Retirement and 401K to IRA

[Alan]

One note of warning. I don't believe you listed an existing Traditional IRA. If you do have an existing TIRA, and you have a basis (non-deductible contributions) in that TIRA, DON'T roll over the 401k until you fully understand the tax ramifications of any roll over. I have a basis on my TIRA, and the tax ramifications is why, even after 23 years of retirement, my 401k money has NOT been rolled over.

I was in a similar situation when I retired. I had a non-deductible tIRA with a large basis and a large 401k with no basis. When you do a Roth conversion the portion that is taxable is determined by the size of the basis, you can’t selectively choose the non-taxable basis. e.g. if the basis is 50% ($50k tax free) of a $100k IRA then if you convert $40k to a Roth you will be taxed on $20k and the basis reduced by $20k. However, if you roll over a 401k of $400k before you start making conversions then that $50k of basis is now only 10% of the total so if you then convert $40k you will be taxed on $36k and your basis reduced to $46k. You will retain a basis until the very last conversion and the value of the IRA is zero.

I decided to convert all of my IRA the first year I retired and the the following year rolled over my 401k to an IRA. That way I had no basis going forward and all the non-deductible contributions in my basis was now tucked away in a Roth and future growth was no longer tax deferred, it was tax free.

 

[RE2Boys]

Can you explain this a little further? Are you performing Roth conversions from you TIRA and thinking about your pro-rata calculation? I don't think that is impacted by any 401k rollover. Are there other considerations? I've got a huge 401k that is still sitting in place (five years after retirement). But that's only because I've been sluggish in moving it. Are there other things I should think about when deciding to roll it over or leave it in place? Thanks.

Sure. One uses IRS Form 8606 to keep track of your basis in your TIRA. When you take a distribution from your TIRA, a percentage of the distribution is a return of your already taxed dollars thus reducing the taxable portion of the distribution. Calculations are performed on the 8606. If you take out 10% of the total value of Your TIRAs, then 10% of the basis is recovered. If you roll over a large 401k into your TIRA, any distribution may be a small portion of the total TIRA that you just added a large amount to, a smaller amount of the basis is recovered, thus a larger percentage of the distribution is taxable. This is to avoid paying taxes twice on a non-deductible contributions to your TIRA.


Alan in the post above did a good job of recovering his total basis before rolling his 401k into a TIRA. You only reduce your basis to zero by either converting your entire TIRA accounts to Roths or withdrawing 100% of your TIRAs. Remember, that the IRS considers each individual to have only one TIRA, regardless of the number of accounts at different financial institutions you may have.

 

[BlueberryPie]

Quick and easy? 10 days to 2 weeks? The two contradict each other.
Last time I did a 401(k) rollover the market went up, so my $ bought less shares by the time I was able to rebuy them than by the time I had to sell to go to cash. I lost $18K which was a lot of money (still is really)

 

[temartin]

Rolling from 401k to IRA

I haven't seen anyone mention these two things:

1) You can withdraw from 401k penalty-free if you have retired and are over 55. You need to be 59.5 to withdraw penalty-free from IRA.

2) in most states money in 401k is protected from lawsuits, often IRA is not.

You may not care about these things, as you mention you have plenty in taxable to spend until 59.5. But we left some money in my DWs 401k for flexibility when we retired (she was just 55)

 

[hpnutty]

I was in the same situation. I rolled everything (Mine and DW's 401Ks, Roth 401K and two brokerage accounts) to Fido this year for many reasons.
1) Brick and mortar/local relationship for DW if I kick the bucket before her
2) They gave me bonus $s to move accounts
3) Better fixed income options
4) Better phone support & website
5) Help with estate planning
6) VG disallowed certain types of investments in tIRAs that Fido allowed
7) Fido has zero cost HSA offering if you have one
Fido was easy to work with on the transfer and all Funds, Equities, T-Bills and CDs transferred except the VG Institutional funds. Since these are only available to super large VG 401k client/companies they will have to be liquidated. They tend to have really low fees so compare them to the Fido ZERO mutual funds to make sure it is worth the move for you.

