Roll-over 401k to Traditional IRA

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Topic Author
vivekian123
Posts: 37
Joined: Sat May 24, 2014 1:13 pm

Roll-over 401k to Traditional IRA

Post by vivekian123 » Wed Jul 10, 2019 3:40 am

Hi,

My wife quit her job back in Feb of this year to redirect her career and has around $100K in her Fidelity 401k from her workplace in a Vanguard 2050 Target Fund. There is at-least a small plan fees which has to be paid to Fidelity every quarter ($15-$20). I am wondering if we should make the move and rollover to a traditional IRA at vanguard. The one downside I could think of was not being able to take a loan against the 401k in an emergency? But on the upside, the scenario where that happens has very low likelihood. Will definitely have the opportunity to manage the asset allocation better in Vanguard since we are not restricted to just Vanguard Target funds.

Any thoughts from folks who have done this in the past? Any dos/don'ts on how this should be done?

Thanks in advance,
vivekian

lakpr
Posts: 1900
Joined: Fri Mar 18, 2011 9:59 am

Re: Roll-over 401k to Traditional IRA

Post by lakpr » Wed Jul 10, 2019 4:15 am

Don't is my advice. There are at least two distinct disadvantages for rolling over 401k to a Traditional IRA.

1. If you need to do backdoor Roth IRA, the rollover IRA interferes with it, subjecting it to a pro-rata rule. [ If your household income is greater than $193k in 2019, you will need to do backdoor Roth IRA ]
2. Asset protection. 401k plans provide absolute creditor protections, whereas IRAs are subject to a patchwork of individual state laws. In layman's terms, if you are held liable for something, the creditor can seize your IRA assets -- unless the state laws prevent it. California is a notorious example of weak state laws; only CO and OH have creditor protections for IRA comparably strong to ERISA act protections.

Of course, these two disadvantages have to be weighed against the plan fees and expenses; some 401k plans have egregious fees and fund expenses. But for the sake of $15 to $20 per quarter? Nah ...

When your wife gets back to work, you can roll this 401k money into her new employer's plan. Until then, I strongly advise you to leave it where it is.

Topic Author
vivekian123
Posts: 37
Joined: Sat May 24, 2014 1:13 pm

Re: Roll-over 401k to Traditional IRA

Post by vivekian123 » Wed Jul 10, 2019 3:31 pm

lakpr wrote:
Wed Jul 10, 2019 4:15 am
Don't is my advice. There are at least two distinct disadvantages for rolling over 401k to a Traditional IRA.

1. If you need to do backdoor Roth IRA, the rollover IRA interferes with it, subjecting it to a pro-rata rule. [ If your household income is greater than $193k in 2019, you will need to do backdoor Roth IRA ]
2. Asset protection. 401k plans provide absolute creditor protections, whereas IRAs are subject to a patchwork of individual state laws. In layman's terms, if you are held liable for something, the creditor can seize your IRA assets -- unless the state laws prevent it. California is a notorious example of weak state laws; only CO and OH have creditor protections for IRA comparably strong to ERISA act protections.

Of course, these two disadvantages have to be weighed against the plan fees and expenses; some 401k plans have egregious fees and fund expenses. But for the sake of $15 to $20 per quarter? Nah ...

When your wife gets back to work, you can roll this 401k money into her new employer's plan. Until then, I strongly advise you to leave it where it is.
Thanks for your reply. The interference with Roth IRA is enough to dissuade me. I like the idea of a 401k to 401k rollover.

Topic Author
vivekian123
Posts: 37
Joined: Sat May 24, 2014 1:13 pm

Re: Roll-over 401k to Traditional IRA

Post by vivekian123 » Wed Jul 10, 2019 3:31 pm

lakpr wrote:
Wed Jul 10, 2019 4:15 am
Don't is my advice. There are at least two distinct disadvantages for rolling over 401k to a Traditional IRA.

1. If you need to do backdoor Roth IRA, the rollover IRA interferes with it, subjecting it to a pro-rata rule. [ If your household income is greater than $193k in 2019, you will need to do backdoor Roth IRA ]
2. Asset protection. 401k plans provide absolute creditor protections, whereas IRAs are subject to a patchwork of individual state laws. In layman's terms, if you are held liable for something, the creditor can seize your IRA assets -- unless the state laws prevent it. California is a notorious example of weak state laws; only CO and OH have creditor protections for IRA comparably strong to ERISA act protections.

