Moving 401k to IRAs. What actually happens?

[always_learning]

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.

 

[pb4uski]

Going back many years but as I recall there were forms that I had to fill out... might have been online... I don't remember. In any event the 401k administrator sold everything and sent me a check made out to, in my case, "Vanguard Brokerage Services FBO pb4uski".

I then took a picture of the check and mailed it to Vanguard with another form and they deposited it in my tIRA (that I already had established many years earlier) and then I decided what to invest it in. For some unknown reason my 401k administrator would not transfer funds directly to Vanguard for deposit to my account.

 

[cathy63]

Usually, everything in the 401k will be sold off and a check or wire transfer will be initiated to move the funds to the new accounts. It might be possible to move the assets rather than selling and repurchasing, but you will have to talk to the custodians and see if they have a way to make that happen. I have found that it's faster to have the 401k administrator send me a check made out to "new broker fbo my name" than to have a direct transfer to the new account. You'd think it would be faster to move the money from institution to institution, but for some reason it's not.

If you have funds in a Roth 401k, those will go to a Roth IRA. Everything else goes to a traditional IRA. Generally the broker won't know how much of the money they receive is employer match vs previous employer vs contributions. It's all just one lump sum to them. It would be a good idea to make sure you know how much money should end up in each account and double check that there's no mix-up on the brokerage end when they receive the rollovers. I had a regular 401k rollover end up in my Roth IRA once, but fortunately I noticed right away and the broker moved the money to the right account immediately when I called them.

Any Roth IRA starts the 5-year clock ticking.

I can't help with your NUA question.

 

[NewEnglander]

My DW just did this, it worked exactly as pb4uski stated.
You'd think that an electronic transfer could take place but no, an actual paper check had to be delivered to my wife made out to her account at Vanguard, then she had to send it to Vanguard. She elected to Fedex it instead of mailing it due to the slow downs at the postal service. Even though it was Fedex'd via overnight delivery it actually took 8 days to arrive at Vanguard! My wife was a nervous wreck as the delivery was lost in limbo for a week. Fedex said the delay was due to storms. It worked to her advantage though, the markets were down that week so she ended up with almost $40K more when she re-purchased funds after Vanguard received the check.

 

[CardsFan]

If you have after tax money in there, there can be a way to extract it.

When I moved a 401k, with after tax money, to an IRA, I was allowed to take the after tax money out (contributions, not earnings). They had all the numbers and made it simple. I was too naïve at the time to ask if it could be converted to a Roth. Maybe that is possible.

But, at least I separated the after tax from pre tax

Edit to add: You need to do this with the 401k custodian. BEFORE you make the transfer.

 

[Out of Steam]

My experience is that the money is placed in a money market account at the new provider and you allocate it after it arrives, though my daughter was able to allocate a recent rollover to a target date fund before it arrived at Vanguard.

 

[RetireBy90]

I went from mega Corp 401K admistered by Fido to a Fido IRA. The funds in the 401K were only for the 401Ks and weren’t available so they dumped all to cash, transferred it and I invested in funds of my choosing.

 

[Montecfo]

My most recent 401k rollover i did in kind which aas convenient. Our plan allowed that.

 

[UnrealizedPotential]

As I remember it, my 401K was moved from one brokerage {401K}, to another, different brokerage as it was rolled into a traditional Ira. I never physically touched the money and there was no check involved in the process. I remember picking out my new investment selections for the tIRA and that was it.



I was on the phone with my brokerage that the money was going to and we completed the whole process over the phone with the brokerage who held the 401K. It was easy as I already had an account with the brokerage that I was moving the money to.

But OP I would ask the brokerage that you want to move the money to, I would ask them your questions as it directly relates to you.

 

[JoshTrent]

Based on your other thread, I would suggest you call Fido and have someone walk you through the process.

 

[always_learning]

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 other thread, I would suggest you call Fido and have someone walk you through the process.

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).

 

[bada bing]

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.

