When IRA Rollovers go Wrong

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letsgobobby
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When IRA Rollovers go Wrong

Post by letsgobobby » Thu Jul 26, 2012 12:04 pm

http://www.smartmoney.com/taxes/income/ ... 243259709/

Great little article. I have always wondered why typical financial media advice is to rollover your old 401k to an IRA. There seem to be so many disadvantages to this:

1. loss of access to backdoor Roth IRA, if applicable.
2. reduced flexibility for early withdrawals, as illustrated by this article.
3. potentially less protection from lawsuits, depending on state law.
4. loss of access to lower cost institutional mutual funds, depending on your 401k.

Obviously a lot depends on the quality of your 401k, but does anyone else think this boilerplate advice is wrong as much as it is right?

hsv_climber
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Re: When IRA Rollovers go Wrong

Post by hsv_climber » Thu Jul 26, 2012 12:19 pm

I think generic advice about rollover is correct.

1. What is backdoor Roth has to do with 401K -> IRA conversion?

2. The guy in the article should've used 72t. Why would anyone want to withdraw the whole amount anyway? 10% is a small price to pay for the 35% (federal) + State stupidity tax.

3. Are you sure that it is the case?

4. 0.06% E/R on VTI is ridiculously more expensive than 0.05% on Institutional shares of the same fund. ($10 / year on $100,000). OTOH, you can buy bonds directly and save much more money on bond funds E/R.

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letsgobobby
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Re: When IRA Rollovers go Wrong

Post by letsgobobby » Thu Jul 26, 2012 12:38 pm

hsv_climber wrote:I think generic advice about rollover is correct.

1. What is backdoor Roth has to do with 401K -> IRA conversion?
- if you have a substantial rollover IRA, your backdoor Roth IRA attempts are going to be frustrated by pro-rata taxation.
3. Are you sure that it is the case?
- yes, details may depend on state law:

http://online.wsj.com/article/SB124181801239401917.html
4. 0.06% E/R on VTI is ridiculously more expensive than 0.05% on Institutional shares of the same fund. ($10 / year on $100,000). OTOH, you can buy bonds directly and save much more money on bond funds E/R.
- if you participate in TSP, or have access to SSGA funds, for example, their expenses are lower than VTI.

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House Blend
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Re: When IRA Rollovers go Wrong

Post by House Blend » Thu Jul 26, 2012 2:40 pm

letsgobobby wrote:Obviously a lot depends on the quality of your 401k, but does anyone else think this boilerplate advice is wrong as much as it is right?
No, but I'm willing to stand with you in condemning blanket recommendations that "everyone" should roll their 401k to an IRA. (Don't recall seeing any articles like that, however.)

What I hate are articles, like this one, that try to scare you into thinking that our tax laws are too complicated for you. (No doubt this applies to the authors of many such articles.) The easily predictable conclusion is that it is absolutely essential that you hire a Tax Professional (tm).

I'd like to see more articles aimed at encouraging people to learn how the tax laws apply to them. And pointers to books and software and IRS publications. In fact, with minor editing, this article could have been pitched as educational/informative, rather than a fear-fest.

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tfb
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Re: When IRA Rollovers go Wrong

Post by tfb » Thu Jul 26, 2012 3:09 pm

You gave some corner case exceptions. Most of them are already noted in this article by ObliviousInvestor:

http://www.obliviousinvestor.com/should ... to-an-ira/

They don't change the conclusion for most people. That is rollover when you can.
Harry Sit, taking a break from the forums.

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Peter Foley
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Re: When IRA Rollovers go Wrong

Post by Peter Foley » Thu Jul 26, 2012 3:28 pm

One point that is being missed is that when you do a rollover you will lose access to some investment options in a 401 (k). I'm a proponent of having some funds in a stable value fund. Expense ratios matter, but so too do the variety of investments available.
By the way - one may not have to roll everything over if the 401 (k) provider allows partial distributions/transfers.

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letsgobobby
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Re: When IRA Rollovers go Wrong

Post by letsgobobby » Thu Jul 26, 2012 5:50 pm

Good point. I also have 1/4 of my assets in my stable value fund, an option I would lose completely if rolled over to an IRA.

I know there are lots of terrible, expensive 401k plans out there. But there are also many good, cheap 401k plans. Right now, for example, my wife and I both have great plans, my dad has a dog, two sisters-in-law have great plans, one has a lousy plan, etc. The advice should be less broad-brushed than "most people should rollover." Something more nuanced, like, "The decision to rollover or not depends on many factors, including the expenses of your 401k, the investment options in your 401k, whether you are eligible to make deductible IRA contributions or not, your state's asset protection laws as they apply to retirement plans, and your own personal exposure to liability."

Not as neat, but I think much more accurate. Kind of like there is no single blanket recommendation for IRA vs Roth IRA; the decision must be individualized.

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