Rolling over to IRA - Question

[EvrClrx311]

After 10 years with the same company I switched jobs to a new company. I am now in the process of rolling over my old 401k to an IRA. I understand this is a common thing, but I haven't found much discussion on a situation like I'm encountering. Just wanted to make sure I'm not missing anything... so appreciate feedback or advice.

I have $153,000 being rolled over from Vanguard 401k to Vanguard IRA. About $7,500 of that was a ROTH 401k, that in the 401k was tracked as a percentage of my 401k but part of the big pot from what I could tell. That is, I could invest it across the 5 funds I was using for diversity without worrying about the minimums that Vanguard funds require in order to invest in them.

So Vanguard is having me make separate accounts for the IRA, and Roth section of the IRA. This means that I'll now have $7,500 in a separate container to invest. After asking the same question over multiple times I finally got an answer from Vanguard that said:

A) The smaller Roth IRA and total IRA, as well as my new 401k (which is all Vanguard) combine to mean I don't pay any yearly fees. It's all large enough. however...

B) The smaller Roth IRA cannot be distributed in the same way it was before across 5 funds, because I won't hit the minimum for investing in those. Say I wanted to put 10% in a certain index... that means from their perspective that account would only have $750 invested from the Roth IRA partition.

So I assume the correct thing to do here is to just designate that $7,500 all toward, say a targeted retirement fund, in lieu of spreading it across multiple index funds. Appreciate peoples thoughts or advice on this one.

 

[rodi]

Yes - have the roth contain one fund - but include that fund and $ percentage in your overall asset allocation.

 

[jazz4cash]

If I understand this, your old and new 401k are both with Vanguard? Regardless, the guidance provided by Vanguard sounds right to me as far as meeting the minimums for a Roth IRA designated account. Roth 401k funds would need to go into another Roth designated account. The 7.5k is a pretty small amount to spread over several funds, so your Target Date idea is as good as any....or find a sector where the 401k choices are deficient (like international or emerging markets) and put it there.

Does the old 401k give you access to a Stable Value fund?

Since it seems to be important to you to have the balances spread over several accounts, I am curious if you have considered:

1. leaving the old 401k in tact.
2. rolling the old 401k into the new 401k.

 

[EvrClrx311]

If I understand this, your old and new 401k are both with Vanguard? Regardless, the guidance provided by Vanguard sounds right to me as far as meeting the minimums for a Roth IRA designated account. Roth 401k funds would need to go into another Roth designated account. The 7.5k is a pretty small amount to spread over several funds, so your Target Date idea is as good as any....or find a sector where the 401k choices are deficient (like international or emerging markets) and put it there.

Does the old 401k give you access to a Stable Value fund?

Since it seems to be important to you to have the balances spread over several accounts, I am curious if you have considered:

1. leaving the old 401k in tact.
2. rolling the old 401k into the new 401k.

Yep, everything has been Vanguard (old and new employer, plus rollover). I hadn't considered leaving it with the old employer because of everything I've read. Although maybe that wouldn't have been such a bad idea? The new employer is small (I'm employee number 4) and the fund options are rather limited, so I crossed out the idea of rolling it in there.

I'm not so sure it's important to me to have balance spread across several accounts... but I do want to make sure I have a good plan to stick with. As I understand it, that ROTH money will be treated differently in a variety of ways when I reach retirement... the most obvious of which will be no taxes on it. I may also just keep it growing and designate as inheritance for my daughters or grandchildren someday (as I understand it, I don't HAVE to take distributions on a ROTH and it passes tax free so if I designated it to someone rather young, the account could become a growing distribution for them for life? Good way to turn a very modest amount today into something that could really benefit an heir down the road.) Kind of neat: http://www.bankers-anonymous.com/blog/the-magical-roth-ira/

Just in the gather information stage... trying to make sure I didn't miss anything here.

 

[gauss]

I know that the financial industry has a huge marketing campaign telling people to rollover their 401k's to an IRAs.

Have you checked if it makes good sense for your personally?

Some of the things you may loose after doing this are:

- ability to withdrawal funds penalty free after age 55 under certain conditions
- loss of access to stable value funds
- potential for loan options from some 401ks

- employer bookkeeping responsibility / basis tracking (trad IRA, Roth contributions, Roth conversions all tracked separately)

- potentially more asset protection (ie legal) in some states
- potential access to low cost funds in the 401k - sometimes

I almost made a 401k rollover myself when I left my final employer, however, I caught myself in time. Every plan is different, but the financial industry only tells one side of the story ("roll it over ASAP"), so this analysis is not always well known.

-gauss

 

[jazz4cash]

I know that the financial industry has a huge marketing campaign telling people to rollover their 401k's to an IRAs.

Have you checked if it makes good sense for your personally?

Some of the things you may loose after doing this are:

- ability to withdrawal funds penalty free after age 55 under certain conditions
- loss of access to stable value funds
- potential for loan options from some 401ks

- employer bookkeeping responsibility / basis tracking (trad IRA, Roth contributions, Roth conversions all tracked separately)

- potentially more asset protection (ie legal) in some states
- potential access to low cost funds in the 401k - sometimes

I almost made a 401k rollover myself when I left my final employer, however, I caught myself in time. Every plan is different, but the financial industry only tells one side of the story ("roll it over ASAP"), so this analysis is not always well known.

-gauss

Very well stated.
These all factored into my decision to maintain my 401k from former employer. Also when MegaCorp sold off the division I worked at, the new company thankfully chose Fidelity for our 401k (same as MegaCorp). Being a larger company, MegaCorp had negotiated better terms with Fidelity compared to the the new company. When I log into Fidelity I can access both 401k's and any other Fido accounts from a single "dashboard".

Just to be clear, the item I bolded requires that you separate (from prior employer) at or after age 55. Not sure about the OP's situation, but figured he may be younger since he stated 10 years with prior employer. I know this from personal experience. If you rolled the old plan into the new one at some point in the future you could still use the age 55 exception.

 

[Sunset]

OP - since your previous employer 401K was with Vanguard , were the fees very low ?
If so you might want to just leave it there if the fund choices were satisfying for you.
Especially if there is no yearly fee (or any other fee beyond each funds yearly fee).

Most folks roll over a 401K as the employer chosen funds charge high fees or to get a wide range of fund choices.