401k to Roth IRA conversion

[summer2007]

I'm trying my best to help my Dad out with his 401k to Roth IRA conversion.

He has both his 401k and Roth IRA with Vanguard.

Right now after talking to a few people at Vanguard they have him a little confused.

The guy he was talking to last was telling him that whatever amount that he wants to convert that they send my Dad a check for that amount and then he sends the check back in to Vanguard to be put into his Roth account??

I thought they would just transfer the shares that he holds in his 401k over to his Roth IRA?

Does this sound right to others that have converted from a 401k to a Roth to have a check sent to you and then you send it back to put in your Roth IRA?

Thanks

Jim

[LOL!]

I have not done this yet, but I am not surprised since you are talking about a 401(k) here and not a personal account.

The employer sponsors the 401(k), but has Vanguard running it. Also you don't transfer shares. You transfer money. So the shares in the 401(k) have to be liquidated to get the money.

They cash out the 401(k) which is an employer thing with funds offered by the employer. There is a check involved: 401(k) Rollover | Rollover IRA

It just happens in Dad's case that the 401(k) is at Vanguard and that he wants to open his Roth at Vanguard. What if his 401(k) was at Fidelity and he wanted to open a Roth at Vanguard? Whether the check goes from Vanguard to Vanguard or from Vanguard to Dad back to Vanguard is not a big deal. Or not converting at all may mean he is not taxed on it at all (if his income is low enough)?

And Dad knows that he will have to pay income taxes on the Roth conversion, right? And he has cash outside the 401(k) in order to pay those taxes, right? Also does he know that rolling over to a traditional IRA, then converting a little of that traditional IRA each year may lower his taxes on it significantly?

[kaneohe]

Here's another reference that contains some qualifications your Dad needs to meet to do this conversion
Conversion Eligibility

I haven't done this but I'm not surprised because the retail and institutional sides of the business even at one institution operate pretty much like separate companies. I am a bit surprised, though ,that direct transfers aren't allowed and checks have to be written.

[Animorph]

I did a 401k to traditional IRA (no conversion to Roth), both at Fidelity, without any fuss or check. And the transfer was in-kind, preserving all my investments instead of selling them. I don't know of any reason Vanguard would need to issue a check.

[JOHNNIE36]

Last year I did a rollover from my 401K to a IRA CD. Why? Because the market scared me and I wanted out. The 401K was managed by Fidelity and so I rolled the funds into one of their brokerage CD's. No income taxes triggered. A direct rollover. Then early this year I transferred those funds into another IRA CD that I established at a local bank. Why? Because I made a lot of money on the brokerage CD but had to sell it. That move was very inportant in that I never saw the funds. This is called a custodial transfer. Fidelity to local bank all by electronic transfer. It can be done by check but the safest way to avoid income tax is to keep your hands off the money. A lot of this information is available on the IRS web site. There are a lot of rules regarding how to do rollovers and fransfers and how often you are allowed to roll the funds.

[WilliamG]

I don't think you can go directly from 401k to Roth. At least this was the case when I did my 401k rollover in 2000. Do a rollover to traditional IRA and then you can Roth convert from there.

[kaneohe]

Quote:

Originally Posted by WilliamG I don't think you can go directly from 401k to Roth. At least this was the case when I did my 401k rollover in 2000. Do a rollover to traditional IRA and then you can Roth convert from there.

from the Fairmark reference above:
For years before 2008, direct conversions from an employer plan to a Roth IRA were not permitted. You can do that now, but in some situations it may be preferable to roll to a traditional IRA and then convert to a Roth IRA.

[jameson71]

I would be wary any time someone says you need to get a check for a rollover. I know with some IRAs, the transfer MUST be institution to institution, untouched by the person, or else it is considered a withdrawal, and taxed & penalized appropriately.

[Gotadimple]

Quote:

Originally Posted by jameson71 I would be wary any time someone says you need to get a check for a rollover. I know with some IRAs, the transfer MUST be institution to institution, untouched by the person, or else it is considered a withdrawal, and taxed & penalized appropriately.

Sometimes it just has to happen that way. When it does, there are no tax implications to receiving a check -- as long as you don't deposit it, but get it to your new custodian so they can deposit it.

-- Rita

[kaneohe]

Quote:

Originally Posted by Gotadimple Sometimes it just has to happen that way. When it does, there are no tax implications to receiving a check -- as long as you don't deposit it, but get it to your new custodian so they can deposit it. -- Rita

I wonder whether the key factor is if you don't deposit or if you couldn't deposit it because the check is made out to the new custodian. Seems like if the check is made out to you it might be a different story even if you didn't deposit it.

[target2019]

This Vanguard article covers it all.

[Gotadimple]

Quote:

Originally Posted by kaneohe I wonder whether the key factor is if you don't deposit or if you couldn't deposit it because the check is made out to the new custodian. Seems like if the check is made out to you it might be a different story even if you didn't deposit it.

When you do a conversion, a 1099 will be filed with the IRS (whether they move the funds electronically, or issue a check to move them). It is important to have both sides (the 401k custodian, and the IRA custodian) understand what will happen. I did this conversion last year between Fidelity and Schwab.

