Moving 401k to IRAs. What actually happens?

[always_learning]

After tax contributions are eligible to be rolled into a ROTH IRA. Earnings on after tax contributions are treated like pre-tax contributions and can be rolled into a traditional IRA.

That is:
401k Pre-Tax withdraw => Ordinary Income (or roll to traditional IRA)
401k After-Tax contribution withdraw => Not taxed (return of principal) (or roll to ROTH IRA)
401k After-Tax earnings withdraw => Ordinary Income (or roll to traditional IRA)

Now, here's the rub: You can't just take out (or roll over) the after tax contributions without also withdrawing the earnings on those contributions. For example, let's say your account had $100K, 50K pre-tax + earnings, 20K after-Tax, and 30K after-tax earnings. If you distributed $10K, 80% of the 10K (8K) would be considered ordinary income.

Further complicating things: If you are considering traditional to ROTH IRA conversions and have any after tax (i.e. non-deductible) IRA's, all of the IRA's are considered together when determining the % that is after tax. This article explains it further: https://rodgers-associates.com/blog/pro-rata-rule/

Thanks for your reply and the details. We're looking more in-depth at the various amounts and thinking about what to do so this is helpful.

I'm making notes on everyone's replies and trying to figure out what will be the best course of action.

90 degrees to the discussion, have you confirmed that rolling over is the best choice? I'm sure you have more options for investment in other brokerage accounts. In my case, I rolled over some but kept some in my 401(k). My 401(k) had a guaranteed income fund which I liked. Keeping my company stock in the 401(k) made sense to me at the time and added some flexibility since I WANTED to keep my Megacorp stock.

Other practical issues of 401(k)s. My understanding is they are the most secure from being taken from you in a civil judgement. Others may have more info on this, but I think some states may have allowed civil judgments with IRAs but don't quote me.

Honestly, I have found my 401(k) to be WAY easier to manipulate (by phone or the Net) than even Vanguard where virtually all my IRAs are maintained.

I mention all of this ONLY to suggest you convince yourself there are too few reasons to keep all or part of your funds within your particular 401(k). Maybe I'm just lucky (or, heck, maybe I'm wrong) but I am really happy with a good chunk of my funds STILL in the 401(k) 15 years after FIRE.

As always and more than ever this is very much a YMMV.

Thanks for asking. Is this the best course of action? I honestly have no idea. Our thoughts were that we would have more investing options going forward and we could take advantage of highly-appreciated co. stock. While we aren't unhappy with the company's performance, we feel the amount in there is worth using the NUA for the tax bonus and decide if/when to sell the actual stock. To take advantage of the NUA we have to liquidate the 401k.

As for the guaranteed income fund, we are mostly growth investors with some more aggressive funds than what the 401k offers and won't (shouldn't!) need the guaranteed income from the smallish amount we would keep in there.

So, as I said, I have no idea if it's the right choice, but I think it is?

 

[always_learning]

My after tax 401k contributions were rolled into a Roth IRA along with Roth 401k contributions and earnings. Everything else went into a tIRA. I’m pretty sure only cash can be moved into an IRA, so 401k funds were all liquidated before the electronic rollover. Then I invested into individual stocks and ETFs. In kind rollovers/conversions can be done between IRAs.

Thanks!!

+1

My 401k is with Fidelity, and though I do not plan to roll it over into an IRA, I called them to ask "If I wanted to roll my 401K over into an IRA, what exactly would have to be done?". They were happy to give me the detailed steps with no pressure.

This is a good idea. I think we'll call next week and see what info we receive.

The part I bolded may be true when you are making actual withdrawals from an account which has a mix of after-tax contributions and the untaxed earnings of the after-tax contributions. However, and maybe this isn't true any more, but back in late 2008 when I liquidated my 401k/ESOP, I was able to completely separate the after-tax contributions from the earnings on those after-tax contributions and handle them differently in the most tax-favorable way.

As I wrote in an earlier post in this thread, I took as cash all of my after-tax contributions and paid zero taxes on them, while at the same time did a direct, trustee-to-trustee rollover of the earnings of those after-tax contributions into a tIRA. The earnings of those after-tax contributions joined my pre-tax contributions, company match contributions, and all earnings of all types in the new tIRA. All the earnings had not been taxed yet, of course. I did not have to do any proportional split.

I had learned about this tactic in a company memo a few years earlier which permitted this only when the 401k was being emptied. Otherwise, the proportional split when determining its tax treatment applied.

I'm really going to have to investigate this.

Did the company automatically tell you what these numbers were once you began the process? We can see the cost basis of each fund, but not the % of contributions vs growth. Unless... the area where they break down before tax/after tax/after tax contributions is the only number I need and I just take the % of after-tax contributions and they've already left out the growth on that?
Added to that the fact that we moved money around a bit over the decades and I have no real idea what the tax implications of everything is. I don't think. Blech. There is so much to consider!

