401k to IRA rollover while working, Pros and Cons

[conversationalphrase]

I am two years away from retiring but have reached 59 1/2. I called Fidelity last week and my 401k allows rollovers to my IRA.

Since my 401k is roughly twice the size of my IRA and has limited investment options I have struggled with efficient asset allocation in recent years.

Before I transfer it though I'd like to hear Pros and Cons I may be overlooking. The Fidelity rep pointed out two - lower expense ratios for some funds in the 401k and better protection from creditors (the latter is not a concern for me). I also know I could take a loan from my 401k.

Anything else I should be considering?

[jazz4cash]

I did some direct transfers to get access to CDs since my 401k was weak on cash equivalents. This became more important as I approached ER. Fidelity was very good about doing direct transfer to my credit union. I generally had them send me a check made payable to my credit union so it's a direct xfer and not a rollover.

[Dtail]

I am assuming you don't have any Stable Value fund in your 401k, as you won't have this option in Fidelity. If the rate is high enough, it can be part of a bond allocation substitute in your AA.
I had thought that a 401k has the same credit protection as an IRA?

[gauss]

Quote:

Originally Posted by Dtail I am assuming you don't have any Stable Value fund in your 401k, as you won't have this option in Fidelity. If the rate is high enough, it can be part of a bond allocation substitute in your AA. I had thought that a 401k has the same credit protection as an IRA?

Hmm...I think this is dependent on individual state law. It is my understanding that in all cases, 401k meets or exceeds IRA protections.

-gauss

[gauss]

In a 401k the plan sponsor is responsible for most of the tax bookkeeping (ie determining taxable amount of any withdrawals).

In an IRA this will become your responsibility so be sure to understand and document any possible after-tax basis in the 401k before transferring to IRA.

IRS From 8606 gets into these issues once the funds are in the IRA world.

-gauss

[Freedom56]

Quote:

Originally Posted by conversationalphrase I am two years away from retiring but have reached 59 1/2. I called Fidelity last week and my 401k allows rollovers to my IRA. Since my 401k is roughly twice the size of my IRA and has limited investment options I have struggled with efficient asset allocation in recent years. Before I transfer it though I'd like to hear Pros and Cons I may be overlooking. The Fidelity rep pointed out two - lower expense ratios for some funds in the 401k and better protection from creditors (the latter is not a concern for me). I also know I could take a loan from my 401k. Anything else I should be considering?

If you plan to work for another 2 years, aren't you going to keep contributing to your 401K for another 2 years? I assume that your company matches a portion of your contribution also.

[bada bing]

I am the same age, also working for another two years and also have a Fidelity 401K
through my employer. I have found it advantageous to do the opposite of your
proposed roll-over into an IRA. I rolled all my tIRA balances into 401K plans several
years ago. I did it to facilitate "backdoor Roth" conversions. My employer's 401K plan
also allows the actions that comprise the "Mega-backdoor Roth" which I have
been doing as well. If you don't know what "backdoor Roth" and "mega-backdoor Roth"
are, a simple google search will turn up lots of hits.

Like your 401K plan, my employer's 401K is missing some fixed income options I'd prefer
to have, but otherwise has adequate and very cheap investment choices that meet my
allocation needs. The tax advantages of access to the backdoor Roths far outweighs
the somewhat limited investment options for me. Especially considering
I'll be retired and can roll out of the 401K in just a couple more years.

The "mega-backdoor Roth" in particular is of benefit to me and I wish I had understood
it and taken advantage earlier. If you have money outside of your retirement accounts
or income adequate to fund the mega-backdoor it is a useful way to shuttle money
into Roth. Especially useful as you get past 59.5 and approach retirement.

[gauss]

Quote:

Originally Posted by bada bing I am the same age, also working for another two years and also have a Fidelity 401K through my employer. I have found it advantageous to do the opposite of your proposed roll-over into an IRA. I rolled all my tIRA balances into 401K plans several years ago. I did it to facilitate "backdoor Roth" conversions. My employer's 401K plan also allows the actions that comprise the "Mega-backdoor Roth" which I have been doing as well. If you don't know what "backdoor Roth" and "mega-backdoor Roth" are, a simple google search will turn up lots of hits. Like your 401K plan, my employer's 401K is missing some fixed income options I'd prefer to have, but otherwise has adequate and very cheap investment choices that meet my allocation needs. The tax advantages of access to the backdoor Roths far outweighs the somewhat limited investment options for me. Especially considering I'll be retired and can roll out of the 401K in just a couple more years. The "mega-backdoor Roth" in particular is of benefit to me and I wish I had understood it and taken advantage earlier. If you have money outside of your retirement accounts or income adequate to fund the mega-backdoor it is a useful way to shuttle money into Roth. Especially useful as you get past 59.5 and approach retirement.

Bada,
Did your 401k accept rollover money that was after-tax? I know that mine did not. I thought most would not. Fidelity's self-employed 401(k) plan does not - (see section 11.3 pg 16)

Assuming we are talking about the same thing with regards to mega-back-door roth strategies, it often involves after-tax money that is contributed to a 401k then rolled over to a Roth.

