Why transfer from 401K -> IRA?

[teejayevans]

I always see people transferring their 401Ks to IRAs, seems like the
first thing everybody does. Why? Is there some reason that I don't
know about. I'm pretty happy with the selection of funds, what's
does it buy me? Do I have to transfer it out when I ER?
TJ

 

[RedHawk]

Don't know the exact details but there is a difference in the tax treatment when an IRA is inherited rather than a 401k.

 

[LOL!]

My 401(k) funds have an average expense ratio of about 1.4%. If I move those to funds with er's of 0.2%, I will have more money for my pocket.

My 401(k) options are also limited, so I can get different and presumably better asset allocation by moving that money to an IRA.

I would like to use convert my 401(k) assets to a Roth IRA for the tax savings in the future. I will need to rollover to an IRA to do this when I am retired.

 

[FinanceGeek]

Most 401k's have limited investment choices whereas if you roll into an IRA you can own any mutual fund or stock you want to!

Of course that offers you more opportunity to own lower cost funds/ETFs, etc.

 

[TexasGal]

I have wonderful choices in my 401k and will leave my money there for 6 to 10 more years (although I don't use 99% of those choices). Vanguard told me that when I want to start withdrawals I have to take it out of the 401k and rollover into an IRA.

 

[Sam]

My 401(k) options are also limited, so I can get different and presumably better asset allocation by moving that money to an IRA.

Most 401k's have limited investment choices whereas if you roll into an IRA you can own any mutual fund or stock you want to!

Of course that offers you more opportunity to own lower cost funds/ETFs, etc.

What they said.

I think (not 100% sure) the only advantage of keeping the 401(k) is when you intend to quit working at age 55 or later. You would be free to manipulate the account anyway you want without penalty. I think (again) this rule only applies to 401(k), and not to IRA.

 

[teejayevans]

What they said.

I think (not 100% sure) the only advantage of keeping the 401(k) is when you intend to quit working at age 55 or later. You would be free to manipulate the account anyway you want without penalty. I think (again) this rule only applies to 401(k), and not to IRA.

Since I'm happy with where it is and since I don't want all my eggs
in one basket, I'm inclined to keep it where it is.
Thanks,
TJ

 

[Sam]

Since I'm happy with where it is and since I don't want all my eggs
in one basket, I'm inclined to keep it where it is.
Thanks,
TJ

Yes, keep it there if you're happy. But rolling it over to an IRA doesn't mean keeping all eggs in one basket.

 

[Spanky]

I am not aware this is a common practice. I only rollover to an IRA from 401K when I leave an employer. IRA does provide more investment options, but it does not offer a stable value fund that provides return in between a short and an intermediate bond fund but with a risk of a slightly higher than a money market fund.

 

[heyyou]

My 401k had institutional index funds with fees of only .06 to .09%. The admin fee was .7% so my last year at work, I paid $3000 in fees for them to handle my weekly deposits. I moved to an IRA on the day I was eligible.
For years, the provider bragged about the low fund fees. After Spitzer came along, the provider supplied info about the admin fee. This was not a family business, there were over 100,000 participants in the 401k. .7% of the deposits was a lot of funding for tracking the deposits and publishing a quarterly newsletter, considering that Vanguard and your credit union can do the same job at a much lower price.

 

[wildcat]

In my past experiences with rollovers, your employer will allow you to park it there for "x" period of time (apprx. 6-12 months IRIC) upon your departure. At some point however, you will be asked to take action in the form of either a distribution check, a rollover to a new 401k plan with a new employer or a rollover to an IRA. So to my knowledge, even if you like the choices, you will have to move it.

Personally, I always felt I could do a better job allocating the money on my own that my what employer offered in the 401k. If you are happy with your plan, I would say leave your money parked in the 401k until you get the notice in the mail requesting action.

 

[teejayevans]

My 401k had institutional index funds with fees of only .06 to .09%. The admin fee was .7% so my last year at work, I paid $3000 in fees for them to handle my weekly deposits. I moved to an IRA on the day I was eligible.

Where would I find the admin fee?? I'm sure its in the fine print somewhere,
but where?
TJ

 

[TexasGal]

My directions as a retiree were that I didn't have to do anything until I am 62. At that time Vanguard will send me notice asking me to:
1) roll it over to IRA
2) take lump sum
3) or confirm that I want to leave it in the 401k

I can leave it there until I am 70-1/2 when I have to begin distributions. Before I can begin distributions I will have to roll it over into an IRA.

