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401(k) to roll or not?
Old 01-28-2005, 07:46 AM   #1
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401(k) to roll or not?

When you change your job or finally make the announcement to retire, you'll most likely be faced with a decision concerning what to do with your retirement plan at your former employer. Many people don't know that they have other options, or they think they must keep the money in the old plan until they reach age 65. Individuals have started accumulating a majority of their retirement wealth in 401(k)'s, 403(b)'s and other Pension/Profit Sharing type accounts, so it's important that you take the time to get your assets in the best investment vehicle available.

As you contemplate what to do with your former plan's retirement assets, you should consider the expenses that you are paying for the plan, the investments that are available, if you would like to make contributions in the future, rules on beneficiary designations, and if any penalties might be generated from your actions. Since most plans have their own internal paperwork to complete to access the funds, you'll need to call your current administrator to obtain the distribution paperwork should you decide to take action. By the time that you've received the paperwork you should have had enough time and effort involved to size up your options, they include rolling over the funds into an IRA (Individual Retirement Account), rolling over the funds into your new employer plan (if available), keeping your funds in the current plan (if allowed), and taking your savings in cash.

Rollover to an IRA

When you rollover your former employer retirement plan to an IRA you'll have the flexibility to select the custodian of your choice such as Fidelity, TD Waterhouse, or Schwab, just to name a few. You'll need to call around to the different custodians prior to opening a new account and inquire about their fees for the type of investment products for which you are going to invest. The direct rollover is the wisest method of transfer in that a check is simply issued from your old retirement plan and sent directly to the new custodian for deposit to your new IRA account. In doing this, you'll avoid the 10% early withdrawal penalty and still give your funds the opportunity to grow tax-deferred in the IRA. The IRA allows you to consolidate all of your former 401k plans and maintain control of the account as well as allowing more flexibility in investment choices. The clear cut benefits of rolling your funds into the IRA are flexibility in beneficiary designation and the ability to later convert to a Roth IRA should you desire.

Rollover your old plan to your New Employer

If your concerned about liability protection (which is governed by state law), the IRA protection laws may differ from the liability protection provided to the qualified plan under federal law, so you may want to keep your funds under the 'qualified plan umbrella' and rollover your plan assets into your new employer plan, if allowed. Should you elect this option, you'll- avoid the 10% IRS penalty, keep your plan consolidated, might improve your investment options, still qualify for loans, and enjoy the benefit of tax-deferred growth on the assets transferred into the new plan. On the downside, you're still limited to the investment selections within the plan, possibly higher fees than the old plan or an IRA, subject to plan provisions for distributions, and now all your eggs are in one basket.

Do Nothing

Some employers will allow you to still keep your funds in their plan long after you have left the company. Why would you want to do this? Maybe you're a paperwork hater for starters, or perhaps you've been extremely pleased with the performance of your former employer's plan. Some of the other advantages of keeping your funds in the current plan include: greater protection from bankruptcy/divorce in a 401(k) versus an IRA, maintain your current asset allocation, and you may be able to borrow funds without penalty. However, the drawbacks include- a limitation to the investment options within the plan, future company changes can effect the plan both positively & negatively (Enron for example), and high fees even though you may not actually see them! Plus, you may find it more difficult and time consuming in later years when trying to transfer the funds or get in contact with the appropriate person to obtain the paperwork to make your withdrawals. In most every case, the former employer will no longer allow you to contribute to the plan, so your additional contribution days are over.

Cash Out

Well, in most cases, this is the worst choice that you can make. Why? If you are under age 59 1/2, you have now subjected the distribution to a 10% tax penalty imposed by the IRS for an early withdrawal, plus ordinary income tax on the distribution amount. If you're retired and over age 59 1/2, whatever amount you distribute from the plan will still be taxed as ordinary income to you. You'll lose the tax-deferral of earnings and the distribution just might push you into a higher tax bracket.

Although, you do have four options with your former retirement plan, it's usually the best idea to rollover your funds into an IRA for the enhanced flexibility available in the IRA product.


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Re: 401(k) to roll or not?
Old 01-28-2005, 08:20 AM   #2
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Re: 401(k) to roll or not?

Quote:
... it's usually the best idea to rollover your funds into an IRA for the enhanced flexibility available in the IRA product.
And then convert that puppy to a Roth before your SS kicks in.
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Re: 401(k) to roll or not?
Old 01-28-2005, 09:51 AM   #3
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Re: 401(k) to roll or not?

In my case I believe the assets were transferred directly rather than selling 401(k) assets -> rollover cash to IRA -> buying IRA assets, but I don't know if that's doable for everyone. Selling some assets--such as company stock--may require further consideration.

My 401(k) plan had a small but decent selection of Vanguard funds, but I like the unlimited selection and feeling of freedom and security in having my own IRA. Supposedly my 401(k) was 100% safe from the shennanigans that happen elsewhere, but the others probably thought that before they lost their money.
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Re: 401(k) to roll or not?
Old 01-28-2005, 11:40 AM   #4
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Re: 401(k) to roll or not?

