Question re: Rollover from High-Fee 401K to IRA, and Possibly to Roth IRA

[Mo Money]

I retired a few months ago. I am 54, and I have a large retirement plan balance from my former j*b. I will have substantial taxable income this year because I worked full time till a few months ago, and because of a large 6-figure taxable windfall that landed in my lap about a month ago. So my tax bracket will be very high this year.

My 401K is an okay performer but its financial adviser charges me almost 1% in management fees, plus the funds in the portfolio have their own fees on top of that. The retirement plan is part 401K (“profit sharing”), and part Roth 401K.

Apart from retirement plan $ as described above, I have about 10-20 years of living expenses in after-tax non-retirement accounts, so I can afford not to touch the retirement plan $ for a while.

My state protects IRA funds from judgments, and I have a large 2MM umbrella policy, BTW.

My current plan:
(a) roll over the traditional 401K into a Schwab traditional IRA, choosing Vanguard index funds. (I’d like to keep the IRA at Schwab because all of my other $ is there, and I like the convenience of having my $ in one place.)
(b) roll over the Roth 401K into a Schwab Roth IRA, choosing Vanguard index funds.
(c) when i-Orp indicates that it makes sense (likely in future years, not this year given my high 2015 taxable income), I’d like to roll money from the Schwab traditional IRA into a Schwab Roth IRA. This would likely be a series of rollovers over the course of a decade or so, as i-Orp typically suggests, in order to keep me in a favorable tax bracket.

Any critiques from the wise ones at ER.org?

Can one roll over money from a w*rk retirement plan to a traditional IRA, and then eventually to a Roth IRA, as I am planning? Any snags you see?

Thanks so much for your help.

Mathematically challenged,

Mo Money

[pb4uski]

Quote:

Originally Posted by Mo Money ....Can one roll over money from a w*rk retirement plan to a traditional IRA, and then eventually to a Roth IRA, as I am planning? ....

Yes, that is what many of us are doing. I did exactly what you did... shortly after retiring I rolled my 401k over to my IRA and have been doing Roth conversions to the top of the 15% tax bracket for a number of years now.

i-orp actually recommends that I convert much more than to the top of the 15% tax bracket but I have yet to get totally comfortable with its recommendations but am still studying it.

[RunningBum]

Yes, that's a good plan. You may also want to consider if you'll be eligible for ACA subsidies and see how that affects the conversions. One plan could be to convert more now and take the subsidy as you get closer to 65 as it is worth much more as insurance costs rise but you're responsibility would stay low, though of course subsidies could be long gone by then.

Regarding Schwab, I don't think you'll be able to get the lower expense admiral class funds there, will you? I understand the convenience of one place, but with index funds its mostly set and forget so it's probably not that big of a deal for the lower expenses. If you have $500K and have 0.1% lower expenses with admiral funds, that's $500/year for your inconvenience. And some people like to have diversification in the form of money at different institutions just in case there is an account access problem or some other issue at one place.

[Chuckanut]

Quote:

Originally Posted by RunningBum Regarding Schwab, I don't think you'll be able to get the lower expense admiral class funds there, will you? I understand the convenience of one place, but with index funds its mostly set and forget so it's probably not that big of a deal for the lower expenses. If you have $500K and have 0.1% lower expenses with admiral funds, that's $500/year for your inconvenience. .

FWIW, Schwab has some ETF funds with expenses down in the 0.04% area. Almost free. RB is right about small differences on a large amount of money.

[youbet]

Quote:

Originally Posted by Chuckanut FWIW, Schwab has some ETF funds with expenses down in the 0.04% area. Almost free. RB is right about small differences on a large amount of money.

Yes. I do business with Schwab and generally am able to avoid paying much of the 0.1% delta that RB uses in his example. But I can't avoid higher costs completely even though Schwab has their own MF's which come close to Schwab's Admiral funds (less than RB's 0.1% delta).

Since personal family issues make it advantageous for us to have a brick and mortar presence from our brokerage, we suck it up and pay a few hundred bux per year in higher fees for the convenience of what I consider a "nicer" brokerage web site, some pretty good trading tools, a great team of phone folks and a handy local office where the staff stands on their heads to accommodate you.

If DW was more Internet savvy and I was more disciplined at writing down instructions, I'd probably split the money between Schwab and Vanguard. But for $200 - $300 per year, I go for the simplicity, convenience and service level we're able to get from Schwab.

Edit: I didn't mean to downplay the fact that OP wants to hold Vanguard funds, which are not available as Admiral funds at Schwab, and that does play into this. If OP wants to go with Schwab (as I did) Schwab index funds or any ETF should be considered where there is a true equivalent. For example, the Schwab TSM index fund compares favorably with the Vanguard TSM Admiral fund in total returns over time. Or, buy the ETF VTI.

[Mo Money]

Thanks for the input. Interestingly, I currently have over $1MM in Vanguard funds at Schwab. I am now feeling a certain "ouch" at the thought that maybe I should have just bought them at Vanguard to get the Admiral rate.... And any additional Vanguard funds bought during a 401k rollover would be an even larger amount. Maybe I should seek the Schwab equivalent of Admiral....

But hey, the bright side is at least I have relatively low-cost funds overall (all indexes), and that they are of a decent size, such that I was able to ER. (I'm flailing about for a bright side!)

[youbet]

Quote:

Originally Posted by Mo Money Thanks for the input. Interestingly, I currently have over $1MM in Vanguard funds at Schwab. I am now feeling a certain "ouch" at the thought that maybe I should have just bought them at Vanguard to get the Admiral rate.... And any additional Vanguard funds bought during a 401k rollover would be an even larger amount. Maybe I should seek the Schwab equivalent of Admiral.... But hey, the bright side is at least I have relatively low-cost funds overall (all indexes), and that they are of a decent size, such that I was able to ER. (I'm flailing about for a bright side!)

Either buy the Schwab equivalent fund, if one exists, and you'll wind up paying in the vicinity of 0.04% higher ER (pretty negligible) or buy the Vanguard ETF equivalent of the Admiral fund.

Or, keep what's at Schwab at Schwab and put the new money at Vanguard.

Everything is relative and despite the fact you might have had an overall ER that's 0.04% to 0.1% lower by confining yourself to Vanguard Admiral funds, you've substantially avoided the big mistake of buying finds with ER's that are 1% - 2% - 3% higher. You've avoided the "big mistake."


BTW, if you're still paying commissions to buy Vanguard funds at Schwab, PM me and I'll share my decoder ring for avoiding that.