A friend of mine left my company 12 years ago and has never moved or changed his 401k either. He is 50 and does not plan to move it for many years. This particular plan offers all of the Vanguard funds and many others outside of Vanguard.

Maybe there are different rules for different plans. That was the way mine worked out.

 

[FIRE'd@51]

If you take a distribution from a 401K, 20% is automatically withheld for taxes. With an IRA, you can elect the amount to be withheld, including 0%.

 

[teejayevans]

If you take a distribution from a 401K, 20% is automatically withheld for taxes. With an IRA, you can elect the amount to be withheld, including 0%.

Really?! First I ever heard of that, is that true for all 401Ks, ie is that a
fed law?
TJ

To answer my own question, it appears to be a fed law.
My plan has a 0.11% overhead fee, not bad...

 

[Ed_The_Gypsy]

I think (not 100% sure) the only advantage of keeping the 401(k) is when you intend to quit working at age 55 or later. You would be free to manipulate the account anyway you want without penalty. I think (again) this rule only applies to 401(k), and not to IRA.

Yup. Like Sam said.

Another advantage is the OJ strategy--401ks are protected from attachment and lawsuit.

I left my money in two 401ks so that I would have the option of accessing them before 62 without penalty. That advantage will soon expire and I will look at herding them both into Vanguard.

 

[REWahoo]

I left my money in two 401ks so that I would have the option of accessing them before 62 without penalty.

Don't you mean 59 1/2?

 

[Ed_The_Gypsy]

oops

Don't you mean 59 1/2?

Oh yeah. Brain-fart. Sorry.

I bought a book from Nolo Press years ago that explained a lot to me, but I have misplaced it. I think this is the one:
IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out

 

[kaneohe]

Yup. Like Sam said.

Another advantage is the OJ strategy--401ks are protected from attachment and lawsuit.

I like this feature. My impression is that the 401K can only be accessed by IRS and QDRO (like in a divorce proceeding so that protection is very strong.

Although IRAs, esp. those rolled over from qualified plans, are touted as having creditor protection (unlimited in the case of rollovers from qualified plans), you need to successfully file for bankruptcy in order for the protection to be effective. You don't have to do that for the 401K. I don't know if there is any real world difference in the the protection but the 401K protection sounds more robust to me.

A few yrs back, one significant disadvantage of keeping funds in the 401K was that a non-spouse beneficiary could not rollover the funds into an IRA to stretch it but I think that is mostly not an issue anymore (provided that the plan allows it).

 

[FinanceDude]

Don't know the exact details but there is a difference in the tax treatment when an IRA is inherited rather than a 401k.

Not really......... I went through this with my sister's 403B, after a lot of "discussion" I worked it out with TIAA........either way, the beneficiary needs to take annual RMD's on the "stretch"............

 

[Achiever51]

When I left MegaCorp, I was undecided about rolling over my 401(k) into an IRA until I got a letter from MegaCorp shortly after I left telling me that my menu of choices for investments was being cut to, IIRC, something like five or ten options -- rather than the essentially unlimited number of stocks, etc. that I had as an employee. That made my decision to move to Vanguard very easy!

 

[Redbugdave]

If you are a federal worker under the FERS system, rolling the 401K into other IRA accounts would not be beneficial until you reach the age of 59 1/2. For me, I can begin getting 401 payments, (TSP), immediately when I reach retirement age...at age 56. When I reach 59 1/2, it would certainly be a viable option. I'm a fan of Vanguard. Some of you are in the same boat? Corrrrect me if I am wrong... First post...howdy you guys...and gals!

 

[TexasGal]

Welcome Redbugdave! With a moniker like that it almost sounds as though you came from Texas. You ever live in Texas?

Off topic, but I think we definitely need some Texas smilies on this forum. We need smilies fighting varmints, smilies lining up their guns to shoot them or somebody or something, oh I can just think of all kinds of smilies that would be used.

Oh well, Redbug welcome again, and make yourself at home.

TG

 

[REWahoo]

Off topic, but I think we definitely need some Texas smilies on this forum. We need smilies fighting varmints, smilies lining up their guns to shoot them or somebody or something, oh I can just think of all kinds of smilies that would be used.

You mean something like this?

...and this?

 

[TexasGal]

Oh yes, yes, yes, yes!!! Perfect!

Just seems like we need some powerful smilies in order to properly illustrate what we have to deal with in Texas. Also, those really demo my mood too!