401k rollover

[eridanus]

A friend is leaving a job and is trying to roll over her 401k to an IRA. Her employer told her that there is a 1-year "wait period" to do a rollover. In other words, my friend has to wait 1 year from her quit date before any rollover can occur.

I've never encountered this but it's been a while since I've had to do a rollover. Is this part of the new 401k regulations or is this an employer rule?

 

[tightasadrum]

Sounds like an employer "rule". Is it a small company? I would ask to see the written documentation that supports this rule. I'm naturally suspicious about money anyway, so I would be concerned about something going on that is not quite on the up and up. But it's probably nothing and in the rules, but I would check it. As a former manager, I learned to trust people's word to get something done, but follow up. It made everyone a lot more trustworthy.

 

[eridanus]

Yes, it is a small company and, yes, I've found nothing about an IRS wait period on the net.

If Vanguard comes calling with a transfer form, does the employer rule matter once you're no longer an employee? I'm thinking the employer rules can be used as toilet paper at that point.

 

[MichaelB]

The terms for withdrawing the funds should be specified in the 401(k) summary plan document, which the friend should have. There are legitimate reasons for a company to keep the funds for an extended period, such as investments in thinly traded company stock or other illiquid assets. The reasons themselves are not spelled out in the summary, but the waiting period must be, or it is not valid.

 

[jazz4cash]

The employer determines whether 401k rollovers are permitted. My theory is that the Plan Administrator encourages the employer to not permit rollovers so it is more difficult for participants to move thier money. I have not heard of a holding period before, but it still fits my theory. Whenever I initiate a rollover from my 401k at Fidelity, the rep sounds skeptical until they review the details of our plan and then confirm "Yes!, you plan does permit rollovers!", sounding quite surprised and seem to believe they are telling something I did not already know.

In our plan issues pertaining to thinly traded funds, high transaction costs, etc. are addressed with a fee for selling shares held less than xx days for certain funds so that inter-fund trading is discouraged as well as rollovers.

There may also be a a vesting period the employer can impose pertaining to the company match. The above suggestion to dig through the Summary Plan Description is the best action.

 

[eridanus]

The employer determines whether 401k rollovers are permitted.

So a former employer can just hold your money until you're 65 and[or] start withdrawals? I'm skeptical of that.

There may also be a a vesting period the employer can impose pertaining to the company match.

Yeah, I figured they'd do this with a clawback and not a complete hold.


We'll get the Summary and go over it. Thanks, folks.

 

[jazz4cash]

So a former employer can just hold your money until you're 65 and[or] start withdrawals? I'm skeptical of that.



Yeah, I figured they'd do this with a clawback and not a complete hold.


We'll get the Summary and go over it. Thanks, folks.

I sorta missed the part where your friend is leaving her job. Once she is no longer an active employee, different rules apply. Actually in that case, the plan is REQUIRED to offer her the option to leave her assets in place if they are over some threshold (3k, maybe). I think a former employee would almost always be able to do an IRA rollover.

 

[ChadR]

Just be careful doing an IRA rollover if your friend has high income and wants to do a backdoor ROTH IRA.

I didn't think I'd ever need a backdoor roth IRA option and rolled over my 401K into an IRA but after getting married I no longer qualify for the roth IRA and have way to large of an IRA already from my rollover.

 

[Alan]

Just be careful doing an IRA rollover if your friend has high income and wants to do a backdoor ROTH IRA.

I didn't think I'd ever need a backdoor roth IRA option and rolled over my 401K into an IRA but after getting married I no longer qualify for the roth IRA and have way to large of an IRA already from my rollover.

Once you have completed the rollover into an IRA you can convert small amounts from it, not the whole thing. Maybe I've not understood what you mean.

 

[ChadR]

Once you have completed the rollover into an IRA you can convert small amounts from it, not the whole thing. Maybe I've not understood what you mean.

Well some people (myself being one) don't want to convert their traditional 401K money to a Roth. And now that I've personally done a rollover into a traditional IRA I can't take advantage of the backdoor roth without paying taxes on the gains in my rollover IRA since you can't pick and choose.

 

[Alan]

Well some people (myself being one) don't want to convert their traditional 401K money to a Roth. And now that I've personally done a rollover into a traditional IRA I can't take advantage of the backdoor roth without paying taxes on the gains in my rollover IRA since you can't pick and choose.

When you said, "I no longer qualify for the roth IRA and have way to large of an IRA already from my rollover.", I was only pointing out that you could convert small portions of it to take advantage of lower tax rates.

I completely understand your position if you are already in a high tax bracket before any conversions.

 

[Animorph]

When you said, "I no longer qualify for the roth IRA and have way to large of an IRA already from my rollover.", I was only pointing out that you could convert small portions of it to take advantage of lower tax rates.

I completely understand your position if you are already in a high tax bracket before any conversions.

Doing a Roth conversion of a small IRA with only post-tax money in it costs roughly $0 in additional taxes (and doesn't increase your income). That's the "backdoor" Roth contribution scheme. Useful if your income is too high to make a regular Roth contribution.

However, if you already have an IRA with pre-tax money in it, the IRS assumes that the Roth conversion proportionately draws from all IRA's. That means the Roth conversion of a small IRA with only post-tax money in it becomes the conversion of a small part of the post-tax IRA and a larger part of the pre-tax IRA (in proportion to their balances). That will increase you income and taxes will be due. It essentially shuts the "backdoor" and limits you to normal Roth conversions with taxes to pay.

 

[Alan]

Doing a Roth conversion of a small IRA with only post-tax money in it costs roughly $0 in additional taxes (and doesn't increase your income). That's the "backdoor" Roth contribution scheme. Useful if your income is too high to make a regular Roth contribution.

However, if you already have an IRA with pre-tax money in it, the IRS assumes that the Roth conversion proportionately draws from all IRA's. That means the Roth conversion of a small IRA with only post-tax money in it becomes the conversion of a small part of the post-tax IRA and a larger part of the pre-tax IRA (in proportion to their balances). That will increase you income and taxes will be due. It essentially shuts the "backdoor" and limits you to normal Roth conversions with taxes to pay.

Nicely worded.

That's why I did my Roth conversion of my small post-tax IRA the year before I did my 401k rollover.