The concern is that if the money is pulled out of the 401k and the plan thinks all the in-bound rollovers were pre-tax money, then you will pay tax to pull them out again. 401k company codes the 1099-R taxable amount and does not check the "taxable amount not determined" box.

In other words, the plan sponsor is required to track and report the after-tax basis in the 401k -- unlike an IRA where that is the taxpayers responsibility.

-gauss

[bada bing]

Quote:

Originally Posted by gauss Bada, Did your 401k accept rollover money that was after-tax? I know that mine did not. I thought most would not. -gauss

I have only rolled in pre-tax money into my 401K. I think you are correct about
the tax implications or plan prohibitions of rolling after-tax money into a 401K plan.
When doing both backdoor Roth and mega-backdoor Roth, it is important to
keep IRA pre-tax and after-tax monies segregated and be sure to have pre-tax
balances where you want them (probably $0) on Jan. 1 of each year.

It can become a little complicated managing roll-overs, but evidently not that bad,
because I've been able to keep up with it on my own. Because of doing my mega-backdoors
as rollovers, I do an annual round-trip with the pre-tax earnings portion. I roll the
after-tax into a Roth IRA and the earnings go into a tIRA. Prior to year end, I roll
the tIRA money back into the 401K.

I don't want to make it sound too complicated and scare off people who could benefit
from using a mega-backdoor Roth, if they have an eligible plan. I have found Fidelity
to have very capable CSR's, and they know what to do. They won't offer advice,
so it is necessary to be knowledgeable enough to ask the right questions. It has been painless
so far, even for a financial neophyte like myself. As an example, the benefit to me
for 2018 is the ability to move ~$30K into Roth space this year with no additional
tax. That is addition to using my IRA contribution limit + catch-up for a backdoor
Roth and using my full 401K contribution limit + catch-up as pre-tax.

[gauss]

Yes these mega back door Roth IRA strategies are hugely beneficial and I have written about them here also.

I just wanted to ensure that you weren't suggesting or yourself inappropriately rolling after-tax money into a 401k.

Farimark.com has very good articles and discussion about this under the topic "isolating the basis".

-gauss

[conversationalphrase]

Thanks for the replies - although I'm a bit confused.

1. To the original question - I haven't heard any cons to moving 401k money to a traditional IRA.

2. Regarding mega back door Roth strategies: Have I got this right?

A. Make additional after tax contributions to the 401k.
B. Transfer these contributions to a Roth IRA.
C. Advantage #1: Earnings in the Roth are tax free, while if I left them in the 401k they would be taxed on withdrawal.
D. Advantage #2: Avoids the $6500 (over 50) annual Roth contribution limit.

[corn18]

E. No RMD's

[gauss]

F. You can contribute 6500 to the Roth IRA and upwards of $55,000 to the after-tax 401k each year -- if your plan allows the after-tax 401k contributions and allows in-service, partial withdrawals (for the rollover to Roth IRA part).

-gauss

[bada bing]

Quote:

Originally Posted by conversationalphrase Thanks for the replies - although I'm a bit confused. 1. To the original question - I haven't heard any cons to moving 401k money to a traditional IRA. 2. Regarding mega back door Roth strategies: Have I got this right? A. Make additional after tax contributions to the 401k. B. Transfer these contributions to a Roth IRA. C. Advantage #1: Earnings in the Roth are tax free, while if I left them in the 401k they would be taxed on withdrawal. D. Advantage #2: Avoids the $6500 (over 50) annual Roth contribution limit.

1. There are several potential cons to moving 401K money into an IRA, but they
don't apply to everyone's situation. Most have been outlined above. A partial list:
availability of 401K loans
Penalty free access at age 55 instead of 59.5
better legal protection from creditors in some states
bookkeeping tracking of basis is responsibility of 401K custodian
Qualified plans don't count in pro-rata calculations for back-door Roths
Some 401K plans actually have cheaper investment options than available to retail customers

2. There are several nuances to what is referred to the "Mega-backdoor Roth":
Your plan may allow in-plan partial withdrawals which can be rolled into Roth IRA and tIRA (for earnings).
Your plan may allow in-plan conversion, which is just converting after-tax money into Roth money within the 401K plan.
Your plan may allow neither of those options, but allow after-tax contributions. Since you are planning retirement
in the near future, you can wait until retired and roll the whole plan out and segregate the funds into Roth and tIRA
at that time. There is more than one way to skin a cat.

[egleys]

Gosh! Wish I had heard about this Mega Roth roll over through a 401K before I retired. I moved my 401K money into an IRA when I left, unfortunately.

[PERSonalTime]

Hfy

[Winemaker]

I moved a portion of my 401k into a IRA brokerage account twice since 2008. The first time my 401k had no Fixed income/bond allocation. The 2nd time I moved it was just to create my own "preferred stock mutual fund". When I ER'd, since I was under 59.5yo, my plan allowed distributions without a 10% penalty, and because of my rentals, I like the asset protection the 401k provides.