What to do with old 401k?

[cputrwz]

Hi there! I saw another post you made and I wanted to ask your advice. I moved jobs last year and I have my old employers 401k just sitting there and I was about to roll it over to my new 401k but I saw your post about saying its not a good idea to do that... do you recommend I put it in an IRA instead? I'm starting to be really good about credit and stuff but I'm a real noob when it comes to investments and such... any advice is welcomed!

 

And I directed this at hegemony but if anybody else is way more ensightful about this stuff than I am, please chime in.

[hegemony]

I am by no means expert on such matters, but in my read of the landscape it is always better to roll an old 401k into an IRA with a low-cost servicer such as Vanguard, Fidelity, or T Rowe Price. The main reason is you have nearly an infinite number of options on how to invest the funds (stocks, mutual funds, bonds, gold, silver, real estate, etc) whereas in an employer run 401K you are limited to the options offered in the program and usually cannot invest in individual stocks, etc. A second reason is the costs to the consumer are usually lower in an IRA run by Vanguard, etc than in any employer sponsored 401k.

 

I have accounts with both Vanguard and Fidelity and like both a lot. About 80% of our retirement investments are with Fidelity. Fidelity has local offices in many cities and I like being able to meet face-to-face with an investment adviser (for free no less).

 

Since your 401k funds are pre-tax you'll want to open a separate IRA account for the rollover. If you ever make after-tax (i.e., non-deductible) contributions to a traditional IRA, the new funds yshould be held in a separate IRA account because mixing pre- and post-tax monies get complicated quickly (for tax purposes).

Edited March 23, 2012 by hegemony

[cputrwz]

Thank you, I don't hold you to being an expert but compared to my knowledge its pretty close. So, is it as simple as just setting up an account and then instead of filling out my rollover form to a new 401k I have them move it to the IRA instead? And then once that is done, does it work similarly to a 401k where I tell it which markets and bonds to put the money in and such? I checked out Fidelities website...what's the difference between a Rollover IRA and a Roth IRA?

 

And sorry one more question, does this impact my taxes at all?

 

Appreciate the reply.

Edited March 23, 2012 by cputrwz

[hegemony]

You should read the web pages for the three companies I mentioned above and see which one looks best for you. Then call and talk to someone about doing a rollover. You just have to make sure the funds are rolled properly to avoid paying taxes on them.

 

IIRC some companies (maybe sharebuilder by ING) have been offering monetary bonuses for opening new IRAs. You might want to look at fatwallet forums to see if there are any offers. Otherwise, I recommend looking at Vanguard or Fidelity.

 

if you want to read general information on investment stuff, CNN-Money has a lot of tutorials and I also recommend reading Smart Money, the magazine or the website.

[Seabee]

I hate to break this to you, heg, but you can't designate one IRA for deductible contributions and one for nondeductible contributions. When you take a distribution from either, the basis and value of ALL IRAs will be used to compute the taxable portion of that distribution. The end result will be no different from having just one IRA.

[hegemony]

I hate to break this to you, heg, but you can't designate one IRA for deductible contributions and one for nondeductible contributions. When you take a distribution from either, the basis and value of ALL IRAs will be used to compute the taxable portion of that distribution. The end result will be no different from having just one IRA.

thanks for the info. A certified planner once told us we made a mistake mixing my spouse's old 401k funds in the same account as her new non-deductible trad. IRA contributions.

[lakpr]

Please keep in mind that, depending on state laws, 401(k) accounts are protected from creditors in the event of a bankruptcy, but the IRAs are not. California is often cited as an example where this is true. If you live in such a state, and if your 401(k) plan choices are reasonable, I'd suggest that you roll over the old 401(k) balance into the new plan rather than diverting it into a separate IRA account.

 

Google the words "Asset Protection <your state here>" to learn more.

 

[ Just offering a counter view to Heg's ]

[hegemony]

Please keep in mind that, depending on state laws, 401(k) accounts are protected from creditors in the event of a bankruptcy, but the IRAs are not. California is often cited as an example where this is true. If you live in such a state, and if your 401(k) plan choices are reasonable, I'd suggest that you roll over the old 401(k) balance into the new plan rather than diverting it into a separate IRA account.

 

Google the words "Asset Protection <your state here>" to learn more.

