mickleover said:
I took ER from a large corporation just a few days ago, and would appreciate comments on a subject I've never seen discussed in any financial literature: whether to move 401(k) money from the company plan to the outside, e.g. broker and mutual funds. Obviously the latter gives access to a far greater variety of investment choices, among which will be better and worse performers. But are there any drawbacks which I'm not aware of to leaving my funds in the company plan? Conversely, are there any advantages?
As mentioned already you can withdraw from a 401(k) earlier without any tricks, and there is the liability thing. The court ruling is very recent and very new.
Other things to consider are sell/buy issues and trust. In my case my 401(k) trustee was Vanguard, and everything I heard said that my money was completely untouchable by the company if they did something stupid or corrupt like has happened with some pension plans. Still I felt more comfortable in an IRA because there's no doubt in my mind the company can't touch it no matter what happens now. And since the trustee was Vanguard and my rollover IRA is with Vanguard the rollover was in kind...didn't require any buying or selling of shares.
If you have company stock in your 401(k), for example, there may or may not be issues with moving that...it may trigger a sell event. I don't know, but be sure to check that out. Same thing with funds. Maybe you have Fidelity funds and are rolling into a Vanguard IRA...I wouldn't expect problems there but would thoroughly check it out.
Also I notice company 401(k) will tell you all about how to get your money out via annuities, but if you want to find out how to roll your investment away from them that information is very hard to come by. I'm fairly certain you are allowed to do this, so don't let them tell you you can't.
Probably most importantly be sure you do a direct rollover if you transfer funds. If they cut you a check or distribute similarly they will withhold 20% for taxes, and if you don't depost 100% of the withdrawn amount (including the withheld 20% made up by you in cash) into a qualified plan (IRA, other 401(k), etc.) you'll be liable for income tax on the difference plus the 10% penalty. But if you make sure you do the paperwork for direct rollover all the shares/money go straight to the new account with no tax worries.
By the way, the company you're rolling into will probably be of more help than the company you're rolling away from.
More on withdrawals: The 401(k) allows earlier withdrawals with no tricks, but you can withdraw from an IRA before 59 1/2 using the 72(t) rule to withdraw substantially equal periodic payments based on your life expectancy. You're more or less stuck with a withdrawal amount--your choice of % of assets or flat amount if I recall correctly--for the greater of 5 years or until you reach age 59 1/2. There are penalties for running out of money using the 72(t) plan. More details can be found at
http://72t.net and
http://www.retireearlyhomepage.com/wdraw59.html .
Another thought: If you do roll the assets somewhere else and avoid comingling with after-tax funds (like after-tax IRA contributions, for example) you can later roll back into another 401(k) or qulified plan, so there are future options. (Oh, you said you ER'ed, so hopefully you won't have to consider going back into a plan.)
(Cross-posted with Martha. She's our local expert on the IRA protection ruling.)
In summary, if I were closer to or older than age 55 I would have considered taking withdrawals from the 401(k), but I'm 35 and have heard too many horror stories of guaranteed pensions evaporating in company bankruptcy, and even though I think the 401(k) should be safe from that I feel safer having it in an individual rollover IRA. Any asset-specific issues need to be looked at, but in my case it was all Vanguard mutual funds.