401K leaving employer

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airahcaz
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401K leaving employer

Post by airahcaz »

If an employer allows partial rollovers to both another 401K and IRA upon separation of the company, would you split it out?

If the employer only allows one rollover, what are the criteria to choose between the two?

Both leaving the 401K at current employer or rolling over to new employer's 401K has the advantages of low cost funds and creditor protection (assume all things being equal, for example assume both have a low cost total market index fund with the exact same expenses).

And of course the IRA has far more flexibility in investments, and it also has low cost index funds (maybe not as super low as some 401K's, but still pretty darn low).

Why then, besides creditor protection, would one not roll to an IRA?
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livesoft
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Re: 401K leaving employer

Post by livesoft »

airahcaz wrote:Why then, besides creditor protection, would one not roll to an IRA?
Backdoor Roth IRA possibilities comes to mind.
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furwut
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Re: 401K leaving employer

Post by furwut »

Judging from posts here asking for advice on which fund(s) to choose from their plans I would say that many people would find the choices with an IRA to be both wider and less expensive.

An advantage with 401ks is the ability to take loans. Though one needs to check to see if a plan allows loans against rollover contributions.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

livesoft wrote:
airahcaz wrote:Why then, besides creditor protection, would one not roll to an IRA?
Backdoor Roth IRA possibilities comes to mind.
Ah, with a decent amount in the 401K, if rolled to a traditional IRA, this all but practically eliminates the Backdoor, correct? So one needs to decide whether essentially forgoing all future IRA contributions is worth it?

I did find this:
"Let's assume in our previous example that you have another traditional IRA account that was rolled over from a 401(k) plan with a value of $100,000. Would 100% of your backdoor Roth IRA conversion still be nontaxable?

The nontaxable amount of your Roth IRA conversion would be equal to your conversion of $5,500 multiplied by a fraction equal to your nondeductible contribution of $5,500 divided by the total value of all of your traditional IRA accounts of $105,500, or 5,500 x $5,500/$105,500, or $287. This results in a taxable amount of $5,213 ($5,500 - $287), or 95% of your conversion amount. Quite a different result compared with the situation where you had no other traditional IRA accounts."
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Alskar
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Re: 401K leaving employer

Post by Alskar »

airahcaz wrote:Why then, besides creditor protection, would one not roll to an IRA?
To be eligible for a backdoor Roth IRA contribution is about the only reason I can think of besides creditor protection. FWIW, I just did my 9th 401k rollover. I now reflexivity rollover my 401k as soon as I leave an employer.

I'm told there are 401k plans with lower expenses than what I'm paying for my rollover IRA, but I haven't experienced one.
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Re: 401K leaving employer

Post by 123 »

If you continue to work past age 70.5 you can delay taking RMDs from your employer's 401K in most cases if you are still working for that employer and you own less then 5% of the company. RMDs can't be delayed/avoided for IRAs.

Thus is you anticipate working after age 70.5 you're probably better off having all your retirement money in a 401K with your current employer if you don't want to take RMDs.
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DSInvestor
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Re: 401K leaving employer

Post by DSInvestor »

If you separate from service in or after the year that you reach age 55, you are permitted to withdraw from the 401k without early withdrawal penalty.
See this IRS list of exceptions to the early withdrawal penalty:
http://www.irs.gov/Retirement-Plans/Pla ... tributions

I'm not sure if this applies to all 401k accounts you may have or just the one provided by the employer that you're leaving.

IRA does not offer this exception so it may not be a good idea to rollover to IRA if you need to withdraw 401k assets from age 55-59.5.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

Alskar wrote:
airahcaz wrote:Why then, besides creditor protection, would one not roll to an IRA?
To be eligible for a backdoor Roth IRA contribution is about the only reason I can think of besides creditor protection. FWIW, I just did my 9th 401k rollover. I now reflexivity rollover my 401k as soon as I leave an employer.

I'm told there are 401k plans with lower expenses than what I'm paying for my rollover IRA, but I haven't experienced one.

So you religiously rolled over to new employer 401K so it is all in one place?

I suppose one needs to think if there is "enough" in a Roth IRA (there is never enough) and forgo the Backdoor, and decide that the $5500 previously allocated goes to an after-tax account?