Nords comment made me think about whether I should roll or convert my IRA into a Roth IRA after I stop working and have no taxible income.

I have a 401K rollover into an IRA. I will probably stop working in May and will live off saved money until I can collect pensions.

Can I roll/convert some of the IRA to a ROth each year ? How would the taxes work in that if I have not additional income?
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Re: 401(k) to roll or not?
Old 01-28-2005, 11:44 AM   #5
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Re: 401(k) to roll or not?

If you have a 401(k) with an employer and are leaving that employment, you can leave the 401(k) there if you have more than $5000 in the 401(k). The employer can require you to take out or rollover amounts less than $5000.

Before rolling over that 401(k), remember that 401(k)s are protected under ERISA from claims of creditors to a far greater extent that an IRA is protected. I am comforted by that protection and given that my choices and expenses in my particular 401(k) plan are good, I am unlikely to ever roll it over on leaving employment.

Martha
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Re: 401(k) to roll or not?
Old 01-28-2005, 11:53 AM   #6
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Re: 401(k) to roll or not?

Quote:
Nords comment made me think about whether I should roll or convert my IRA into a Roth IRA after I stop working and have no taxible income.

I have a 401K rollover into an IRA. I will probably stop working in May and will live off saved money until I can collect pensions.

Can I roll/convert some of the IRA to a ROth each year ? How would the taxes work in that if I have not additional income?
Here is a pretty good article on converting IRA money into a Roth IRA: http://www.fool.com/news/commentary/...ry04120305.htm

Mostly it is an exercise in tax effects and timing as to when you expect to need to withdraw from the new ROTH.

Hey KB, weren't you the gardener working on the master gardener program? I am ansy to start gardening even though the ground is covered by several feet of snow. The gardening catalogs should be coming soon.

Martha

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IRA conversions
Old 01-28-2005, 11:53 AM   #7
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IRA conversions

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Can I roll/convert some of the IRA to a ROth each year? *How would the taxes work in that if I have not additional income?
The short answer is yes, and you'd pay taxes on the gains above your IRA's cost basis. There are some qualifications & limits but if your income is generally under $100K then generally you'd be able to do the conversion.

Those bases are the challenge-- part of the 401(k) may be your deductible contributions, part may be employer's match, and part may be after-tax contributions. The first two will have a different basis than the third. If they've been sitting in a conventional IRA for any length of time, then they all have their own (taxable) gains, perhaps also at different rates.

You could convert the whole IRA at once or you could convert a little each year to stay within the 10%-15% tax brackets. (Spouse & I are doing the latter on an eight-year plan.) Each has advantages & drawbacks.

In addition to avoiding SS taxation and the thrill of calculating your RMDs, conversion also gives you a rare opportunity. If you pay the conversion taxes with funds that didn't come from the converted IRA, then essentially you've boosted the Roth IRA's value by the amount of the tax bill. It's like a free contribution. It'll keep growing tax-free and the withdrawals are pretty much up to you.

Another source of all 401(k) & IRA wisdom is Ed Slott's IRA discussion board at http://www.irahelp.com/cgi-bin/forum/index.cgi/ . It's frequented by CPAs, some of them published writers, who all delight in researching/answering the nitpickingest of questions. You'll get good help there.

But the full answer is: Go read IRS Pub 590 and the directions for Form 8606 at http://www.irs.gov/pub/irs-pdf/p590.pdf and http://www.irs.gov/pub/irs-pdf/i8606.pdf . Every taxpayer's situation is different and we're all sure to have some tiny exception to the conventional wisdom that'll screw up otherwise sound advice.
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Re: 401(k) to roll or not?
Old 01-28-2005, 11:56 AM   #8
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Re: 401(k) to roll or not?

Quote:
If you have a 401(k) with an employer and are leaving that employment, you can leave the 401(k) there if you have more than $5000 in the 401(k). *The employer can require you to take out or rollover amounts less than $5000.

Before rolling over that 401(k), remember that 401(k)s are protected under ERISA from claims of creditors to a far greater extent that an IRA is protected. *I am comforted by that protection and given that my choices and expenses in my particular 401(k) plan are good, I am unlikely to ever roll it over on leaving employment.

Martha
Martha, do you happen to know whether the protections from 401k plans extend to the newer solo 401ks?
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Re: 401(k) to roll or not?
Old 01-28-2005, 12:06 PM   #9
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Re: 401(k) to roll or not?

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And then convert that puppy (IRA) to a Roth before your SS kicks in.
When you convert an IRA to a Roth, don't you have to pay the taxes on the converted money?

I had planned to do that anytime my fed tax rate went down to 15% over the next several years , as I assume that after I sell my house in the future, the additional investment income will probably put in the equivalent of today's 25% tax bracket.

