What to do with 401K

[The Kid]

After being downsized by Megacorp 1 7 months ago and spending a very pleasant time fishing and hiking with my dog I am about to join Megacorp 2. The time off has confirmed that I want to FIRE in about 5 years. My question is what to do with my 401K from Megacorp 1? (about 400k)

1. Leave in Megacorp 1 401K - decent selection of low expense index funds

2. Role over to Fidelity IRA

3. Role over to Megacorp 2 401K which is run by Fidelity and seems to have access to all Fidelity funds.

Should I choose option 2 as it allows me to convert to a Roth IRA at some point in the future?

Should I choose option 3 so that I can make early withdrawals under rule 72t?

Thanks for your thoughts.

 

[samclem]

You investment choices will be much broader in an IRA than in either of the 401Ks. You may decide in the future that you would prefer Vanguard (lower fees in most cases than similar Fido funds), and getting access to those is pricier if you are using a fidelity brokerage or other means to get to them.

You can take 72T withdrawals from an IRA just as you can from a 401K. Also, as you point out, the Roth conversion of the IRA may be useful. Finally, if you leave your $$ in your old 401K or put it into a new one, you have no control over what the company does in the future. Companies do things all the time with their 401Ks that are not in the best interests of their employees--your costs could go up a lot or the available funds could get worse if the wrong people hear a briefing from a high-fee rep bearing glossy folders.

I'd go with the IRA for these reasons.

 

[Achiever51]

I agree with Samclem; do the rollover to the IRA.

 

[Darryl]

Yep, you have to do #2 and probably want Fidelity or Vanguard. Get control of your money whenever you can and you won't have that in a company 401k.

 

[Animorph]

My Fidelity 401k doesn't have many fund choices. I'll be rolling over to a Fidelity IRA in a few months, as soon as my severance period ends. Then I'll finally be able to get my AA filled out properly.

Dan

 

[jazz4cash]

I assume the 'age 55 and seperated' rule does not apply.......only other consideration I can think of for leaving it where it is. My megacorp 401k just went through a slew of changes that were unwelcomed, but aimed at saving Megacorp some fees I believe.

 

[bbbamI]

We have to make a decision about DH's 401k as well. I believe we can roll it over to two IRA's with Fidelity. We are not planning on using the 72t rule, but if we have to, we can take money from just one of the IRA's and leave the other one alone so that it can grow.

 

[jazz4cash]

one more thing..if you happen to have any after-tax monies in the 401k, you should avoid mixing them into the IRA. I've heard some plans have rolled the after tax money into the IRA and once it gets inter-mixed its tough to unwind.

 

[kaneohe]

one more thing..if you happen to have any after-tax monies in the 401k, you should avoid mixing them into the IRA. I've heard some plans have rolled the after tax money into the IRA and once it gets inter-mixed its tough to unwind.

What is the problem w/ intermixing pre/after tax money?

 

[Achiever51]

What is the problem w/ intermixing pre/after tax money?

When you begin distributions from your IRA, you don't want to pay taxes on your after-tax contributions...you already did that! It's just easier to keep the pre and post tax dollars separate. About 10% of my IRA is post-tax and I have two Vanguard IRAs: one is a "traditional" one that holds my post tax $$ and the other is a roll-over IRA that has the proceeds of my 401(k) (pretax $$)

 

[jazz4cash]

What is the problem w/ intermixing pre/after tax money?

IIRC, once they are intermixed in an IRA, you cannot take out JUST the aftertax portion......so if you put $100 in there and 10% of it was after-tax, any IRA withdrawals would be pro-rated 10% aftertax and 90% pre-tax. I was vaguely aware of this, but Fidelity was careful to seperate my after-tax money when I did a rollover. I read somewhere that not all custodians are so careful.

 

[kaneohe]

IIRC, once they are intermixed in an IRA, you cannot take out JUST the aftertax portion......so if you put $100 in there and 10% of it was after-tax, any IRA withdrawals would be pro-rated 10% aftertax and 90% pre-tax. I was vaguely aware of this, but Fidelity was careful to seperate my after-tax money when I did a rollover. I read somewhere that not all custodians are so careful.

This is interesting......is there something special about a rollover IRA from a 401K. Somehow my impression was that this was just another IRA and that when you take $$$ from an IRA, IRS doesn't care whether you segregate into pretax/after-tax (or deductible/non-deductible) or if you intermix them but treats them as a proportionate mix regardless if you pull from the pure pretax or the pure after-tax side.

I'm not sure how the rollover IRA works but I'm pretty sure that's the way it works for normal contributory IRAs. I was once planning to do a Roth conversion from my nondeductible traditional IRA thinking I wouldn't have to pay any taxes (at least on the contributions) but then discovered that I would have to pay because IRS considers all my iRAs as one and since most were deductible , the conversion was mostly taxable.

