401K or IRA, or does it matter?

[tony soprano]

Hello all,

I'm 55 and less than 12 months out from pulling the plug. I'll be 56 when I make my exit. My tax-deferred investment funds are split between my current employer's 401K plan, and an ETrade IRA that was created by rolling over my previous employer's 401K plan when I left. The current allocation by dollar amount is ~40% in my 401K and ~60% in my IRA.

My employer's 401K plan will allow me to roll my IRA funds into my 401K. My first thought was it would be a good idea to do so, because the "rule of 55" would allow access to the funds without penalty. However, the downside is my employer's 401K is primarily limited to target-date funds. There is a "self-directed" option, which I've elected to do. The self-directed plan transfers the 401K funds to a Charles Schwab brokerage account where I can buy individual stocks, bonds, ETFs, etc. When I leave my current employer, I'll be charged a service fee of $10 a month if I leave the funds in the self-directed Schwab account.

I have enough funds in post-tax investment accounts and savings that it's highly unlikely the rule of 55 would ever have to be exercised. I've searched and read every thing I can on the pros and cons of 401Ks vs IRAs, and vice-versa. Nothing has really jumped out to me as showing a distinct advantage for one or the other. I wanted to check with the collective wisdom of this forum to make sure there's not something I've missed. Is there any compelling reason to roll my IRA into my current 401K? Alternatively, any reason I should roll over my 401K into my IRA when I leave my current employer?

Thanks!

[davebarnes]

IRA.
Never have money in a 401k if you don’t have to.
401(k) Woes When a Company Goes Bankrupt — Fair Game - The New York Times

[Dtail]

Quote:

Originally Posted by tony soprano Hello all, I'm 55 and less than 12 months out from pulling the plug. I'll be 56 when I make my exit. My tax-deferred investment funds are split between my current employer's 401K plan, and an ETrade IRA that was created by rolling over my previous employer's 401K plan when I left. The current allocation by dollar amount is ~40% in my 401K and ~60% in my IRA. My employer's 401K plan will allow me to roll my IRA funds into my 401K. My first thought was it would be a good idea to do so, because the "rule of 55" would allow access to the funds without penalty. However, the downside is my employer's 401K is primarily limited to target-date funds. There is a "self-directed" option, which I've elected to do. The self-directed plan transfers the 401K funds to a Charles Schwab brokerage account where I can buy individual stocks, bonds, ETFs, etc. When I leave my current employer, I'll be charged a service fee of $10 a month if I leave the funds in the self-directed Schwab account. I have enough funds in post-tax investment accounts and savings that it's highly unlikely the rule of 55 would ever have to be exercised. I've searched and read every thing I can on the pros and cons of 401Ks vs IRAs, and vice-versa. Nothing has really jumped out to me as showing a distinct advantage for one or the other. I wanted to check with the collective wisdom of this forum to make sure there's not something I've missed. Is there any compelling reason to roll my IRA into my current 401K? Alternatively, any reason I should roll over my 401K into my IRA when I leave my current employer? Thanks!

It appears to be no, but just checking if your 401k a/c has any Stable Value option. This option could be very helpful as part of an allocation decision.

[gauss]

I have written on several advantages of 401ks over IRAs before on other threads.

A few other advantages that come to mind.

In a 401k you will never wind up with a high cost broker, (perhaps via a free meal offer) who will end up churning your account year after year.

In a 401k, the company is generally required to track your basis. In an IRA this will be your responsibility. If you are unsophisticated, you will likely end up with a $0 basis by your taxpreparer whether this is true or not.

Better asset protection (from lawsuits) in 401ks than IRAs in some states. If the vast majority of your assets are exempt from lawsuit/bankruptcy, you worry less about insurance issues.

Potentially access to "stable value" funds in 401ks that are not available outside of group plans.

Rule of 55.

Please be aware that the IRA companies have spent big $ on advertising/marketing over the past few decades about the advantages of rolling from a 401k to an IRA. This is in their best interest. This has shaped popular opinion. Many people will say that you should rollover just because they have been conditioned by the marketing and not because they have studied the issues.

That all being said, if your 401k has high fees or the options don't meet your needs than these may be good reasons to change. In my case this would mean no index funds, or extremely high cost index funds.

The NY Times articles, above, does give me pause, but I would think if there were more than 100 employees involved that someone would go to court to attempt to have the trustee removed or force the 401k termination issue.