Of course, these two disadvantages have to be weighed against the plan fees and expenses; some 401k plans have egregious fees and fund expenses. But for the sake of $15 to $20 per quarter? Nah ...

When your wife gets back to work, you can roll this 401k money into her new employer's plan. Until then, I strongly advise you to leave it where it is.
Thanks for your reply. The interference with Roth IRA is enough to dissuade me. I like the idea of a 401k to 401k rollover.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Roll-over 401k to Traditional IRA

Post by retiredjg » Wed Jul 10, 2019 4:20 pm

vivekian123 wrote:
Wed Jul 10, 2019 3:31 pm
Thanks for your reply. The interference with Roth IRA is enough to dissuade me. I like the idea of a 401k to 401k rollover.
The interference with Roth IRA only applies if your income is so high that you cannot contribute to Roth IRA directly. If that is not an issue for you two, then don't consider it.

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ruralavalon
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Re: Roll-over 401k to Traditional IRA

Post by ruralavalon » Wed Jul 10, 2019 6:23 pm

vivekian123 wrote:
Wed Jul 10, 2019 3:40 am
Hi,

My wife quit her job back in Feb of this year to redirect her career and has around $100K in her Fidelity 401k from her workplace in a Vanguard 2050 Target Fund. There is at-least a small plan fees which has to be paid to Fidelity every quarter ($15-$20). I am wondering if we should make the move and rollover to a traditional IRA at vanguard. The one downside I could think of was not being able to take a loan against the 401k in an emergency? But on the upside, the scenario where that happens has very low likelihood. Will definitely have the opportunity to manage the asset allocation better in Vanguard since we are not restricted to just Vanguard Target funds.

Any thoughts from folks who have done this in the past? Any dos/don'ts on how this should be done?

Thanks in advance,
vivekian
Will she soon be moving to another employer with a 401k plan or similar (403b, 457b, SIMPLE IRA, TSP)?

the rollover issue depends almost entirely on expense ratios and funds offered, information not provided in your post. On a $100k account a quarterly fee of $15 - $20 is probably not large enough to be important in the decision. There are three basic choices.

1) If the funds offered in the old 401k are good with low expense ratios, and there is no account maintenance fee charged for keeping the account there or only a small fee (on a $100k account a quarterly fee of $15 - $20 is fairly minor, around 0.06% to 0.08% of assets annually), then it may be best to leave the old 401k where it is.

2) If a new 401k or other work-based plan in her redirected career offers similar or better funds with similar or lower expense ratios, and will accept a rollover from the old 401k, then it may be best to roll the old 401k over into the new 401k.

3) If neither 401k offers good funds with low expense ratios then it may be best to roll the old 401k over to an IRA at a low cost provider like Vanguard or Fidelity.

Wiki article, 401k, ”Rollover to IRA".

Additional considerations include:

1) the convenience of having one fewer account to keep track and manage, if she moves the old 401k into the new plan or an IRA;

2) depending on your state, a 401k plan may have greater protection from creditors than does an IRA;

3) a rollover to an IRA may impede ability to do a Backdoor Roth IRA for higher income individuals, and

4) a 401k allows distributions penalty free starting at age 55 if no longer employed, and has other provisions for withdrawals earlier than age 59.5. Wiki article, 401k, "Move to new 401k".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ExitStageLeft
Posts: 1438
Joined: Sat Jan 20, 2018 4:02 pm

Re: Roll-over 401k to Traditional IRA

Post by ExitStageLeft » Wed Jul 10, 2019 8:17 pm

I'm pretty sure she won't be able to take out a 401k loan since she is no longer employed there. Even still, I would probably leave it at the old employer for the reasons stated by others.

Topic Author
vivekian123
Posts: 37
Joined: Sat May 24, 2014 1:13 pm

Re: Roll-over 401k to Traditional IRA

Post by vivekian123 » Sat Jul 13, 2019 5:22 pm

ruralavalon wrote:
Wed Jul 10, 2019 6:23 pm
vivekian123 wrote:
Wed Jul 10, 2019 3:40 am
Hi,

My wife quit her job back in Feb of this year to redirect her career and has around $100K in her Fidelity 401k from her workplace in a Vanguard 2050 Target Fund. There is at-least a small plan fees which has to be paid to Fidelity every quarter ($15-$20). I am wondering if we should make the move and rollover to a traditional IRA at vanguard. The one downside I could think of was not being able to take a loan against the 401k in an emergency? But on the upside, the scenario where that happens has very low likelihood. Will definitely have the opportunity to manage the asset allocation better in Vanguard since we are not restricted to just Vanguard Target funds.