Generally, if you are changing custodians you will have to go with a paper transfer after liquidation. The proper way to do this is to request a check made out to the new custodian FBO (for benefit of) the holder's name. Doing it this way avoids withholding. If you request this, they will know exactly what you are asking, since it is the most common roll over method, but you have to remember to request it. Your destination custodian will provide the proper instructions for you to request from the 401K custodian. If you request a check made out directly to you, they will withhold taxes even though you may intend to roll it over yourself.

Many mega-corp 401Ks are invested in investment trusts rather than mutual funds. These investment trusts are not available outside of the particular 401K plan and will have to be liquidated to roll out. If you happened to have a 401K that was invested in retail mutual funds and you intend to roll it into an IRA at the same custodian, it is possible to roll the investments in kind over to the IRA account. This is the only typical situation where in kind transfers are possible. Your "company stock" may be shares of an investment trust invested in 100% company stock rather than actual common shares. These would have to be liquidated to roll over. I am not sure if NUA can be applied to "company stock" that is actually invested through an investment trust.

Whether you roll over the whole account immediately or not, it would be advantageous to get the non-Roth after-tax money rolled into a Roth IRA ASAP. Any gains made by 401K non-Roth after-tax contributions are taxable when withdrawn but once rolled into a Roth IRA will be tax free from that point on. You may have had the ability to roll non-Roth after-tax money out years ago and by not doing so you have cost yourself a lot of unnecessary tax liability on gains, but that's "water under the bridge" now.

 

[Dalmore]

Thanks, everyone. I appreciate each and every reply.

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).

It is easy to be nervous about significant amounts of cash being moved around. I am currently waiting on a 401K move to IRA with a different firm. Funds were pulled 3/24 and I am still waiting for them to land in my account on the other end....

 

[always_learning]

Generally, if you are changing custodians you will have to go with a paper transfer after liquidation. The proper way to do this is to request a check made out to the new custodian FBO (for benefit of) the holder's name. Doing it this way avoids withholding. If you request this, they will know exactly what you are asking, since it is the most common roll over method, but you have to remember to request it. Your destination custodian will provide the proper instructions for you to request from the 401K custodian. If you request a check made out directly to you, they will withhold taxes even though you may intend to roll it over yourself.

Many mega-corp 401Ks are invested in investment trusts rather than mutual funds. These investment trusts are not available outside of the particular 401K plan and will have to be liquidated to roll out. If you happened to have a 401K that was invested in retail mutual funds and you intend to roll it into an IRA at the same custodian, it is possible to roll the investments in kind over to the IRA account. This is the only typical situation where in kind transfers are possible. Your "company stock" may be shares of an investment trust invested in 100% company stock rather than actual common shares. These would have to be liquidated to roll over. I am not sure if NUA can be applied to "company stock" that is actually invested through an investment trust.

Whether you roll over the whole account immediately or not, it would be advantageous to get the non-Roth after-tax money rolled into a Roth IRA ASAP. Any gains made by 401K non-Roth after-tax contributions are taxable when withdrawn but once rolled into a Roth IRA will be tax free from that point on. You may have had the ability to roll non-Roth after-tax money out years ago and by not doing so you have cost yourself a lot of unnecessary tax liability on gains, but that's "water under the bridge" now.

I don't know if we're dealing with an investment trust or simply 'special funds' for only this plan. The SPD mentions that when liquidating, the company stock can be moved to real shares (my brain is much and I can't remember the actual term at the moment. Maybe it's "in-kind"shares? "Like" shares?).

The long-term plan is to do conversions on the pre-tax monies, but that will have to be over several years.

Thankfully, the after-tax amount is minuscule when compared to the bigger picture. It's simply extra money that went in when DH contributed the max, but the ex-mega corp didn't have an auto cut off, so it was impossible to get to the max without going over by a several hundred to a thousand for several years.
Thanks for your detailed reply. It's helpful.

It is easy to be nervous about significant amounts of cash being moved around. I am currently waiting on a 401K move to IRA with a different firm. Funds were pulled 3/24 and I am still waiting for them to land in my account on the other end....

Yep. Plus, thinking of making a mistake and getting hit with a tax bill for the whole thing makes my stomach clench!

