, etc, and has served me well to this day with its nice dividends. Often times one loses on a stock, or fund, if they choose or must sell when the market (stock or that fund) is down. Sue
...See More
Discuss the Roth 401k
Q
Comments (1)
It seems there are two major advantages to the Roth 401k: - Good to save more on a net basis given the current contribution limits - Good if one does not currently qualify for an Roth IRA account. I found a website about the new Roth 401k that has really good and detailed information: www.roth401k-center.com Here is a link that might be useful: www.roth401k-center.com
...See More
steve_o
16 years ago
Given your situation, I'd hold off on a rollover until you feel more comfortable with your new job. However, I would recommend doing the rollover at some point in the not-too-distant future.

I maintained 401(k)s in previous jobs for years. After a while, I tired of managing the paper cloud that arrived quarterly (including the ubiquitous "For your convenience, we have jiggered around with the fund options and management company again" notice). It also was more difficult to manage diversification simply. "OK, x% in U.S. stocks, y% in bonds, z% in international stocks. Ooops -- this plan doesn't offer an international-stock fund. Oh, what's this? Boy, that sure is a carppy bond fund!" And, of course, reallocating actual dollars across 401(k)s was impossible.

I moved everything (except my current employer's 401(k)) to Vanguard. I get one statement, management hasn't changed substantially in years, Vanguard has a great rep for lower costs, and it's really easy to reallocate when necessary.

Good luck with your decision.
saphire
16 years ago
I would either leave it for a while or IRA it. I would not turn it over to your new employer. Since you sound relatively young I would use this time to educate yourself about finance so that you are familiar with alternatives to mutual funds. Then move it to an IRA where you have a better idea of where to invest it
jakkom
16 years ago
You'll probably have multiple employers over time. Set up an IRA at a good low cost broker - Vanguard, T. Rowe Price, Fidelity - and when you leave a job, roll your 401(k) monies into your IRA.

Consolidation will make not only your paperwork easier to create a proper allocation mix (and annual re-allocation), it will also be a great relief to your heirs. Yes, I know you're young and healthy, but believe me, it is a LOT easier to keep the beneficiary designations updated on ONE consolidated IRA account, rather than the half-dozen assorted 401(k)s you've created after a while!

Right now my nephew/niece and I are beating up on their dad (figuratively, of course!) because he has 401k funds at possibly 7 or 8 companies. I think my sister, his ex-wife, is still listed as beneficiary on most of them. Since she's got a million bucks in the bank and is semi-retired by choice, and he'd prefer the money go to his kids, it seems rather foolish to be risking letting his paperwork go - particularly since he suffered an unexpected heart attack recently!

Really, you'll find life is much simpler if you consolidate your accounts. All it usually takes, once you've set up the IRA, is a phone call and a few simple pages to fill out.
rachelh
16 years ago
I was told at the point that I set up my husbands IRA from his 401K rollover, that it would be possible to roll it back into another 401K as long as he hadn't added any other contributions to it. When he left the company they required him to take his 401K with him or else I would have just left it there.
bunnyman
16 years ago
I've not looked at tax law but I don't think it has changed recently....

Roll into a REGULAR IRA... tax free going in. Then convert to a ROTH IRA... tax free going out.

Don't know if that is still an active loophole but very much worth doing if it still open. Taxes take a huge freakin chunk of how ever much money you have. Other thing you can do is be a freak like me and avoid retirement accounts all together.... straight up brokerage account... total control.
randy427
16 years ago
In converting into a Roth, you must pay income tax on the principle plus earnings as if it were regular income in the year you do the conversion. The tax dollars must come from another source, not the IRA. I can't think of a way to come out ahead by doing this.
jakkom
16 years ago
It is only worthwhile converting the IRA rollover to a Roth if you have at least 10 years before retirement, preferably 20, to allow the tax-free compounding to work for you.

If you are close to retiring, unless your retirement income is going to be really low compared to your current income, then a Roth conversion will not generally work in your favor.

One exception is if your current income has dropped so substantially that you can easily afford the "tax bite" of the Roth conversion for that tax year. One of my friends had her income drop from $60,000 to $17,000, and doesn't plan to retire for another 15 yrs, so it was worth it to her to do the Roth conversion on her IRA.
PRO
acdesignsky
16 years ago
Just be aware of the upfront costs before switching. It may make more sense to leave it alone.
DH had a 401K at his old job that had grown into 6 figures over the course of nine years. His new employer didn't offer a 401K and his old employer was facing really bumpy times ahead, so he rolled it over into an IRA.
I didn't realize how much we had been saving in fees with his 401K. The IRA rollover cost over 13K in fees alone. I'm sure that had something to do with the funds (or whatever the term) he'd chosen, but it still hurt to see over a year's worth of savings gone in an instant.

Advantages of rolling 401k to IRA?

Comments (10)

zone_8grandma

missjulied

Related Discussions

steve_o

saphire

jakkom

rachelh

bunnyman

randy427

jakkom

acdesignsky

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US