Lost job today, 401k question

[Lisa99]

My DH lost his job today in a corporate downsizing. He's happy about it since the environment was toxic. This gave him the push to find something he's happy with since money isn't a concern.

One of the decisions we have to make is whether to leave his 401k where it is or roll it into a Vanguard IRA.

I've done some googling but thought I'd ask the experts. Are there any reasons financially to not move his money into a roll-over IRA? He's 48 so the one reason I found re: being able to use the money penalty free if you retire at 55 doesn't apply.

 

[LOL!]

If he leaves it in the 401(k), then the assets will not affect something called a "backdoor Roth IRA" if that is a possibility in the future.

 

[daylatedollarshort]

401Ks are usually asset protected because of ERISA, but with IRAs the level of asset protection depends on state law. Also 401Ks may have a stable value fund not available to the general public, so that is one other consideration.

 

[Alan]

If he leaves it in the 401(k), then the assets will not affect something called a "backdoor Roth IRA" if that is a possibility in the future.

Another thing to consider if it applies. I left my money in my 401k until after I had converted my tIRA to a ROTH. The 401k was substantial and 100% tax deferred. My tIRA was much smaller and had a significant after-tax basis so converting it before the 401k was rolled into an IRA meant I paid tax on only the gains of the tIRA.

 

[golfnut]

If the 401k has good selection of funds (both equity and bonds) and has low expense ratios (below .4) and no other fees, I would probably leave it in the 401K.

 

[Bestwifeever]

Nm

 

[Clover5]

Another thing to consider if it applies. I left my money in my 401k until after I had converted my tIRA to a ROTH. The 401k was substantial and 100% tax deferred. My tIRA was much smaller and had a significant after-tax basis so converting it before the 401k was rolled into an IRA meant I paid tax on only the gains of the tIRA.

Need some help here. My assumption was that the tax basis for the tIRA to ROTH backdoor was based on gains prior to any 401k conversion funds... I think you are saying that the 401k dollars are part of the gain?

 

[Bestwifeever]

Really glad that your DH's job loss is a positive development for him, Lisa, so congrats!

And agree with others that the available funds are one factor in the rollover decision.

 

[Alan]

Need some help here. My assumption was that the tax basis for the tIRA to ROTH backdoor was based on gains prior to any 401k conversion funds... I think you are saying that the 401k dollars are part of the gain?

When you convert some IRA money to a ROTH you cannot pick and choose which IRA money to convert. Suppose you have rollover IRA of $400k from a 401k which was all funded from tax-deferred contributions and you have a tIRA which you funded with $60k of after tax money and it is now worth $100k. If you convert $50k to a Roth the amount of basis you can convert is a proportion of the total of all IRA's. $50k is 10% of the all your IRA's so when you do the conversion you get 10% of your basis tax free, i.e. 10% of $60k, which = $6k, and you pay tax on $44k. Your basis going forward is now $54k.

If you don't do do a rollover, and leave that $400k in the 401k, then the only IRA money is the $100k in the tIRA so when you convert $50k, you get 50% of the basis which is $30k and you only pay tax on $20k instead of the $44k in the example above. You now have a tIRA worth $50k with a basis of $30k, plus a ROTH of $50k.

This is what I did when I retired, leaving the 401k money where it was until I had converted my tIRA which all funded on after tax money, so I only paid taxes on the gains within that tIRA.

 

[Animorph]

Need some help here. My assumption was that the tax basis for the tIRA to ROTH backdoor was based on gains prior to any 401k conversion funds... I think you are saying that the 401k dollars are part of the gain?

The tax basis used for Roth conversions is the amount of nondeductible tax contributions you made to all similar existing IRA's. You have no choice about it. So if all your current IRA's had only nondeductible contributions and no growth (a typical "backdoor" Roth situation), the taxes due on conversion can be $0 ($6500 "income" - $6500 basis). However, if you rollover a $200k 401k into an tIRA, you have $0 tax basis in that IRA (assuming the 401k was all pre-tax contributions). And now your $6500 "income" for the "backdoor" Roth conversion is offset by a basis of $6500 * ($0 + $6500) / ($200,000 + $6500), only $204.60 . You owe taxes on a net "income" of $6500 - $204.60 = $6295.40 . That's almost a pure Roth conversion, not a contribution.

 

[pb4uski]

If your DH's plan includes a stable value fund that is paying a decent interest rate that would be a reason to stay given the current and expected future interest rate environment.

 

[explanade]

How long do they typically allow you to maintain your 401k?

 

[Texas Proud]

Another reason is if you own company stock.... it is late, so I am not looking it up...

But, if you own shares of company stock, you can take it out as stock and only have the cost basis as taxable income....

An example.... you bought shares over the years and they cost $50K.... when you are (IIRC) 59 1/2 you take out the shares and they are worth $200K.... you would only have taxable income on the $50K.... the gain is not taxable... (at least not until you sell, and then it is cap gains)....


That is the main reason I left my money in my mega 401.....

 

[Lisa99]

Thanks everyone for your input.

We will start doing a backdoor roth once I retire so we'll leave his 401k where it is. Plus there are some decent very low cost funds in his 401k that align with our asset allocation so no reason to move the money.

 

[2B]

I suggest you not leave it there indefinitely. Plans can change or even end. I have heard horror stories about people that had 401k plans with tech companies that went belly up after 2000 found that the plans became orphans. The company was defunct and no longer paid to administrator. Without pay, the administrator didn't do anything for the people with 401ks. I'm not sure how it all worked out. I'd feel much safer with my money with Vanguard (or others).