Before I rolled everything I already had smaller tIRA and brokerage accounts at Fido. I scheduled a meeting at the local office and brought all my recent VG statements. The office meeting took about an hour. The time it took to move all assets took about 6 business days. Most of my equities and funds had some fractional shares that got converted to cash, less than 1% of the portfolio. A few didn't get resolved until the 10th business day. Fido will tell you 6-10 business days for the conversion.

Make sure you capture (download) your monthly VG statements for the year, including cost basis for all taxable accounts, before the move. After a few months VG closed my account and I could not get that information from their website. Fido includes the cost basis info that VG has, but I needed it to help figure out my Roth conversions for 2023.

 

[rmcelwee]

I did not think you could roll over a 401K under the rule of 55. Am I wrong

 

[temartin]

I did not think you could roll over a 401K under the rule of 55. Am I wrong

You can roll it any time after you leave the company. The 55 rule does not have anything to do with the roll.

BUT once the money is converted to an IRA, it is not eligible for 55 rule withdrawals, it is now the usual IRA 59.5.

 

[Al18]

The time to transfer a Fidelity managed 401K to a Fidelity rollover IRA was a couple of minutes, effective close of business that day. All funds in my account, except one non-Fidelity fund, were transferred in-kind.

 

[FireProoof]

Company Stock

Educate yourself on the tax advantages of company stock in a 401 k that you will lose if you sell and roll it into an IRA.

Not sure this is 100% (the advantage is but I may be wrong about some details) but when I retired from Mega Corp and rolled my 401 k into an IRA, it was pointed out to me that company stock in a 401 k is treated differently. When you withdraw it, you are only taxed on the cost basis, not the gains.

This can be pretty big if you are loaded with company stock and have been there a lot of years. I was only there 7 years so rolled it anyway to simplify my life and get total control over my money.

 

[BlueberryPie]

Fido was easy to work with on the transfer and all Funds, Equities, T-Bills and CDs were transferred except the VG Institutional funds. Since these are only available to super large VG 401k client/companies they will have to be liquidated.

That was my problem last time and will happen again this time: my 401(k) has access to institutional class funds, so, for example, the total market fund in my 401(k) is VITSX, which is the institutional shares of VTSAX (or VTI as an ETF) but I don't believe they'll be able to transfer "in kind" from VITSX to VTSAX, you have to liquidate and they don't do electronic cash transfer, so it will take up to 2 weeks for the cash to be available for reinvesting.

EDIT: so I went back to my 401(k) choices and they have some options that are not institutional funds. FSPGX at first glance seems like a good enough place to park stocks for a few weeks until I can transfer to VTI, and VBILX is where my 401(k) bonds are and I can likely transfer that in kind. Tehr may be a few (Fidelity charges $75 to buy Vanguard mutual funds, but it is dwarfed compared to the size of the transfer and is well worth it in my opinion to not be out of the market for 2 weeks, and they might waive the fee from what I read)
So I would likely want to swap out of teh institutional funds within the 401(k) in preparation of a rollover, but not as bad as I thought.

 

[LateToFIRE]

OP - If you are going to roll-over $1M or more to Fidelity, be sure to phone them and ask for a bonus, they will probably give you $1K for doing it.

But if you don't ask, you won't get anything.

Also, at +$1M, Fidelity should be willing to assign you to an advisor in their Private Client Group at little to no fee - that's what they've been pitching to me.

 

[frogprin01]

One question to you and the rest of the group. Does your company pay for the fees associated with your 401K funds and could you keep the 401K with the megacorp after you retire? Would transferring the 401K to either a Vanguard or Fidelity IRA mean you now will have to pay those fees?

 

[BlueberryPie]

Fees are to the company that administers the 401(k), for their cost of running a 401(k). Once you roll over to your tIRA they no longer administer your money so the fee no longer applies. You still pay the ER associates without your investments of course.

So in most cases you will pay less fees by rolling over

In my case the company pays some fixed-cost fees (not sure what happens after you leave, I think that they keep paying them for all plan participants) and the company that administers the plan charges everyone 4bpts, and those would continue if you retire and leave the money in the plan. So I would be 0.04% better off in fees by going to Fidelity.