Yes, I received a check. No, I did not deposit it, I took it to Schwab for deposit. I received a 1099 from Fidelity showing I had liquidated the account and that it was being rolled over to another custodian. I received a 1099 from Schwab showing I had rolled over $. As a matter of fact, Schwab got on the phone with me when I talked to Fidelity and arranged the small details they needed with them right on the phone.

The OP stated that Vanguard was telling him and Vanguard/Vanguard conversion would require they issue a check and then the OP send the check back to Vanguard. It's their rules and may have to do with the difference between their institutional accounts (401K) and commercial accounts (IRA).

-- Rita

Tax impact: $0

[Nords]

Quote:

Originally Posted by summer2007 I'm trying my best to help my Dad out with his 401k to Roth IRA conversion. He has both his 401k and Roth IRA with Vanguard. Right now after talking to a few people at Vanguard they have him a little confused. The guy he was talking to last was telling him that whatever amount that he wants to convert that they send my Dad a check for that amount and then he sends the check back in to Vanguard to be put into his Roth account?? I thought they would just transfer the shares that he holds in his 401k over to his Roth IRA? Does this sound right to others that have converted from a 401k to a Roth to have a check sent to you and then you send it back to put in your Roth IRA?

Quote:

Originally Posted by Gotadimple The OP stated that Vanguard was telling him and Vanguard/Vanguard conversion would require they issue a check and then the OP send the check back to Vanguard. It's their rules and may have to do with the difference between their institutional accounts (401K) and commercial accounts (IRA).

I think it's another example of Vanguard's rock-bottom low-cost customer service in action.

Most custodians would create a conventional IRA account and roll the 401(k) into that. Then the custodian creates a Roth IRA account and converts the conventional IRA. Most companies probably need a piece of paper with a signature on it. Once they have the paperwork on file then Fidelity will even do the rest on their website.

I think the procedure will magically become easier/clearer as the OP's father gets to progressively higher levels of customer-service supervisors.

You might want to re-post this question at Ed Slott's IRA discussion board (Ed Slott and Company IRA Discussion Forum • Index page). The frequent posters have probably seen this before and will know how to deal with Vanguard's lack of knowledge of their own procedures. I guess the same would apply to the Bogleheads forum.

[summer2007]

Thanks everyone.

My Dad already talked to the IRS and has the tax end of things all figured out...he just needs to do the conversion.

Nords

I'm going to try what you suggested and post on the other forums and see what others say.

Last year my Dad wanted to convert and whoever he talked to at Vanguard told him WRONG that he could not do it. So it would really help if the people answering the questions were competent enough to know what they are talking about. So that cost my Dad some money because he trusted that this guy told him right.

Thankfully some of the great posters on this board made me tell my Dad to double check!

I would love to be able to give my Dad someone's number that works there that could guide him through this and knew what they were talking about.

I can understand if Vanguard dose not have a lot of help with figuring out what to invest in. But on conversions like this there has got to be people who want to transfer money into Vanguard and it probably just looses them money to not have competent people helping with those things.

Jim

[target2019]

There's a conversion chart at IRS site, that shows what it is allowable. Dad's situation is allowable. Each situation may be different in how the custodians handle the process. Vanguard the 401 custodian is not the same entity as Vanguard the Roth custodian.

What I got from the article and others is that you should convert 401(k) to IRA. Then, the IRA to Roth conversion becomes easier. I haven't done this, so can't speak about the specifics.

And I agree that you should always call Vanguard twice (at least) when things are complicated.

[Nords]

Quote:

Originally Posted by summer2007 I can understand if Vanguard dose not have a lot of help with figuring out what to invest in. But on conversions like this there has got to be people who want to transfer money into Vanguard and it probably just looses them money to not have competent people helping with those things.

One of Vanguard's very few drawbacks is that they don't hire enough people or pay them well enough.

The shareholders have some of the industry's lowest costs, but in situations like this they're getting exactly what they paid for.

[JOHNNIE36]

Quote:

Originally Posted by target2019 There's a conversion chart at IRS site, that shows what it is allowable. Dad's situation is allowable. Each situation may be different in how the custodians handle the process. Vanguard the 401 custodian is not the same entity as Vanguard the Roth custodian. What I got from the article and others is that you should convert 401(k) to IRA. Then, the IRA to Roth conversion becomes easier. I haven't done this, so can't speak about the specifics. And I agree that you should always call Vanguard twice (at least) when things are complicated.

When it comes to stuff like this I would never trust what just one person tells me. All the reps at Fidelity, Vanguard, etc., feel like they have to tell you something even if it isn't fact. In situations like this I would talk to a Manager or better yet, go to a branch for a one-on-one conversation. There's a lot at stake so play it safe.

[jebmke]

Quote:

Originally Posted by kaneohe from the Fairmark reference above: For years before 2008, direct conversions from an employer plan to a Roth IRA were not permitted. You can do that now, but in some situations it may be preferable to roll to a traditional IRA and then convert to a Roth IRA.

If the 401K has both pre-tax and after-tax funds it is also possible to do a two part rollover and roll the pre-tax funds (first) to a TIRA and then the after-tax funds to a ROTH. 401K plan must permit partial rollovers to do this. Many do.