 

[ Just offering a counter view to Heg's ]

 

My understanding is up to 1 million in an IRA is protected during BK under the 2005 Bankruptcy Abuse Prevention act. I thought the difference in state laws had to do with suits/judgements and whether IRAs are protected. In some states the IRA protection from lawsuits is exactly the same as a 401k while others have zero protection. Perhaps there are new laws I am not familiar with as I am not a legal eagle by any means.

 

For most people, I don't see the logic in remaining in a high cost, limited option plan just out of concern of a low probability event. If someone is really worried, he or she can start by obtaining an umbrella liability policy which will cover some of the risk, but of course not all.

 

Also, if the fear of limited protection for an IRA are real, then IRAs should not be used as an investment vehicle. Life is full of risks; so many employer plans are short on options and long on hidden fees. I can't wait until the day that my spouse can roll out of her company's plan into an IRA.

 

I would think retirees with high 401k balances might want to think twice about a roll-over or perhaps just roll some of the funds. But for someone still in the accumulation stage, having more options and lower fees outweighs the risks you rightly point out. I don't mean to downplay the risk and your point highlights the axiom that an individual's situation is not a generalization.

Edited March 26, 2012 by hegemony

[Kevin20]

Thank you, I don't hold you to being an expert but compared to my knowledge its pretty close. So, is it as simple as just setting up an account and then instead of filling out my rollover form to a new 401k I have them move it to the IRA instead? And then once that is done, does it work similarly to a 401k where I tell it which markets and bonds to put the money in and such? I checked out Fidelities website...what's the difference between a Rollover IRA and a Roth IRA?

 

And sorry one more question, does this impact my taxes at all?

 

Appreciate the reply.

 

As to the legal issue, that's where you can miss the forest for the trees. Unless you're an active con man, it's very unlikely that the arcane differences in the liability protections afforded to 401k's vs. IRA's will ever affect you. On the other hand, 100% of people who have an old 401k available to roll over are affected by the differing costs and investment choices in IRA's as compared with 401k's. IMHO it is completely foolish to advise someone to stick with a a 401K on the rationale that that way they are less likely to be sued to impoverishment (unless you think you're actually about to be sued, I suppose.) That's like advising someone to never drive in a car because car accidents can kill you. True, but you have to keep things in perspective and weigh costs vs. benefits.

 

Now to your question about transfers. Yes every single IRA provider out there has a form you can use to set up the transfer from your old 401k to an IRA. You might also need to fill out some form with your 401k administrator. The specifics vary among all providers, so you have to look into it and figure it out. You can call and ask for help if it's not clear from the website what to do. 401k rollovers are the marketing plan #1 for any IRA provider, so they will be happy to help you.

 

A rollover is not intended to affect your taxes ... you move money from one tax-deferred account to another. But, there are different ways to do the transfer. It can be direct, institution-to-institution. That's easiest but most time consuming. You can also take a direct distribution, cash the check, and then re-deposit it into your IRA. That's a little trickier: you have a time limit to do the deposit, and if you're not careful the 401k administrator might withhold taxes, as if you were going to take the money and spend it in Vegas. So you kind of need to talk to people to be sure what's going to happen. A direct transfer is probably best.

[Kevin20]

I hate to break this to you, heg, but you can't designate one IRA for deductible contributions and one for nondeductible contributions. When you take a distribution from either, the basis and value of ALL IRAs will be used to compute the taxable portion of that distribution. The end result will be no different from having just one IRA.

thanks for the info. A certified planner once told us we made a mistake mixing my spouse's old 401k funds in the same account as her new non-deductible trad. IRA contributions.

 

It's actually pretty simple. You track non-deductible contributions made to a traditional IRA when you do your taxes. That's called the "IRA Basis". Your IRA (or collection of IRA accounts) has an IRA basis number. It is zero if all contributions have always been deductible. It's bigger than zero if there have been non-deductible contribution. And that number comes into play when you pull money out of the IRA. Actually when it comes time to make a distribution of the IRA, the larger the IRA basis the better, as that basis money is untaxed at distribution (since it was alrady taxed when contributed).

 

And, in all ways the IRS does not care if you have one actual IRA account or a hundred separate accounts. It'a all just one IRA black box to the IRS. Therefore Seabee is correct, it would not in any way matter whether you commingled those deductible and non-deductible funds in one account.