Forced to Convert 401k to IRA?

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FreddieG
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Forced to Convert 401k to IRA?

Post by FreddieG » Sat Jun 17, 2017 10:24 am

I am 60, and retired at 58 from a large corporation, where I worked for 32 years.

I have a substantial 401k, and am contemplating starting to withdraw from it in the next year or two. The 401k is managed by Vanguard.

I called Vanguard, and they said that in order to begin withdrawing, I'd have to convert the entire 401k to an IRA. My post-tax contributions would be put in a Roth IRA, and my pre-tax would go to a regular IRA.

I thought I was pretty savvy financially, but this info floored me. I assumed all along it would stay in the 401k, and I would just draw it down. I know it doesn't really matter in the end. An account is an account, whether it says "401k" or "IRA", but it just took me by surprise.

Is this arrangement standard? I guess it would make sense to withdraw from the Roth 1st? Although my tax rate could be even higher when I start collecting SS. I was anticipating doing that at 66.

Thanks!

retiredjg
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Re: Forced to Convert 401k to IRA?

Post by retiredjg » Sat Jun 17, 2017 10:35 am

The answer you got does not seem right to me either (but I'm not a benefits person). Have you checked your plan document to see what it says about withdrawals?

There are reasons for some people to want/need to leave their money in 401k, not IRA. That might not apply to you, but I'm sure it applies to some.

Did you talk to someone at Vanguard in general or did you talk to someone who has something to do with your 401k at Vanguard? I'd give it another call. I'm not confident you got the correct information unless there is something in your plan that actually says that.

Any former co-workers you might be able to ask?

I wonder if it has something to do with having both pre-tax and post-tax money in there. Maybe it would have to be pro-rated if you don't roll it all out to IRA.

mhalley
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Re: Forced to Convert 401k to IRA?

Post by mhalley » Sat Jun 17, 2017 10:38 am

It depends on the plan documents. Some 401ks allow for partial withdrawals/rollover, some do not.
From a Morningstar q&a
"Although the Internal Revenue Service doesn't prohibit partial rollovers, some plans allow them, while others take an all-or-nothing approach, meaning you must either roll over your entire balance into an IRA or leave it all behind. Check with your 401(k) "

cherijoh
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Re: Forced to Convert 401k to IRA?

Post by cherijoh » Sat Jun 17, 2017 10:48 am

FreddieG wrote:I am 60, and retired at 58 from a large corporation, where I worked for 32 years.

I have a substantial 401k, and am contemplating starting to withdraw from it in the next year or two. The 401k is managed by Vanguard.

I called Vanguard, and they said that in order to begin withdrawing, I'd have to convert the entire 401k to an IRA. My post-tax contributions would be put in a Roth IRA, and my pre-tax would go to a regular IRA.

I thought I was pretty savvy financially, but this info floored me. I assumed all along it would stay in the 401k, and I would just draw it down. I know it doesn't really matter in the end. An account is an account, whether it says "401k" or "IRA", but it just took me by surprise.

Is this arrangement standard? I guess it would make sense to withdraw from the Roth 1st? Although my tax rate could be even higher when I start collecting SS. I was anticipating doing that at 66.

Thanks!


Vanguard is only the custodian of your 401k and it doesn't make the rules. The withdrawal options are specified in your former employer's summary plan documents. I think the IRS allows companies to set up their own rules for withdrawal other than requiring the plan to allow former employees to leave their money in the plan or to roll it over tax-free to an IRA. However, I would be surprised if you were able to what you tried to do - just contact the custodian whenever you want to get as much money as you want.

What does the plan document say? Have you contacted HR at your former company? It may be that you can set up a withdrawal plan through the company. My employer permits retirees to set up a schedule when you retire and get payments quarterly (or annually) for up to 15 years or they can take a partial withdrawal. This is done through HR not the custodian.

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celia
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Re: Forced to Convert 401k to IRA?

Post by celia » Sat Jun 17, 2017 10:54 am

Vanguard's response is what I would have expected. I assume they managed the 401K for the whole company the same for everyone (one big pie with you owning a slice). For them to do otherwise would be very expensive for them and who would pay those expenses? What they are saying is that you can have your slice removed and you can invest it however you like and control your distributions.

Whether to take your slice now or not, you need to figure out how much you need to withdraw each year for living expenses aside from your other income (pension, annuities, RMDs from tIRAs, SS) and figure out if you can make it last for the rest of your life. Assume you/your spouse will live to 100.