The ability to Backdoor probably trumps the alternative of having flexibility in investing in an IRA...
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Re: 401K leaving employer

Post by jebmke »

airahcaz wrote:Why then, besides creditor protection, would one not roll to an IRA?
In Maryland, when you turn 65 you are permitted to exclude (subject to a limit) pension income from your taxable income. Qualified plans (such as 401(k), 403(b)s ...) count as pensions, IRAs do not, even if they were funded by rollovers from qualified plans.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
cherijoh
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Re: 401K leaving employer

Post by cherijoh »

DSInvestor wrote:If you separate from service in or after the year that you reach age 55, you are permitted to withdraw from the 401k without early withdrawal penalty.
See this IRS list of exceptions to the early withdrawal penalty:
http://www.irs.gov/Retirement-Plans/Pla ... tributions

I'm not sure if this applies to all 401k accounts you may have or just the one provided by the employer that you're leaving.

IRA does not offer this exception so it may not be a good idea to rollover to IRA if you need to withdraw 401k assets from age 55-59.5.
But you do have the option to do a SEPP (aka 72t) withdrawal from an IRA - it must be for 5 years or until you reach 59.5, whichever is longer.
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Re: 401K leaving employer

Post by cherijoh »

Alskar wrote:
airahcaz wrote:Why then, besides creditor protection, would one not roll to an IRA?
To be eligible for a backdoor Roth IRA contribution is about the only reason I can think of besides creditor protection. FWIW, I just did my 9th 401k rollover. I now reflexivity rollover my 401k as soon as I leave an employer.

I'm told there are 401k plans with lower expenses than what I'm paying for my rollover IRA, but I haven't experienced one.
Yikes - does this mean you are on your 10th employer?
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TomatoTomahto
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Re: 401K leaving employer

Post by TomatoTomahto »

To keep backdooring, don't most 401ks accept reverse rollovers?

I expect to, when changing employers:
roll OldCo post-tax 401k to Roth IRA
roll OldCo pre-tax and earnings in 401k to tIRA
reverse roll tIRA to NewCo 401k
resume backdoor Roth, although I plan on waiting a year
I get the FI part but not the RE part of FIRE.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

TomatoTomahto wrote:To keep backdooring, don't most 401ks accept reverse rollovers?

I expect to, when changing employers:
roll OldCo post-tax 401k to Roth IRA
roll OldCo pre-tax and earnings in 401k to tIRA
reverse roll tIRA to NewCo 401k
resume backdoor Roth, although I plan on waiting a year
I don't get it. The point was to keep the funds in the tIRA to keep the flexibility of the IRA.
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TomatoTomahto
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Re: 401K leaving employer

Post by TomatoTomahto »

Yes, true enough. Never mind. Insufficient caffeine on a Sunday morning.
I get the FI part but not the RE part of FIRE.
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Alskar
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Re: 401K leaving employer

Post by Alskar »

airahcaz wrote:So you religiously rolled over to new employer 401K so it is all in one place?

I suppose one needs to think if there is "enough" in a Roth IRA (there is never enough) and forgo the Backdoor, and decide that the $5500 previously allocated goes to an after-tax account?

The ability to Backdoor probably trumps the alternative of having flexibility in investing in an IRA...
Sorry, I wasn't clear. I religious rollover my 401k funds into a rollover traditional IRA and a rollover Roth IRA at Fidelity. This keeps my costs lower than if I left the money in the 401k and gives me complete control over how it is invested.

Additionally, I have a history of working for high-tech startups. High-tech startups have a history of failing. When a startup fails, the 401k plan has to be shutdown. It can take 18 months to get one's money out of a 401k that has shutdown. It's much easier if you get your money out before the company folds.

I don't make enough to fund a backdoor Roth, so that option doesn't offer much to me.
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Alskar
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Re: 401K leaving employer

Post by Alskar »

cherijoh wrote:Yikes - does this mean you are on your 10th employer?
Yes indeed! Welcome to the nasty world of high-tech! For the record, I'm only 54. I expect to have at least 2-3 more employers before I retire.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

What if one utilized the Backdoor in January of the same year that one leaves their company and rolls over the 401K to IRA?