 

[audreyh1]

Unfortunately Roth conversion rules were too restrictive when I retired. I never had an opportunity to convert my post-tax IRA before rolling over my 401K. Oh well!

 

[indiajust]

I serially rolled 401ks, simples, insurance, pension... just tossed them into tIRA as each company folded. I had several years of non deductible contributions. Converted the whole thing in chunks to Roth over 6 years of unemployment.

5 years after i closed tIRA, I had a delayed shareholder lawsuit payout... which I invested in SIVB and is now gone. perhaps $100 left. Roll early and roll often!

I was able to complete everything by 54, and have waited 5 years, so all funds available.

 

[HI Bill]

I have brokerage investments at Vanguard that should last more than 10 years, so I don't need to touch the 401K early.

You may want to retain at least a portion of the 401(k) so that you can make taxable withdrawals from your 401(k) [following the Rule of 55] annually prior to RMD age to complement your brokerage withdrawals. This has two benefits: 1) You can take advantage of the 0% LTCGs tax rate, and can lower your future taxable burden when SS/Pension/RMDs hit you simultaneously.

In my plan, I'm taking ~$45K annually from one 401(k) (the first ~$29K is tax-free for MFJ), and supplement this income by brokerage withdrawals comprised exclusively of LTCGs (first $94,050 is in the 0% tax bracket). This means if you're MFJ, you can have up to ~$120K of annual 'income' excluding the basis portion of your brokerage sales with no Federal taxes.

 

[RetirementNinja]

You mentioned "retirement age at 55"... why wait? I retired at 52, and just used a SEPP to start withdrawals. Was very easy. You roll your 401K to a Rollover IRA and issue a SEPP off of that. Run the #s with a 72t calculator to see how much you can withdraw. it will be very high due to the high interest rates. Good luck!

I'm rapidly approaching retirement at 55 from generic mega-corp where I have over 1M pretax in a 401K. I have brokerage investments at Vanguard that should last more than 10 years, so I don't need to touch the 401K early. I also have a small Roth at Vanguard.

I have an old small account at Fidelity. I'm thinking I'd like to roll the 401K into an IRA perhaps at Fidelity, with the notion of doing Roth conversions for the next several years to ease taxes much later in life. I'm familiar with Fidelity and I'd like to have my assets spread around, which is part of why I'd like to get out of the 401K at mega-corp, besides more investment options.

Threads here generally seem to like Fidelity, Vanguard and Schwab. Does the plan seem reasonable to shift m-c 401K to a Fidelity IRA? Do the conversion tools at Fidelity work as well as anyone's?

I had planned to spend many evenings planning out the retirement and just getting comfortable with it all, but health issues with my parents have hit and I'm swamped and my nerves are shot. Trying to figure out what they can afford for their remaining years is one of my biggest worries besides the day-to-day stuff. So I'm trying to rush through my retirement now to free up time.

Sorry if these questions have been asked before - I did some searching first. Thanks in advance for any advice.

 

[rmcelwee]

You mentioned "retirement age at 55"... why wait?

For me, the difference between FIRE at 54 and 364 days and FIRE one day later at 55 was around $140,000. I made a spreadsheet that took this into account and would look at it quite often. It would tell me things like "you have 8 days left to work and are getting paid $1275 per hour" (due to the big payout for the last day). This helped me make it the last few months when things got really bad.

 

[imbatman]

Not sure I understand why a proper SEPP at any age would be any different from waiting to 55, assuming all other things being equal.......don't forget rule of 55 only works on funds held by the employer where you leave at 55 or older........

 

[Al18]

HI Bill, FYI any withdrawals from a 401K require 20% Federal withholding. So if you withdrawal 45K, your 401K provider will send 9K to the Federal govt and 36K to you. I found this out when I started withdrawing 5 years ago. You may want to withdraw a smaller amount to cover your taxes for the year, and use other non-retirement funds to cover the balance.