Leaving 401k money at previous employer

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jaj2276
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Joined: Sat Apr 16, 2011 5:13 pm

Leaving 401k money at previous employer

Post by jaj2276 » Thu Mar 27, 2014 9:28 am

I currently have around $250k in my previous employer's 401k. In addition to that account, I have a Roth IRA account that I contribute to each year via the backdoor Roth (so I also have a traditional IRA that has a zero balance).

I had planned on rolling over my previous employer's 401k $$ into my current employer's 401k so that I could continue the backdoor Roth contributions without incurring any additional taxes. However, my current 401k plan leaves a lot to be desired. The choices are good but there's a fee of 30 bps that we pay to the "manager" and an additional 25 bps added to any fund that we invest with that doesn't have a 12-b1 fee.

So for example, the plan offers a Vanguard Target Retirement fund with a 15 bps fee but the real fee is (15 + 30 + 25) bps = 70 bps.

I figure my options are:

1) Leave old 401k where it's at.
2) Roll over 401k into new 401k and pay increased fees.
3) Roll over 401k into IRA and convert Rollover IRA to Roth. Pay taxes on entire amount converted in one year with my marginal rate likely being 35%+.
4) Roll over 401k into IRA, continue backdoor Roth, and slowly pay the tax every year (i.e. whatever portion of the conversion that the IRS deems to have come from the Rollover IRA as opposed to the traditional non-deductible IRA that I add $5,550 to each year).

In between jobs, I assumed #2 was going to be the answer. Seeing the additional fees, now I'm not so sure. Comparing this plan to a Vanguard IRA - after 30 years and assuming 5% return - the additional fees would cost me $170k. The fees in the old 401k are rock-bottom, even less than Vanguard's Admiral shares, so the additional cost would be greater. So now I'm thinking to save on both fees and taxes, I should give more thought to #1.

What protection does 401k monies have in case of a company's bankruptcy and/or fraud? Are they part of the company's assets (I don't think so)? Does anyone have any experience in accessing 401k money from a company that is in bankruptcy and/or became bankrupt?

Does anyone have any thoughts about continuing on with one of the other options?

Bidwell
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Re: Leaving 401k money at previous employer

Post by Bidwell » Thu Mar 27, 2014 9:45 am

Forgive me, but would not a rollover to Vanguard's low fees, superb offerings and no mgr's percentage make you more money? My son shifted his retirement funds to USAA's after a job change. Three years later we compared USAA alongside Vanguard. The differences were significant in favor the later. For years, I've read that it's wise to move your finds from the previous employer to an independent financial institution.
Last edited by Bidwell on Thu Mar 27, 2014 9:51 am, edited 1 time in total.

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TomatoTomahto
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Re: Leaving 401k money at previous employer

Post by TomatoTomahto » Thu Mar 27, 2014 9:47 am

modelamike wrote:Forgive me would not a rollover to Vanguard's low fees, superb offerings and no mgr's percentage make you more money? My son shifted his retirement funds to USAA's offerings after a job change. Three years later we compared USAA alongside Vanguard. The differences were significant in favor the later.
This.
Okay, I get it; I won't be political or controversial. The Earth is flat.

jeff1949
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Re: Leaving 401k money at previous employer

Post by jeff1949 » Thu Mar 27, 2014 9:49 am

I would definitely go with option 4).

You will have lower fees and more choices with a Rollover IRA at Vanguard. I can't see any downside to this.

Edit: Funny that your post was up there for about 17 minutes and then within 4 minutes three posters all say essentially the same thing. I guess I need to learn to type faster. :sharebeer

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tainted-meat
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Re: Leaving 401k money at previous employer

Post by tainted-meat » Thu Mar 27, 2014 9:55 am

If the fees in the old 401k are lower than they would be in a Vanguard IRA, then I would leave the 401k where it is. That way, it doesn't affect your backdoor roth option.

Remember, taxes are one of the largest drags on a retirement portfolio, there is no need to do a rollover only to conver that large of an amount if you are in a 25% or more tax bracket.

My advise: keep the old 401k, continue doing a backdoor roth, and make life easy by avoiding pro-rata rules.

In other words: Option 1 appears to be the superior choice.
Last edited by tainted-meat on Thu Mar 27, 2014 10:01 am, edited 1 time in total.

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TomatoTomahto
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Re: Leaving 401k money at previous employer

Post by TomatoTomahto » Thu Mar 27, 2014 9:55 am

jeff1949 wrote:I would definitely go with option 4).

You will have lower fees and more choices with a Rollover IRA at Vanguard. I can't see any downside to this.

Edit: Funny that your post was up there for about 17 minutes and then within 4 minutes three posters all say essentially the same thing. I guess I need to learn to type faster. :sharebeer
Well, you're not going to type faster if you're having a shared beer :D
Okay, I get it; I won't be political or controversial. The Earth is flat.

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BL
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Re: Leaving 401k money at previous employer

Post by BL » Thu Mar 27, 2014 9:59 am

I think #1 would be a reasonable choice if there are no extra costs since the fees are so low. That is the one I would choose if I were using the Backdoor Roth.

Polaris
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Re: Leaving 401k money at previous employer

Post by Polaris » Thu Mar 27, 2014 10:06 am

I've had money in a 401k at Fidelity from a previous employer for more than a decade. I didn't enjoy working there very much, but they did offer excellent employee benefits. Their 401k has several good options, but my balance there is 100% allocated to the Vanguard Total International Stock Index Fund Institutional Shares (VTSNX) with an ER of 0.12% and represents the bulk of my international stock allocation.

Cherilus
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Re: Leaving 401k money at previous employer

Post by Cherilus » Thu Mar 27, 2014 10:41 am

Those that are suggesting a rollover to an IRA are probably either forgetting or do not know about the pro rata rule that would nearly the entire portion of your Backdoor Roth taxable, negating almost the entire benefit of the Roth to begin with.

If you intend to keep doing the Backdoor Roth, you are better off staying in the old employers plan if the investment options are better and cheaper than the new 401k. It may be a bit more to manage, but probably the "best" option.

Topic Author
jaj2276
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Re: Leaving 401k money at previous employer

Post by jaj2276 » Thu Mar 27, 2014 11:20 am

Right, I guess I wasn't clear in my original email that the reason I wouldn't want #3 or #4 is because I would have to pay taxes to continue my backdoor Roth contributions. Option #2 was going to be my choice as long as the expense ratios were close to Vanguard's. Theyr'e not. It helps that my old 401k has fees lower than Vanguard's Admiral shares so I can't even make the argument that I would save on fees by moving the money out of my old 401k into Vanguard.

But I never wanted to leave my money in my old 401k due to my belief/feelings that my money is tied to an employer that might/could not be around in 1, 5, or 10 years. How safe is that money sitting in my employer's old 401k?

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