I don't understand how a backdoor Roth could be done any differently from a 401k than a tIRA.

 

[Lisa99]

Good point 2B.

It won't be indefinite but not concerned about the company's stability right now. They're an industry leader and have billions in free cash.

 

[cinman2000]

My preference when changing jobs has always been to move it out of the company 401k into a self directed IRA. Much more flexibility. Until recently I thought that if I waited until Jan 2015 (the year I turn 55) to retire that I would be able to take money out as needed without a 10% penalty. As it turns out in reading the fine print, that is true, but I must withdraw the entire amount and pay taxes on it in that year. Being that this is 50% of my retirement savings, that is not going to work. Now I will be headed towards a rollover and 72t when the time comes to RE.

 

[GrayHare]

No-penalty withdrawals from a 401k can occur starting at age 55, but if you xfer those dollars into an tIRA, you have to wait until age 59.5.

 

[cinman2000]

No-penalty withdrawals from a 401k can occur starting at age 55, but if you xfer those dollars into an tIRA, you have to wait until age 59.5.

Below is one of the exceptions to the 10% penalty directly from the IRS site. It does not exclude IRA's from 72t rules. Am I missing something?

"Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply."

 

[gozer]

No-penalty withdrawals from a 401k can occur starting at age 55, but if you xfer those dollars into an tIRA, you have to wait until age 59.5.

I thought that in order to withdrawal money from a 401k at 55, with no penalty or special considerations, you had to be working in the year in which you turned 55.

 

[Rustward]

I guess I'd read up in the IRS pubs or, heaven forbid, consult a professional on the really important issues.

 

[Walt34]

I have heard horror stories about people that had 401k plans with tech companies that went belly up after 2000 found that the plans became orphans. The company was defunct and no longer paid to administrator. Without pay, the administrator didn't do anything for the people with 401ks. I'm not sure how it all worked out. I'd feel much safer with my money with Vanguard (or others).

That happened with a bunch of people I worked with at my last job. The previous company went bankrupt and it took two years and a lawyer's help to get the funds in the 401ks out. They did, however, get it out. Minus attorney's fees, of course.

That's why when I left the job I immediately put the 401k money in an IRA so if the company goes BK then their problems don't become my problem.

 

[CoolChange]

I have always left my 401(k) money in place since I have been fortunate to have relatively good plans and wanted the extra protection (maybe protection diversification) of provided by having money in 401(k)'s. Now, I have more to consider:

In favor of leaving money in 401(k)'s: Talk of tax savings for Roth conversions. I do not understand this yet and need to know more.

In favor of rolling into IRA's: Fear of companies going bankrupt, etc. This is not likely but not out of the realm of possibility. It is not something I had worried about in the past since the custodians are large, well respected firms like Fidelity. But, it sounds like thee could still be serious (and potentially expensive) issues with getting my $$$ if my old companies went belly up.

I will definitely continue to follow this discussion hoping for additional insight.

 

[sengsational]

I suggest you not leave it there indefinitely. Plans can change or even end. I have heard horror stories about people that had 401k plans with tech companies that went belly up after 2000 found that the plans became orphans. The company was defunct and no longer paid to administrator. Without pay, the administrator didn't do anything for the people with 401ks. I'm not sure how it all worked out. I'd feel much safer with my money with Vanguard (or others).

I don't understand how a backdoor Roth could be done any differently from a 401k than a tIRA.

Mine wasn't full-on horror, but I left it there for a while until I had a 401k at my new employer. But before that one was ready, the insiders at my previous employer bailed out of the 401k, because they knew what was happening. Then they announced they were dissolving the plan, and the suckers that were left had to pay the legal fees proportionally to the assets they had. It was under $200, but it stung. And my goal, to get it in the new employer 401k was thwarted.

 

[sengsational]

When you convert some IRA money to a ROTH you cannot pick and choose which IRA money to convert. Suppose you have rollover IRA of $400k from a 401k which was all funded from tax-deferred contributions and you have a tIRA which you funded with $60k of after tax money and it is now worth $100k. If you convert $50k to a Roth the amount of basis you can convert is a proportion of the total of all IRA's. $50k is 10% of the all your IRA's so when you do the conversion you get 10% of your basis tax free, i.e. 10% of $60k, which = $6k, and you pay tax on $44k. Your basis going forward is now $54k.

If you don't do do a rollover, and leave that $400k in the 401k, then the only IRA money is the $100k in the tIRA so when you convert $50k, you get 50% of the basis which is $30k and you only pay tax on $20k instead of the $44k in the example above. You now have a tIRA worth $50k with a basis of $30k, plus a ROTH of $50k.

This is what I did when I retired, leaving the 401k money where it was until I had converted my tIRA which all funded on after tax money, so I only paid taxes on the gains within that tIRA.

Thanks for that example. The difference is that you take advantage of the $60k basis in two years (2 50k conversions, and you have all of your after tax money in the Roth, 30k each year). Whereas if the 401k was rolled in, You'd only get $6k of the tax free basis per year, so would take 10 years to get the entire advantage. So what you're looking at is really the gains on what remains of your original $60k inside the tIRA? The longer that after tax money stays in the tIRA (creating gains) the more tax you'll pay on conversion because if it had made it to the Roth sooner, those gains would be tax free. So even though you'll "run out" of tax free conversions after two years, and the alternative strings out the smaller but eventually equal tax free conversions, the advantage is to get the gains inside the Roth. Have I got that right?