Son rolling over 401K

[socaldonnan]

My 37 year old DS who is a civil engineer is moving to another company after 14 years with previous company. He has diligently saved in old company's 401K as well as taken advantage of Roth 401K. He received letter from old company that he has 60 days to move retirement funds. He's trying to decide to move it to a rollover IRA at Vanguard, Fidelity or T. Rowe or into new company's 401K. My suggestion his that he not transfer to new company's plan and to roll it over to Vanguard, Fidelity or T.Rowe. It will allow him more flexibility and he might be limited as to the options at new company. He's been very diligent about saving from the first day he started work right out of college and company was generous with their matching. Oh as a side, I don't believe he can do a Roth IRA any longer but he does throw money into his HSA because of inability to use a Roth. Thoughts about this? Forgot to mention he's married, one son and one on the way in July. Thanks for any insights.

 

[Sunset]

I agree, he should roll it over to Vanguard/Fidelity/Schwab/Merrill-Edge as a direct roll-over to a roll-over IRA, and rollover RothIRA as they have lots of choices and often low fees.

He has no idea right not on how expensive and the lousy choices he might have in his new company 401K.

 

[steelyman]

Setting up a rollover account would establish a firm home for this and any future transfers and/or contributions/rollovers from future employers.

 

[pb4uski]

I would set up a tIRA with Vanguard or Fidelity and transfer it into the new tIRA.... at his age going all in on VTSAX would be fine.

 

[gwraigty]

He has diligently saved in old company's 401K as well as taken advantage of Roth 401K.

I would set up a tIRA with Vanguard or Fidelity and transfer it into the new tIRA.... at his age going all in on VTSAX would be fine.

Roth 401k balances should be rolled over into a Roth IRA. Pretax balances should be rolled over into an IRA.

 

[RunningBum]

Oh as a side, I don't believe he can do a Roth IRA any longer but he does throw money into his HSA because of inability to use a Roth. Thoughts about this?

He should contribute to an HSA any year he has an HSA eligible health plan, whether or not he can contribute to a Roth. If ability to save is limited, the HSA should come first since it has the most advantages.

 

[Perryinva]

They must have a pretty good income combined to not be eligible for Roth contribution at that age!!! If their income is that high, then adding to a Roth may not even make much sense, except that the current tax rates are all discounted 3% through 2025. I agree with all the others, do not roll in to new employers 401k.

 

[ckelly78z]

I strongly suggest the T Rowe Price large cap growth R4 fund, which I am mostly in through my employer. As of yesterday, it was the highest yielding fund available to me in my 401K plan....it was at 18.6% YTD, and has been averaging 19.1% a year for the last 10.

 

[timbervest]

1. Roll pre-tax 401(k) into new employer 401(k) and Roth 401(k) to Roth IRA
2. Make new 401(k) contributions to traditional 401(k) or Roth 401(k) as is his preference
3, Transfer taxable earnings from tIRA to new 401(k)
4. Convert remaining basis in tIRA (non deductible contributions) if any to Roth IRA
5. Make annual contributions to tIRA and immediately convert to Roth IRA ("backdoor IRA")

 

[pjigar]

1. Roll pre-tax 401(k) into new employer 401(k) and Roth 401(k) to Roth IRA
2. Make new 401(k) contributions to traditional 401(k) or Roth 401(k) as is his preference
3, Transfer taxable earnings from tIRA to new 401(k)
4. Convert remaining basis in tIRA (non deductible contributions) if any to Roth IRA
5. Make annual contributions to tIRA and immediately convert to Roth IRA ("backdoor IRA")

+1

Above assumes he has good investment choices in new 401K. I have done this myself in order to allow easy tax basis calculation for backdoor Roth IRA conversions. Saving extra $12K per couple in Roth IRA is worth the trouble.

By the way, one should NOT utilize Roth 401K if they haven't maxed out backdoor Roth IRA. I recommend the following order for the investments:
1. pre-tax 401K up to company match
2. HSA max out if eligible
3. Roth IRA or backdoor Roth IRA max out
4. Pre-tax traditional 401K max out
5. After tax 401K contributions aka super-backdoor Roth IRA (which most plans allows and principal can be rolled over to Roth in-service or after-service depending on the plan terms).

Note that the order of 3 and 4 can be switched depending on the personal goal of more Roth balance or more pre-tax balance.