-gauss

[pjm-7]

Remember, once you roll over to an IRA the age 55 rule no longer applies. The IRS looks at where the money came out of not the original. You might want to hold the 401k for just a couple of years just to be safe.

[Gumby]

One thing to consider is your 401k plan rules. They might not allow the periodic withdrawals that you might need.

See this short article

http://www.chicagotribune.com/busine...120-story.html

[JoeWras]

If planning Roth conversions, and you have non-deductible basis, or plan to do backdoors, then where it is (IRA vs 401k) also matters.

[harley]

Quote:

Originally Posted by gauss In a 401k you will never wind up with a high cost broker, (perhaps via a free meal offer) who will end up churning your account year after year.

Depends on the 401k and what investments are offered. DW's choices are so high priced I've advised her not to use it (no match), and just put the money in after tax investments. Ah, I see you covered that a bit later in your post.

Quote:

In a 401k, the company is generally required to track your basis. In an IRA this will be your responsibility. If you are unsophisticated, you will likely end up with a $0 basis by your taxpreparer whether this is true or not.

Does basis matter at all in an IRA? I thought you just paid taxes on withdrawals based on your tax bracket. No tracking of basis for capital gains required. Is that wrong?

[Dtail]

Quote:

Originally Posted by harley Depends on the 401k and what investments are offered. DW's choices are so high priced I've advised her not to use it (no match), and just put the money in after tax investments. Ah, I see you covered that a bit later in your post. Does basis matter at all in an IRA? I thought you just paid taxes on withdrawals based on your tax bracket. No tracking of basis for capital gains required. Is that wrong?

I was thinking the same question. Perhaps the reference was for keeping track of non deductible vs. deductible IRA?

[kaneohe]

Quote:

Originally Posted by harley ................................. Does basis matter at all in an IRA? I thought you just paid taxes on withdrawals based on your tax bracket. No tracking of basis for capital gains required. Is that wrong?

In gauss's excellent review of 401K v IRA, I believe he is talking about non-deductible contributions (basis) which is non-taxable when withdrawn........not the cost basis used for CG calculations........no CG in tax-deferred accts.

[gauss]

Thanks Kaneohe,

Yes I was referring to the "after-tax basis" in contributions to the IRA when a tax benefit was not taken the year of the contribution.

There is no such thing as a non-deductible vs deductible IRA. If it is not a Roth IRA then it is a traditional IRA. The thing that can change each year is if your contributions are deductible vs non-deductible and whether you actually take the deduction or not.

So yes, in some cases in can be very simple, but be prepared to answer the more general questions about this if you wish to have a proper tax return down the road when you take distributions from the IRA.

-gauss

p.s. If you have an after-tax basis in your 401k and you roll it to an IRA, then then the IRA company will not keep track of this for you.

[Scuba]

I think it really depends on several variables. In my case, the 401K fees were relatively high, investment choices were limited, and I didn’t plan to tap into the funds between ages 55-60. Therefore, it made sense for me to roll it over into a self-directed IRA with very low fees. However, if you like the options available in your 401K, may want to access it before 59.5, and you think the fees are reasonable, sounds like the 401K could work for you. Just make sure you truly understand ALL the fees as they are not necessarily that transparent.

[tony soprano]

Thanks all, for your input! The self-directed option from my employer's 401K transfers funds to a Schwab brokerage account which gives me access to most all the investment options the 401K lacks. Otherwise, the 401K plan is heavily focused on target-date funds. If I leave the funds in the Schwab account when I leave my current employer they'll charge me a $10 a month service fee. I'll need to look more closely for any additional fees I might not be aware of.

Quote:

Originally Posted by JoeWras If planning Roth conversions, and you have non-deductible basis, or plan to do backdoors, then where it is (IRA vs 401k) also matters.

Can you expand a little more on this? This is an area I'm particularly interested in. When I leave my current employer I will be moving out of California to Nevada (no state income tax). At that point I thought I'd start Roth conversions. My current income excludes me from having a Roth IRA and I didn't have the foresight to make any aftertax 401K contributions.

[JoeWras]

Quote:

Originally Posted by tony soprano Can you expand a little more on this? This is an area I'm particularly interested in. When I leave my current employer I will be moving out of California to Nevada (no state income tax). At that point I thought I'd start Roth conversions. My current income excludes me from having a Roth IRA and I didn't have the foresight to make any aftertax 401K contributions.

Conversions must be done on a pro-rata basis.