 

[RetireBy90]

3 quick comments, 1) you can look at the funds he has in the 401K and then look them up say on finance.yahoo.com to see if they are available in an IRA or not.
And 2) I thought I had read something says you were going to transfer to Fidelity. I have done transfers in person at the local office and over the phone. Each time they worked the details and I never touched a check or the money. They called the current custodian and asked me to join a conference call to approve to custodian but they did the transfer. And 3) as far as company stock, I would call the custodian and ask about transferring that or selling it in the 401K and then transfer the funds to the IRA. My company funded the match to my contributions with company stock and they would let you sell the stock. May work or may not, custodian will know if you can do this.

 

[scrabbler1]

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 left my old company back in late 2008, my 401k had a lot of different types of money in there. I had pre-tax contributions, after-tax contributions, company match, and company stock. When I received a package of forms to complete, telling the plan admin what I wanted to do, I included several special instructions.

The company stock I cashed out using NUA, an option specified in the forms. I wanted those funds electronically moved to my local bank account, so I had to provide a Medallion Signature Guarantee due its large amount.

The after-tax contributions (a small amount) I also wanted to take as cash. This was a non-taxable event.

The pre-tax contributions, company match, and all earnings from them and the after-tax contributions I took as a direct rollover to my tIRA. I had set up a shell account with Fidelity beforehand so the 401k plan admin could include it on the check made out to Fidelity (trustee-to-trustee) but mailed to me. This was a non-taxable event.

After the check arrived, I went to my local Fidelity office to deposit it, and to set up a new bond fund within my existing taxable account using the company stock's proceeds which had arrived a week earlier.

The only thing I had forgotten to do was to note how much of my 401k's rollover part was in the stock fund and the bond fund so I could mimic the AA in my new tIRA. By the time I remembered, the account was zero. I set up an AA as best as I could remember, which ended up being very close, as I learned later.

 

[StJohnsWood]

Vanguard makes it a piece of cake. They walk you right through everything. One of the easier things I had to do. The money went into a money market and I could move it as I saw fit.

 

[a60dan]

I recently rolled over my Fidelity 401k to a Vanguard traditional IRA (tIRA).

First I opened a separate traditional IRA at Vanguard because I wanted to keep the funds separated. I think I could have rolled it over to an existing IRA.

Fidelity sent a paper check made payable to Vanguard FBO <me>. (For Benefit Of). They charged me $25 (from the proceeds), and had free use of my money for several days. In hindsight, I wish I'd paid the extra to Fidelity to move it faster (for the large amount involved).

I mailed the check to Vanguard to deposit into the new tIRA, and invested it per the current asset allocation.

Because I'm still employed, and can rollover the 401k as often as I wish, I rolled over another year's worth of 401k contributions about a year later.

This time I had a "V8 moment" and deposited the rollover check using the Vanguard app This rollover was relatively small, so I didn't care about the free loan to Fidelity. I could have done that the first time but didn't think of it.

 

[MarieIG]

I did that recently - but into Vanguard.

I pressed a button that I was interested in transferring in excess of 300k so got a call back from a Vanguard rep.

In my case, I already had an account, and was able to specify how I wanted the money allocated. Otherwise, it would have gone into a money market account.

My 401k did an electronic transfer of funds; and the money arrived quickly (first into Vanguard's bank account - and then after another telephone call, into my account.) Probably from soup to nuts, a three day turn around. You will need the forms authorizing the rollover, but they do distinguish between pre-and post tax. I did not ask about an in kind transfer, as I did not want to keep the funds I had; but that may be available if they funds are the same. There should be no tax consequences.

The money never came to me - it was a direct custodian to custodian transfer, which I believe is preferable, if the 401k custodian allows for it.

It took much, much longer to "roll" the funds from DH's 401k managed by Vanguard, into a Vanguard IRA. It "disappeared" for what seemed like weeks. (It was a shame to lose some of the investment options, but getting money out of the 401k was horrific.)

There is nothing wrong with handholding by a Fido rep. They can check over your forms and make sure everything is in order.

 

[copyright1997reloaded]

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/

 

[Koolau]

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.

 

[Dash man]

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.