The last, but not the least, is brokerage investments which can be inserted anywhere after 2 depending on personal goal of how much pre-retirement access they need for the nest egg.

 

[socaldonnan]

Thanks everyone for the input, suggestions and guidance. He has talked about a backdoor IRA and is looking into that as well as putting as much into his HSA as allowed. As his wife is working part-time until May, I must remind him to fund her Roth IRA for last year by April 15th if that's an option. I'm leaning towards encouraging him to consider rolling over his IRA into Vanguard, Fidelity or T.Rowe Price. I think I should also remind him to look into additional disability insurance over and above what his new company offers. Thanks again everyone for your thoughts.

 

[athena53]

I rolled over a 401(k) into a new employer's plan and it was a huge mistake which could not be reversed unless I quit or took a withdrawal based on hardship (there was none in my case and of course there would have been tax penalties).

I see only two possible upsides to rolling a 401(k) into a new employer's plan- one is if it's a terrific plan (rare). The other: I believe that assets in a 401(k) have some protections that assets in an IRA don't have if, for example, he's involved in an at-fault auto accident and has insufficient insurance. Not totally sure about that part- after my unfortunate rollover to a new employer plan, I rolled over 401(k)s into self-directed IRAs when leaving employers after that.

 

[pjigar]

He has talked about a backdoor IRA and is looking into that as well as putting as much into his HSA as allowed.

You need to have a zero balance in traditional/rollover IRA in order to maximize the benefits of backdoor IRA which means rolling 401k money from old to new employer. In case new employer 401k doesn't have good investment choices then just forget about backdoor IRA.

But there may be an alternative which is "super-backdoor IRA" contributions aka after-tax contributions to 401K plan. Investigate if 401K allows after-tax contributions and if they allow in-service distributions. If 401k plan allows in-service distribution then you want to "distribute" total of after-tax contributions every year and do a trustee-to-trustee transfer from 401K to Roth IRA. The tax bill will be zero for such distributions since the tax was already paid on the contributions and there won't be any penalty either because funds were transferred to another eligible retirement account. If in-service distributions are not allowed then track after-tax contributions until you quit the job or 59 1/2 at which time sum of all contributions can be rolled over to Roth IRA tax-free and penalty-free!

 

[kgtest]

My 37 year old DS who is a civil engineer is moving to another company after 14 years with previous company. He has diligently saved in old company's 401K as well as taken advantage of Roth 401K. He received letter from old company that he has 60 days to move retirement funds. He's trying to decide to move it to a rollover IRA at Vanguard, Fidelity or T. Rowe or into new company's 401K. My suggestion his that he not transfer to new company's plan and to roll it over to Vanguard, Fidelity or T.Rowe. It will allow him more flexibility and he might be limited as to the options at new company. He's been very diligent about saving from the first day he started work right out of college and company was generous with their matching. Oh as a side, I don't believe he can do a Roth IRA any longer but he does throw money into his HSA because of inability to use a Roth. Thoughts about this? Forgot to mention he's married, one son and one on the way in July. Thanks for any insights.

His MFJ MAGI is over $193,000? He is doing well. Rollover to Vanguard and don't look back.


I am 37 as well but we still qualify for Roth IRA our MAGI isn't over 193k though

 

[kgtest]

You need to have a zero balance in traditional/rollover IRA in order to maximize the benefits of backdoor IRA which means rolling 401k money from old to new employer. In case new employer 401k doesn't have good investment choices then just forget about backdoor IRA.

But there may be an alternative which is "super-backdoor IRA" contributions aka after-tax contributions to 401K plan. Investigate if 401K allows after-tax contributions and if they allow in-service distributions. If 401k plan allows in-service distribution then you want to "distribute" total of after-tax contributions every year and do a trustee-to-trustee transfer from 401K to Roth IRA. The tax bill will be zero for such distributions since the tax was already paid on the contributions and there won't be any penalty either because funds were transferred to another eligible retirement account. If in-service distributions are not allowed then track after-tax contributions until you quit the job or 59 1/2 at which time sum of all contributions can be rolled over to Roth IRA tax-free and penalty-free!

+1 He is so close to ER, if his next job allows In-service withdrawals he could simply retire in 13 years and start taking his withdrawals. IN that case, moving to new employer would be beneficical if he can do the after-tax + in-service withdrawal AND the new company offers a good low-cost selection of index/ETF funds. THAT would be MY condition.