Is that a good idea?

MJ ???
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Re: 401(k) to roll or not?
Old 01-28-2005, 12:07 PM   #10
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Re: 401(k) to roll or not?

Quote:

Martha, do you happen to know whether the protections from 401k plans extend to the newer solo 401ks?

Yes they have the same protections under ERISA.
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Re: 401(k) to roll or not?
Old 01-28-2005, 01:46 PM   #11
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Re: 401(k) to roll or not?

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Before rolling over that 401(k), remember that 401(k)s are protected under ERISA from claims of creditors to a far greater extent that an IRA is protected. *I am comforted by that protection and given that my choices and expenses in my particular 401(k) plan are good, I am unlikely to ever roll it over on leaving employment.
I'm keeping my 403(b) for that reason. Martha, wasn't there federal legislation in the works at one time that would provide the same protections to IRAs? Also, do you happen to know if SEPs and SIMPLEs are protected under ERISA?
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Re: 401(k) to roll or not?
Old 01-28-2005, 03:43 PM   #12
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Re: 401(k) to roll or not?

Thanks for the rollover info.

Yes Martha, I'm 3 weeks into my program and loving it. I just ordered my vegetable seeds and will start my seeds indoors so I can get started as soon as they get here. I have 3 brand new raised beds just waiting for the plants. We don't have snow, but it's still too early. Happy gardening.
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Re: 401(k) to roll or not?
Old 01-28-2005, 04:09 PM   #13
 
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Re: 401(k) to roll or not?

I'm sticking with my traditional IRA for now
(still untouched). It makes no sense to me that
401Ks and 403Bs have "creditor protection" while IRAs
do not. Does anyone know why this is? (other than the
whims and vagaries of politics)?

JG
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Re: 401(k) to roll or not?
Old 01-29-2005, 05:24 AM   #14
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Re: 401(k) to roll or not?

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I'm keeping my 403(b) for that reason. Martha, wasn't there federal legislation in the works at one time that would provide the same protections to IRAs? Also, do you happen to know if SEPs and SIMPLEs are protected under ERISA?

The SEPS and SIMPLEs are treated the same as other IRAs. The Supreme Court this summer will likely give more guidance on how much protection IRAs have under federal law. There is some chance that the decision will lead to legislation at the federal level.

Martha

EDIT: I should clarify that there are also SIMPLE 401(k)s and they get the benefit of the 401(k) treatment.
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Re: 401(k) to roll or not?
Old 01-29-2005, 05:51 AM   #15
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Re: 401(k) to roll or not?

Bankruptcy "reform" bills have been stalled since before Clinton left office. It is likely at some point a bill will pass but it is difficult to predict yet what form it will take. In more recent forms of the bill, IRA's (except for some exceptions for things like educational IRAs) would be protected up to a value of a million dollars. However, part of the bill provided that creditors could have you waive your exemptions in retirement plans when signing up for credit. You can bet that credit card companies would immediately amend there credit agreements to provide for waiver of the exemption. Still stalled. I think it is unlikely the credit card companies will get their way on this issue.

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Re: 401(k) to roll or not?
Old 01-29-2005, 09:29 AM   #16
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Re: 401(k) to roll or not?

Hey Nords (or anybody),

If you decide to follow the strategy of partial
conversions to a ROTH each year is the
amount converted put in a common ROTH
or must you create a separate ROTH each
year? The reason I ask is that I am wondering
how they keep track of the 5 year rule if
everything is dumped in the same pot.

Thanks,

Charlie
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Re: 401(k) to roll or not?
Old 01-29-2005, 02:28 PM   #17
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Re: 401(k) to roll or not?

The experts on the board may correct me, but it is my understanding that the 5-year rule applies to the ROTH account itself, not the annual contributions.
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Re: 401(k) to roll or not?
Old 01-29-2005, 02:29 PM   #18
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Re: 401(k) to roll or not?

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And then convert that puppy (IRA) to a Roth before your SS kicks in.
When you convert an IRA to a Roth, don't you have to pay the taxes on the converted money?

MJ
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Re: 401(k) to roll or not?
Old 01-29-2005, 03:21 PM   #19
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Re: 401(k) to roll or not?

Yes MJ you do pay taxes, but with a small income the taxes would be small (theoretically).
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Re: 401(k) to roll or not?
Old 01-29-2005, 03:35 PM   #20
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Re: 401(k) to roll or not?

Thanks Martha. I wouldn't even care about these protections were it not for the runaway costs of health care, and the fact that we're stuck with at least another four more years before anyone even starts doing anything about it. The Washington Post had an interesting article today about hospitals charging low-income, uninsured patients as much as 6 times more than insured patients, and then going after them with a vengeance to collect. These are big hospitals who pay zero taxes. They get their tax exempt status by promising to provide charity care to those who can't afford to pay. Meanwhile, their executives fly around in private jets and are paid fortunes.
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