 

[jollystomper]

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).

+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.

 

[scrabbler1]

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/

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.

 

[always_learning]

3 quick comments, 1) you can look at the funds he has in the 401K and then look them up say on finance.yahoo.com to see if they are available in an IRA or not.
And 2) I thought I had read something says you were going to transfer to Fidelity. I have done transfers in person at the local office and over the phone. Each time they worked the details and I never touched a check or the money. They called the current custodian and asked me to join a conference call to approve to custodian but they did the transfer. And 3) as far as company stock, I would call the custodian and ask about transferring that or selling it in the 401K and then transfer the funds to the IRA. My company funded the match to my contributions with company stock and they would let you sell the stock. May work or may not, custodian will know if you can do this.

Fantastic. Thanks for posting!

When I left my old company back in late 2008, my 401k had a lot of different types of money in there. I had pre-tax contributions, after-tax contributions, company match, and company stock. When I received a package of forms to complete, telling the plan admin what I wanted to do, I included several special instructions.

The company stock I cashed out using NUA, an option specified in the forms. I wanted those funds electronically moved to my local bank account, so I had to provide a Medallion Signature Guarantee due its large amount.

The after-tax contributions (a small amount) I also wanted to take as cash. This was a non-taxable event.

The pre-tax contributions, company match, and all earnings from them and the after-tax contributions I took as a direct rollover to my tIRA. I had set up a shell account with Fidelity beforehand so the 401k plan admin could include it on the check made out to Fidelity (trustee-to-trustee) but mailed to me. This was a non-taxable event.

After the check arrived, I went to my local Fidelity office to deposit it, and to set up a new bond fund within my existing taxable account using the company stock's proceeds which had arrived a week earlier.

The only thing I had forgotten to do was to note how much of my 401k's rollover part was in the stock fund and the bond fund so I could mimic the AA in my new tIRA. By the time I remembered, the account was zero. I set up an AA as best as I could remember, which ended up being very close, as I learned later.

Thanks for typing all of that out. It has given me more to think about.

I recently rolled over my Fidelity 401k to a Vanguard traditional IRA (tIRA).

First I opened a separate traditional IRA at Vanguard because I wanted to keep the funds separated. I think I could have rolled it over to an existing IRA.

Fidelity sent a paper check made payable to Vanguard FBO <me>. (For Benefit Of). They charged me $25 (from the proceeds), and had free use of my money for several days. In hindsight, I wish I'd paid the extra to Fidelity to move it faster (for the large amount involved).

I mailed the check to Vanguard to deposit into the new tIRA, and invested it per the current asset allocation.

Because I'm still employed, and can rollover the 401k as often as I wish, I rolled over another year's worth of 401k contributions about a year later.

This time I had a "V8 moment" and deposited the rollover check using the Vanguard app This rollover was relatively small, so I didn't care about the free loan to Fidelity. I could have done that the first time but didn't think of it.

I've seen recommendations to keep rollover funds separate but never really found out why. Is there a reason you chose to do so?

I did that recently - but into Vanguard.

I pressed a button that I was interested in transferring in excess of 300k so got a call back from a Vanguard rep.

In my case, I already had an account, and was able to specify how I wanted the money allocated. Otherwise, it would have gone into a money market account.

My 401k did an electronic transfer of funds; and the money arrived quickly (first into Vanguard's bank account - and then after another telephone call, into my account.) Probably from soup to nuts, a three day turn around. You will need the forms authorizing the rollover, but they do distinguish between pre-and post tax. I did not ask about an in kind transfer, as I did not want to keep the funds I had; but that may be available if they funds are the same. There should be no tax consequences.

The money never came to me - it was a direct custodian to custodian transfer, which I believe is preferable, if the 401k custodian allows for it.

It took much, much longer to "roll" the funds from DH's 401k managed by Vanguard, into a Vanguard IRA. It "disappeared" for what seemed like weeks. (It was a shame to lose some of the investment options, but getting money out of the 401k was horrific.)

There is nothing wrong with handholding by a Fido rep. They can check over your forms and make sure everything is in order.

Thanks for replying. This is helpful.