Segregation may be useful for mentally keeping track of what each piece is but I'm not sure it actually has an effect. If it does, I'd be interested in a reference for that. Btw, I thought you had to file an 8606 when you do the rollover go keep track of the after tax basis.

 

[CyclingInvestor]

I believe the only difference nowadays between a contributory IRA and a rollover
IRA is that a rollover IRA can be rolled back into an employers 401k plan (if that
company allows it).

 

[kaneohe]

IIRC, once they are intermixed in an IRA, you cannot take out JUST the aftertax portion......so if you put $100 in there and 10% of it was after-tax, any IRA withdrawals would be pro-rated 10% aftertax and 90% pre-tax. I was vaguely aware of this, but Fidelity was careful to seperate my after-tax money when I did a rollover. I read somewhere that not all custodians are so careful.

bbbamI said: We have to make a decision about DH's 401k as well. I believe we can roll it over to two IRA's with Fidelity. We are not planning on using the 72t rule, but if we have to, we can take money from just one of the IRA's and leave the other one alone so that it can grow.

Jazz4cash.........I think I confused myself by not reading your post and bbam's post carefully enough. Upon rereading in the sober light of dawn, it looks like you folks were talking about 2 different things:
I think you were saying keep the after tax money separate from the pretax
money w/ pretax in an IRA and after tax money outside the IRA.
I think bbam was talking about splitting the funds into 2 different IRAs in
order to be able to do 72t withdrawals on one IRA w/o affecting the other.
If this is the correct interpretation, then no conflict........just 2 different
strategies. Yours has (perhaps) simplicity taxwise but no more tax deferred compounding on the after tax $$$ . Bbams does but may have a
more complex tax situation when withdrawing funds.

 

[jazz4cash]

kaneohe.........I agree...no conflict.
There several excellant reasons to have multiple IRA's

• Aftertax money should not be intermixed with pre-tax for the reason I stated. Re-reading OP, maybe that's why two IRA's were mentioned.
• There is still a tax deferral benefit to having aftertax money in an IRA, although it does not seem very attractive.
• Multiple IRA's for 72t is like a bucket strategy ...it lets you put just enough into the 72t plan bucket to take the desired income.

 

[Achiever51]

...
Segregation may be useful for mentally keeping track of what each piece is but I'm not sure it actually has an effect. If it does, I'd be interested in a reference for that. Btw, I thought you had to file an 8606 when you do the rollover go keep track of the after tax basis.

I found this of interest: Rollovers Of After-Tax Assets May Change The Landscape Of Your IRA

Should you roll over after-tax assets to your Traditional IRA, you are required to account for the after-tax assets and the pre-tax assets separately. This accounting is accomplished by filing IRS Form 8606 (available at the IRS website) for the year the after-tax amount is rolled over to the IRA, and for each year you distribute assets from any of your Traditional, SEP or SIMPLE IRAs.

This rule requiring the filing of Form 8606 applies even if the rollover is made from one of your Traditional IRAs that does not include after-tax assets: all of your Traditional, SEP and SIMPLE IRAs are treated as one IRA for the purpose of calculating the taxable portion of your distribution. The information provided on Form 8606 helps both you and the IRS determine the balance of your IRAs that is attributable to after-tax assets. This information also helps to ensure that you do not pay taxes on distributions that should be tax free.

 

[jazz4cash]

Thanks Achierver51. From the above link, here is the specific issue I was addressing..........

Treatment of Distributions Subsequent to Rollover of After-Tax Assets
If after the rollover of after-tax assets you want to make distributions or Roth IRA conversions from your Traditional IRA, you cannot choose to take the assets from strictly either pre-tax or after-tax assets. Instead, until all the after-tax assets have been fully distributed, all distributions and/or Roth IRA conversions will include a pro-rated amount of pre-tax and after-tax assets.


I hope I did not confuse the issue, so may just start by finding out if there are any aftertax contributions in the 401k....if not...nothing to worry about.

 

[kaneohe]

Thanks Achierver51. , so may just start by finding out if there are any aftertax contributions in the 401k....if not...nothing to worry about.

Yes, great article, Achiever51.

Jazz.....you might also want to check whether you have any non-deductible traditional IRAs since, if you do, they will already have provided that intermixing you are trying to avoid. Others have told me that it isn't really so bad even if you intermix since 8606 kind of leads you thru the procedure. You just have to hang on to the older historical 8606s since if you update them, you need the previous one.

Other places to get info, just in case you weren't aware, are the forums at fairmark.com and irahelp.com. The author of the article cited by jazz is a regular participant at irahelp.com.

 

[jazz4cash]

The intermixing is not so awful, but it constrains your after tax monies which would otherwise be more liquid. Its like having the restrictions of the IRA without the tax deduction. Not sure about the non-deductible IRA caveat and it does not apply to me. I was really responding strictly from my experience doing what OP mentioned (rolling 401k funds to IRA) so when folks starting asking why intermixing was not good, I had actually think about why I said that. Maybe not a big deal to some, just something to be aware of if you dont like surprises.