As far as withdrawing from pre-tax or post-tax, you should project your income each year from now until your mid-70s to see what your taxes/tax bracket will be. Usually people want their taxes to remain somewhat level. Why have a few years of no/low taxes now but huge taxes for the rest of your life after you start SS? One way to level out the taxes for your remaining life, is to do Roth conversions before you start SS. (You would have to roll the 401K to IRAs to make Roth conversions.) If you find that will help, you may even want to delay SS until age 70 to give you more Roth conversion years.
Last edited by celia on Sat Jun 17, 2017 10:57 am, edited 1 time in total.

dbr
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Re: Forced to Convert 401k to IRA?

Post by dbr » Sat Jun 17, 2017 10:55 am

This sounds odd. I would think that retired and over age 55 it would be odd that no withdrawals are allowed. Is this something about an age 59.5 thing somehow. I wonder if there is a misunderstanding.

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Puck
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Re: Forced to Convert 401k to IRA?

Post by Puck » Sat Jun 17, 2017 11:00 am

OP,

As the others have stated, it all depends on the rules of your 401K. And those rules will vary widely from company to company as to how much you can take as a distribution and from where and for how long.

If you really want control over your distributions in retirement, it's probably best to at least consider a rollover to an IRA.

Be sure to check your plan rules before making any decision.

Puck

Dottie57
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Re: Forced to Convert 401k to IRA?

Post by Dottie57 » Sat Jun 17, 2017 3:18 pm

FreddieG wrote:I am 60, and retired at 58 from a large corporation, where I worked for 32 years.

I have a substantial 401k, and am contemplating starting to withdraw from it in the next year or two. The 401k is managed by Vanguard.

I called Vanguard, and they said that in order to begin withdrawing, I'd have to convert the entire 401k to an IRA. My post-tax contributions would be put in a Roth IRA, and my pre-tax would go to a regular IRA.

I thought I was pretty savvy financially, but this info floored me. I assumed all along it would stay in the 401k, and I would just draw it down. I know it doesn't really matter in the end. An account is an account, whether it says "401k" or "IRA", but it just took me by surprise.

Is this arrangement standard? I guess it would make sense to withdraw from the Roth 1st? Although my tax rate could be even higher when I start collecting SS. I was anticipating doing that at 66.

Thanks!


If I leave my 401k from employer at fidelity, I will have to contact HR and apply for "benefits". This something the employer controls!

If you roll it to an IRA, your account becomes self directed.

JW-Retired
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Re: Forced to Convert 401k to IRA?

Post by JW-Retired » Sat Jun 17, 2017 6:50 pm

All I can add is I've left my 401k with the employer several years past RMD age. Nothing changed about the account when I retired. No problem taking RMDs at all.

At one point I talked to the 401k administrator company about something else and they reminded me I could roll the 401k to an IRA. I said I'm leaving it in the 401k for asset protection reasons, and they wouldn't be my choice if I did ever want to roll it over anyway.
JW
Retired at Last

delamer
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Re: Forced to Convert 401k to IRA?

Post by delamer » Sat Jun 17, 2017 6:59 pm

Is is possible there was some confusion in your conversation with Vanguard between withdrawal and distribution, with withdrawal signaling a rollover?

PharmerBrown
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Re: Forced to Convert 401k to IRA?

Post by PharmerBrown » Sat Jun 17, 2017 7:01 pm

What if you were >55 and < 59.5 and wanted to withdraw without penalty? Would they still force you to roll it? Could you withdraw without penalty after it was converted?

dbr
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Re: Forced to Convert 401k to IRA?

Post by dbr » Sat Jun 17, 2017 7:15 pm

This article may be helpful explaining that some plans allow only total withdrawal or total withdrawal/equal periodic withdrawals. Other plans allow arbitrary withdrawals. I wonder what happens in a total withdrawal only plan when RMDs are required. I'm sure they comply.

http://www.kiplinger.com/article/retire ... ement.html

Spirit Rider
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Re: Forced to Convert 401k to IRA?

Post by Spirit Rider » Sat Jun 17, 2017 7:46 pm

FreddieG wrote:Is this arrangement standard? I guess it would make sense to withdraw from the Roth 1st? Although my tax rate could be even higher when I start collecting SS. I was anticipating doing that at 66.