 

[levindb]

I have done the NUA thing...there are a lot of rules to make things work right:

1. You do have to empty your 401K completely...in 1 calendar year
2. You need to transfer your company stock IN KIND to after tax/brokerage account.
3. You will pay taxes on the cost basis of the company stock...it will be a withdrawal from your pre-tax account. This will be ordinary income tax.
4. When you decide to sell/diversify the company stock shares, you will pay capital gains tax on the increase in value from the cost basis...that is where the tax benefit comes...especially, if you can stay in the 0% tax bracket for capital gains.
5. There may be a few other things...like your first withdrawal decides the calendar year you have to empty it...and taking dividends from your 401K is a withdrawal.

 

[scrabbler1]

I have done the NUA thing...there are a lot of rules to make things work right:

1. You do have to empty your 401K completely...in 1 calendar year
2. You need to transfer your company stock IN KIND to after tax/brokerage account.
3. You will pay taxes on the cost basis of the company stock...it will be a withdrawal from your pre-tax account. This will be ordinary income tax.
4. When you decide to sell/diversify the company stock shares, you will pay capital gains tax on the increase in value from the cost basis...that is where the tax benefit comes...especially, if you can stay in the 0% tax bracket for capital gains.
5. There may be a few other things...like your first withdrawal decides the calendar year you have to empty it...and taking dividends from your 401K is a withdrawal.

Item 2 is not necessarily true. In my case, the company required that I sell the shares back to the company when I left (at the time these were not publicly traded shares, so non-employees couldn't own them). There was some provision that allowed this sale to be taken in steps, though.

And, the 10% penalty for early withdrawal applies only to the cost basis, not the cap gains (NUA) part.

 

[imnontrad]

When I transferred my 2 401Ks, I did 2 things -
1) the company stock was removed completely from my 401K to my taxable portfolio as a NUA. I paid taxes that year on the cost basis only. This will save me a LOT in taxes if I ever sell and by reducing my IRA, lowers RMDs
2) I got a check for the balance and then I turned it over for the pre-tax IRA and am slowly converting the money to Roth.

 

[Bamaman]

Upon termination, my MegaCorp requires that all 401K's be removed from their FIDO program. That indicates that they were picking up some FIDO fees and program expenses. Their 401K's had some good FIDO funds and some marginal funds in it--conservative enough where employees couldn't make any really risky, bad investments.

Moving my 401K's to FIDO's IRA Rollover allowed me to make investments in the whole piece of FIDO pie. And it was a great time to completely rebalance.

I have a FIDO Money Market account that's used to warehouse and withdraw funds. At the time my 401K's were deposited into IRA's, I also had a number of IRA Rollover mutuals. My 401K's were liquidated and placed into the Money Market account. Then I used the Money Market acct. to buy a number new no load funds. Over time, I have bought and sold accounts to where they are all mixed together.

In the case that there are after tax investments, they'd need to be kept separate from the IRA Rollovers--either in other mutuals, ETF's or Roth accounts.

I'm going to have to do RMD's in another year. I'll put sell orders in and the funds will be placed into the Money Market account. Then they'll transfer them to either my home checking account or to after tax accounts within FIDO--minus Federal and State income taxes. I'm just thankful that no IRA withdrawals have been made until I'm made to take them in year 72.

 

[2177V]

When one empties a 401k and rolls everything over to IRAs, what actually happens?

Are the funds simply transferred to similar funds? Do we have to choose funds for everything or is it all simply sold off and plunked into a type of settlement account and we choose things from scratch?

Are there any benefits/concerns about rebalancing the 401k before starting this process? We aren't sure exactly when we will do this, and have thought about moving some things around as part of usual rebalancing but will hold off if there might be issues afterward, either with taxes or otherwise.

The 401k has a crazy mix of before-tax and after tax monies from various sources (previous employer, employee contributions, after-tax contributions, employer match, etc). Once transferred, are things automatically combined into one Trad IRA and one Roth IRA?

DH (it's his 401k) has a Roth IRA at a different brokerage than the one who will be getting the 401k rollover. He does not have one at the brokerage where we will be rolling the monies to. I know a Roth IRA would have to be opened there to accept those funds, but does the fact that he has a Roth IRA elsewhere mean that we don't have to worry about the 5-year rule for new accounts?

The 401k also has company stock that we want to be careful with and take advantage of the NUA. How do we make sure this is done correctly?

Sorry for all of the questions. I've been looking and looking and can't seem to find what I'm looking for, either here or elsewhere.