If you currently are filing a form 8606 with a non-deductible basis, and plan on doing conversions, it is not a good idea to roll over 401k money into an IRA because you'd have to convert a pro-rata amount of taxable income.

If you have no 8606 basis, then it really doesn't matter.

I'm not talking Roth IRA, I'm talking traditional IRA with non-deductible contributions. As Turbo Tax might say: "This is not typical." However, for those who have done it -- for various reasons -- the total value of all IRAs comes into play when doing conversions.

Sounds like you probably didn't do this.

[samclem]

If you are planning on "age 55 rule" withdrawals from a 401k, be sure to check the Plan Document to see if they are allowed. This is up to the employer and is not universal.

[thepalmersinking]

The self directed option in a 401(k) is the best thing ever created. I can sell covered calls for extra income and buy new IPOs within the plan when I want to use a small mat.

[MarieIG]

This is a timely thread for me, and something which I am also considering. I switched jobs a year ago. My new 401(k) is better than my old one, (John Handcock now, ABA Retirement before) but still somewhat stinky.

It does have some lost cost fund options, but there is a .19 percent administrative fee - and there are also costs in the fine print for withdrawals. The plan does allow in plan Roth conversions, so I was thinking about starting the conversions after DH retires. As far as withdrawals, I would do a single rollover before age 70, as I have no intention on paying a separate fee for each and every separate withdrawal.

My dilemma comes with an old rollover I have at Vanguard. I have both some traditional IRAs that I will want to convert to Roth after I retire, and the old rollover from an old job which is all pre-tax money. I am not paying that .19 administrative fee over at Vanguard, so I don't know if the rollover is worth it, and if so, when to do it. Currently, my taxes are high as we are a two income couple in a high COLA, and there is some investment income on top of that.

[Which Roger]

In 2014, The IRS ruled that when one has both pre- and post-tax contributions in a 401k, the post-tax contributions can be rolled over to a Roth IRA, the the rest of the balance to a TIRA, without the pro rata rules that would apply if one was rolling over from IRA to IRA. Dunno if this will change with the new tax law.

https://www.kitces.com/blog/irs-noti...th-conversion/

[gauss]

Quote:

Originally Posted by samclem If you are planning on "age 55 rule" withdrawals from a 401k, be sure to check the Plan Document to see if they are allowed. This is up to the employer and is not universal.

I think this is a is a bit confusing.

What you need to look for is if your plan will allow partial distributions prior to age 59 1/2 once your employment has ended and if so are there any conditions on this. There does not need to be any plan document description specific to rule of age 55.

Hopefully the company will comply with IRS direction on 1099-R and assign you a code 2 (ie Early Distribution, Exception Applies).

Even if the company incorrectly assigns code 1, you can correct this on IRS Form 5329.

Quote:

Use Code 2 only if the participant has not reached age 5912 and you know the distribution is the following. A Roth IRA conversion (an IRA converted to a Roth IRA). A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331. A governmental section 457(b) plan distribution that is not subject to theadditional 10% tax. But see Governmental section 457(b) plan distributions, earlier, for information on distributions that may be subject to the 10% additional tax. A distribution from a qualified retirement plan after separation from service in or after the year the participant has reached age 55. A distribution from a governmental defined benefit plan to a public safety employee (as defined in 72(t)(10)(B)) after separation from service, in or after the year the employee has reached age 50. A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v). A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA). Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using Code 1, 3, or 4.

-gauss

[bada bing]

Quote:

Originally Posted by gauss Thanks Kaneohe, -gauss p.s. If you have an after-tax basis in your 401k and you roll it to an IRA, then then the IRA company will not keep track of this for you.

If you have after-tax basis in a 401K, it is important and advantageous to roll the
after-tax into a Roth IRA ASAP. That in a nut shell, is what is commonly called "Mega
Backdoor Roth conversion". Some plans don't allow in plan distributions while employed.
You can do it after you leave the employer regardless. If you have after-tax money
in a 401K plan and the plan doesn't allow just rolling out the after-tax portion, that
would be a very big reason to roll the whole 401K over and segregate the money
into Roth IRA and pre-tax tIRA.

That is a difference between after-tax basis in a tIRA that got there by making direct,
non-deductible contributions to the IRA or rolling after-tax money from a 401K into a
tIRA. Conversion of tIRA funds has to follow pro-rata rules. Segregating funds at the
time of a roll over has no pro-rata calculations and no taxes due. Very important to manage
the roll over correctly if you have after-tax basis in the 401K.