Any thoughts from folks who have done this in the past? Any dos/don'ts on how this should be done?

Thanks in advance,
vivekian
Will she soon be moving to another employer with a 401k plan or similar (403b, 457b, SIMPLE IRA, TSP)?

the rollover issue depends almost entirely on expense ratios and funds offered, information not provided in your post. On a $100k account a quarterly fee of $15 - $20 is probably not large enough to be important in the decision. There are three basic choices.

1) If the funds offered in the old 401k are good with low expense ratios, and there is no account maintenance fee charged for keeping the account there or only a small fee (on a $100k account a quarterly fee of $15 - $20 is fairly minor, around 0.06% to 0.08% of assets annually), then it may be best to leave the old 401k where it is.

2) If a new 401k or other work-based plan in her redirected career offers similar or better funds with similar or lower expense ratios, and will accept a rollover from the old 401k, then it may be best to roll the old 401k over into the new 401k.

3) If neither 401k offers good funds with low expense ratios then it may be best to roll the old 401k over to an IRA at a low cost provider like Vanguard or Fidelity.

Wiki article, 401k, ”Rollover to IRA".

Additional considerations include:

1) the convenience of having one fewer account to keep track and manage, if she moves the old 401k into the new plan or an IRA;

2) depending on your state, a 401k plan may have greater protection from creditors than does an IRA;

3) a rollover to an IRA may impede ability to do a Backdoor Roth IRA for higher income individuals, and

4) a 401k allows distributions penalty free starting at age 55 if no longer employed, and has other provisions for withdrawals earlier than age 59.5. Wiki article, 401k, "Move to new 401k".
All of this makes a lot of sense. Investments are all in low cost Vanguard broad index funds (Vanguard Target 2050, Vanguard total bond market). I checked quarterly fees to be $14 per quarter. Best to leave things as they are till she settles down in her next job. My only concern would be in case her older company closes (which is a serious possibility). Not sure if that effects anything since Fidelity hosts the account.

lakpr
Posts: 1900
Joined: Fri Mar 18, 2011 9:59 am

Re: Roll-over 401k to Traditional IRA

Post by lakpr » Sat Jul 13, 2019 10:29 pm

vivekian123 wrote:
Sat Jul 13, 2019 5:22 pm
All of this makes a lot of sense. Investments are all in low cost Vanguard broad index funds (Vanguard Target 2050, Vanguard total bond market). I checked quarterly fees to be $14 per quarter. Best to leave things as they are till she settles down in her next job. My only concern would be in case her older company closes (which is a serious possibility). Not sure if that effects anything since Fidelity hosts the account.
The non-alienation provisions of the ERISA act kick in if the employer goes under. Your wife's 401k contributions are sacrosanct, neither the employer nor the employer's creditors, and for that matter not even your wife's creditors either, can touch the funds in the 401k plan. 401k plans provide the ultimate asset protection. The only exceptions that I know of are defaulting on taxes owed to IRS, QDROs, student loan defaults.

Edited to add: if you are invested in Vanguard Target Retirement 2050, why do you want to add Total Bond Market again? You might as well choose Target Retirement 2045 and drop everything in there ...

Either choose a Target Date fund all by itself and drop everything there, or commit to a 3-fund portfolio according to your asset allocation and do a periodic (perhaps once a year, on your/your spouse's birthday) re-balancing.

Topic Author
vivekian123
Posts: 37
Joined: Sat May 24, 2014 1:13 pm

Re: Roll-over 401k to Traditional IRA

Post by vivekian123 » Mon Jul 15, 2019 12:26 am

Thanks lakpr - that makes me feel much better. The Vanguard Total Bond Market is a small %age of the 401k (5%) - just to ensure that the overall asset allocation is correct. Though I think its time for me to post my complete allocation and get feedback from this wonderful community. Assets are spread in to quite a few accounts and sliced and diced quite a bit which takes away from the overall goal of simplicity. Also, unfortunately, I am tilted heavily to a single stock due to past ESPP contributions and RSUs which makes my portfolio quite risky, but all that is for another post. For now, thanks for this information.

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