Years ago, I transferred my retirement to a Vanguard tIRA and it was pretty seamless. I completed an application with Vanguard and identify my current retirement 401k accounts and Vanguard did the rest. Vanguard will automatically deposit the money into a money market account and from there, you decide on where the money is going.

As far as your situation, with various tIRA and non-taxible IRA, I would contact a Vanguard representative or a representative from that investment company. They are fairly good in providing re-assuring information to new customers because they want your money.

 

[dm]

Back when I moved my 401k to a IRA, I went to cash in the 401k and they sent me a check. They would not wire or transfer the money for me. I don’t remember how the check was made out, I opened a IRA with Vanguard.

After waiting for some time for my check, I finally called to find out what was taking so long. They had mailed it promptly. I found it under a flower pot next to my garage door. The delivery person I guess was worried the envelope might blow away.

 

[themillerman]

What actually happens

The IRA rollover is the easy part. The custodian will show you how to do that with no problem since they do hundreds of 401k rollovers every day.

The issue will be your desire to convert to a Roth IRA. Unless most of your money in the 401k was already after tax Roth funds, you will have to pay the taxes on all before tax dollars converted to Roth funds. Most people do this over a period of years so they minimize the tax impacts of the Roth conversion.

You definitely need to consult with a CFP or CPA before making any moves with the 401k if you plan to immediately convert some or all the funds to a Roth IRA.

 

[Groovy]

I skimmed through the thread, so not sure if it's relevant, but just a minor heads up: I seem to recall that when I rolled my 401K over to an IRA and was sent a paper check, I had x number of days to deposit it in the new account, lest there be tax concerns. I forget what 'x' was, but as long as I didn't dilly-dally, it wasn't going to be a concern.

 

[EastWest Gal]

I believe it’s 60 days.

I rolled two 401Ks and. 403b into a rollover IRA at Schwab. There was paperwork involved, and when I did the first two over a decade ago, I printed out the forms and brought them to a Schwab office. The last time I did it was in 2015, and I either faxed the forms or did it by uploading them to Schwab’s secure system, I can’t remember.

In all cases, I never personally handled a check. The receiving brokerage (Schwab) handled it. Since there was never a check issued to me, the 60 day rule did not apply.

Look into doing the rollover without getting a paper check.

 

[Romer]

90 degrees to the discussion, have you confirmed that rolling over is the best choice? I'm sure you have more options for investment in other brokerage accounts. In my case, I rolled over some but kept some in my 401(k). My 401(k) had a guaranteed income fund which I liked. Keeping my company stock in the 401(k) made sense to me at the time and added some flexibility since I WANTED to keep my Megacorp stock.

Other practical issues of 401(k)s. My understanding is they are the most secure from being taken from you in a civil judgement. Others may have more info on this, but I think some states may have allowed civil judgments with IRAs but don't quote me.

Honestly, I have found my 401(k) to be WAY easier to manipulate (by phone or the Net) than even Vanguard where virtually all my IRAs are maintained.

I mention all of this ONLY to suggest you convince yourself there are too few reasons to keep all or part of your funds within your particular 401(k). Maybe I'm just lucky (or, heck, maybe I'm wrong) but I am really happy with a good chunk of my funds STILL in the 401(k) 15 years after FIRE.

As always and more than ever this is very much a YMMV.

I worked at Megacorp1 for 20 years and then went to Megacorp 2 for 12 years and now am back at Megacorp 1 for 5 years

Each time I moved I moved my 401K into my brokerage IRA. The first time I received a check. The 2nd time TD Ameritrade did it for me after filling out a few forms

Your post above is a good one to step back and make sure as I move into retirement at the end of the year, that moving the $300K i have in my new 401K is the right answer or if I should keep it there. Looking back moving turned out to be the right thing as I bought Microsoft at $25, Disney at $30 and Netflix at $80 using those proceeds. I am not claiming to be smart with my picks or I wouldnt have sold Netflix at $220. I just happened to see some stocks I thought would do well. I can't expect or plan on finding great stocks like that again and as I diversify that potential will reduce in any case.

I will research the investment options in my 401K, I just set them 5 years ago and never looked back. They were diversified. Looking at my 401K they have made an annualized return of 18.5% the last 3 years in a 60/40 mix of stock and Bond funds. Other the investment options including company stock, I don't see any other consideration against rolling over into my IRA. Anyone know of other considerations against moving from the 401K to an IRA other than the civil judgement comment

 

[2177V]

When one empties a 401k and rolls everything over to IRAs, what actually happens?

Are the funds simply transferred to similar funds? Do we have to choose funds for everything or is it all simply sold off and plunked into a type of settlement account and we choose things from scratch?