Generally, you want to withdraw from your pre-tax accounts first. You should already be in a lower tax bracket than when working. Withdrawals from pre-tax accounts reduces your future RMD amounts when you will also be receiving SS benefits. It is good to hold your Roth powder dry to use for tax management. Also there are no RMDs required from Roth IRAs. Also, this might be a good time to convert some pre-tax assets to Roth IRA prior to SS.

Alan S.
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Re: Forced to Convert 401k to IRA?

Post by Alan S. » Sat Jun 17, 2017 9:40 pm

PharmerBrown wrote:What if you were >55 and < 59.5 and wanted to withdraw without penalty? Would they still force you to roll it? Could you withdraw without penalty after it was converted?


This is the first question to be asked if someone retires in that age range and will need distributions to cover expenses. The plans with the non flexible distribution restrictions often forces one into a direct rollover to an IRA and then starting an inflexible 72t (SEPP) plan with the IRA account. Since both options are inflexible, you are forced to choose which option will work best for you. The 72t plan generally limits your annual distribution to less than 5% of the plan balance with today's low interest rates.

If your plan offers flexible distributions, the best choice is to take those distributions from the plan directly, as they will be penalty free per the age 55 separation exception. Some plans offer partial flexibility by restricting distributions to a set amount or frequency each year, but may provide an option to change the amount for the following year. Each such approach requires careful planning and may not address emergency spending needs such a large medical expenses.

Note that if a plan needs to hire an outside professional administrator such as Vanguard, the fees that administrator charges the plan will be somewhat less if they do not have to deal with random distribution requests, partial rollovers, etc. If the plan offers flexible distributions, then the participant is more likely to keep their assets in the plan which will then result in the plan having to deal with more participants subject to RMDs and finally death benefits for beneficiaries. In other words, flexibility in distributions leads to RMDs and death benefits down the road with their attendant costs.

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celia
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Re: Forced to Convert 401k to IRA?

Post by celia » Sat Jun 17, 2017 10:58 pm

FreddieG wrote:I called Vanguard, and they said that in order to begin withdrawing, I'd have to convert the entire 401k to an IRA. My post-tax contributions would be put in a Roth IRA, and my pre-tax would go to a regular IRA.

Upon re-reading the original post again, I'm pretty sure you misunderstood some things. Certain words have a special meaning with the IRS. I am fairly certain Vanguard did not suggest you "Convert" the 401K but to do a "Rollover". If you were to "convert", you would put all of it in a Roth IRA and pay taxes on the pre-tax amount. Of course, this is an option, but the taxes would be horrendous if you were do it all at once, given that you stated the account was quite large.

Since this is a new situation for you, possibly you misunderstood other terminology too. After reading and understanding the plan documents, call Vanguard back and ask your question again. Things may make more sense the second time around.

Timaaaaay53
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Re: Forced to Convert 401k to IRA?

Post by Timaaaaay53 » Mon Jun 19, 2017 4:07 pm

I am also subjected to the all-or-nothing distribution from two 401K's at former positions with large Pharma. No partials.
Note that you really should look at the Summary Plan Description as mentioned above. One of mine states that there will be a full distribution of the 401K (check to me) when I turn 65. The other is the same with a distribution to me when I turn 70. I turn 64 late this year. Both are with Fidelity and I anticipate rolling them over to Vanguard (a lot more info and feedback on Vanguard funds available than Fidelity) fairly soon.

Lynette
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Re: Forced to Convert 401k to IRA?

Post by Lynette » Mon Jun 19, 2017 4:14 pm

I retired this year at the age of 73. As my 401K was with the employer for whom I worked, I did not have to take RMDs until this year. The plan states that I can leave my 401K with them unless the balance drops to below $1,000. I can do partial rollovers, total rollover, withdrawals etc. I see no reason to rollover as they have a good selection of low cost funds. In addition they have a stable value fund that I really like.

delamer
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Re: Forced to Convert 401k to IRA?

Post by delamer » Mon Jun 19, 2017 4:33 pm

I am a retired federal government employee, and there are lots of complaints among TSP (our version of a 401(k)) participants about the withdrawal restrictions on those accounts.

But based on what I've read in this thread, TSP is better than some private plans and worse than others in terms of withdrawals/distributions. We certainly don't get kicked out of the plan when we turn 65.

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