Are there any benefits/concerns about rebalancing the 401k before starting this process? We aren't sure exactly when we will do this, and have thought about moving some things around as part of usual rebalancing but will hold off if there might be issues afterward, either with taxes or otherwise.

The 401k has a crazy mix of before-tax and after tax monies from various sources (previous employer, employee contributions, after-tax contributions, employer match, etc). Once transferred, are things automatically combined into one Trad IRA and one Roth IRA?

DH (it's his 401k) has a Roth IRA at a different brokerage than the one who will be getting the 401k rollover. He does not have one at the brokerage where we will be rolling the monies to. I know a Roth IRA would have to be opened there to accept those funds, but does the fact that he has a Roth IRA elsewhere mean that we don't have to worry about the 5-year rule for new accounts?

The 401k also has company stock that we want to be careful with and take advantage of the NUA. How do we make sure this is done correctly?

Sorry for all of the questions. I've been looking and looking and can't seem to find what I'm looking for, either here or elsewhere.

When I transferred my retirement funds to Vanguard, Vanguard deposited the funds into a money market fund as a settlement account. From there, I distributed the funds to any investment I wanted in the Vanguard family. The important point: Transfer the funds from your existing retirement fund directly to Vanguard which is called a rollover. NEVER receive the funds yourself or else you may be taxed. Yes...you may have to begin from scratch unless you give Vanguard specific instructions.

I do not believe there is any advantage in re-balancing but I would consult Vanguard. Vanguard has portfolio models for different age groups. You can follow those model investments and choose your own depending on whether you are more aggressive or more conservative.

I would imagine Vanguard will set up two settlement accounts: (1) pre-tax and post tax. However, I would consult the receiving IRA company to verify this as well as answers to your other questions. If the receiving IRA company does not satisfy you with answers to your questions, I would suggest calling another IRA company. The receiving IRA company will be making some money so it is to their best interest to give you the right answers.

Finally, compare the fees that the IRA company charges. The fees will vary depending on the investment. Fees to Passive Index funds are low. Fees to Actively managed funds are higher. Vanguard fees are relatively low and they are even lower for their admiral funds which means $50K minimum in the account. If you open an investment grade Vanguard account less than $50K and it grows above $50K, you will get a message whether you want to transfer the money from the investment grade to an admiral grade account to reduce your fees. Of course you should say "yes" because there is little difference in the investment portfolio of that investment.

Once you are happy with the answers to your questions and the fees from the receiving IRA company, you have to complete an application so they can verify who you are and assign you an account number. At that point, you can notify both your existing 401K company and the receiving IRA company that you want a rollover.

 

[Romer]

Another thing that may be applicable is there is a once a year rule on rollovers. Thats every 12 months. A 2nd rollover would be deemed excessive and taxable plus a 6% penalty.

A rollover is when you get a check and then deposit it in another firm, or if it goes to another firm in between like your bank account

However, I do not believe this rule applies to direct transfers from one account to another were the two institutions are doing it

I am not a tax advisor, so please validate anything you take from this

 

[target2019]

Thanks, everyone. I appreciate each and every reply.

I have been researching and reading as much as I could so that when it came time, we would have at least a basic understanding of the process, but the actual details are surprisingly hard to come by. It sounds like this will be similar to a 'normal' rollover with just an extra hoop or two, so that's good. I thought there would be much more to it.

Based on your reply to my other thread, this is exactly what we are going to do! (call them, that is, but we may not need the hand holding I thought we would).

I recently completed my 2nd and final rollover of 401(k) accounts. Details posted here that may help you:
https://www.early-retirement.org/forums/f28/401-k-consolidation-and-rollover-complete-109552.html

In that thread in the first post is a link to a previous thread about rollovers and the thousand thoughts which arise. It took me about 7 years to pull the rollover trigger on that one, because it had a stable value fund and cheap institutional index funds. Eventually the desire for simplicity and the institution charging annoying fees convinced me to rollover ASAP, which I did.


It really depends on your specifics, like the AA you have now, what you may want in the future, all the friggin' rules you don't know about, etc. But you'll get through it.

 

[1242Vintage]

Last month I closed out a 401(k) and 457
Plan that I had through work and transferred it into an IRA.

Took some coordination and paperwork from both the 401(k) and 457 plan administrators and my IRA administrator. Time wise it took two weeks start to finish for the process. Once the funds arrived, I had the IRA administrator invest the new funds in the same proportion as my existing IRA funds.

Word of caution. Years ago I did a similar transfer but had a check drawn for the 401(k) funds mailed to me and then I hand carried to my broker for deposit into my IRA account. The IRS thought this was a disbursement and sent me a demand letter … or whatever it’s called … for unpaid taxes and penalties. Took a few phone calls and back up paperwork to untangle that mess.

Good luck with your transfer.