Should the Backdoor be reversed?
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DSInvestor
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Re: 401K leaving employer

Post by DSInvestor »

airahcaz wrote:What if one utilized the Backdoor in January of the same year that one leaves their company and rolls over the 401K to IRA?

Should the Backdoor be reversed?
Reversal of conversion would avoid the taxes due to prorata calculation but it would not remove the IRA basis. You'd need to undo the TIRA contribution to remove the basis. If you kept the conversion and did the rollover to IRA, you'd need to track the basis every year as you and your heirs withdraw from IRA and the prorata calculation would consume a little basis with each year that you withdraw.

I'd look for ways to isolate the basis and convert all of the basis to Roth IRA before rolling over to IRA.
1. keep the 401k assets in the old 401k.
2. Rollover to new 401k if it has low cost investment options.
3. If retiring, wait until after Dec 31, to rollover to IRA.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

DSInvestor wrote:
airahcaz wrote:What if one utilized the Backdoor in January of the same year that one leaves their company and rolls over the 401K to IRA?

Should the Backdoor be reversed?
Reversal of conversion would avoid the taxes due to prorata calculation but it would not remove the IRA basis. You'd need to undo the TIRA contribution to remove the basis. If you kept the conversion and did the rollover to IRA, you'd need to track the basis every year as you and your heirs withdraw from IRA and the prorata calculation would consume a little basis with each year that you withdraw.

I'd look for ways to isolate the basis and convert all of the basis to Roth IRA before rolling over to IRA.
1. keep the 401k assets in the old 401k.
2. Rollover to new 401k if it has low cost investment options.
3. If retiring, wait until after Dec 31, to rollover to IRA.
I wonder if I don't roll over to anything, how long would I have to roll over in the future, forever?
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Watty
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Re: 401K leaving employer

Post by Watty »

Why then, besides creditor protection, would one not roll to an IRA?
Two things not mentioned,

I have had employers change 401k providers for the worse so rolling it out would help avoid that.

If it is an old 401k that pre-dates a marriage then rolling the money out to an IRA could mix it with post marriage funds which could be a problem if the money was ever split in a divorce.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

The ability to Backdoor and contribute $5500 for 20+ years and incur tax free gains on that 6 figures is a pretty big advantage to forgo. For this alone I suspect it makes sense to either leave in existing 401K or move to new 401K, and not an IRA.

All investments being equal, I also suppose it makes sense to roll over to new 401K for ease of accounting, especially if 401K provider is the same or of the same caliber (Fido, Vanguard, Schwab).
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Re: 401K leaving employer

Post by DSInvestor »

airahcaz wrote:The ability to Backdoor and contribute $5500 for 20+ years and incur tax free gains on that 6 figures is a pretty big advantage to forgo. For this alone I suspect it makes sense to either leave in existing 401K or move to new 401K, and not an IRA.

All investments being equal, I also suppose it makes sense to roll over to new 401K for ease of accounting, especially if 401K provider is the same or of the same caliber (Fido, Vanguard, Schwab).
You should also factor in the size of the 401k account and the difference in expense ratios between 401k and Rollover IRA. For example, if the 401k is 500K and has expense ratios 0.5% higher than Rollover IRA, you're paying an extra $2500/yr in expense ratio to get $5500 into Roth IRA via the backdoor. At some point, it may be better to rollover to IRA to get lower expenses, skip the backdoor and invest $5500/yr in taxable which can be remarkably tax efficient.

Not all Fidelity 401k plans are equal. Some are high cost some are not.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

DSInvestor wrote:
airahcaz wrote:The ability to Backdoor and contribute $5500 for 20+ years and incur tax free gains on that 6 figures is a pretty big advantage to forgo. For this alone I suspect it makes sense to either leave in existing 401K or move to new 401K, and not an IRA.

All investments being equal, I also suppose it makes sense to roll over to new 401K for ease of accounting, especially if 401K provider is the same or of the same caliber (Fido, Vanguard, Schwab).
You should also factor in the size of the 401k account and the difference in expense ratios between 401k and Rollover IRA. For example, if the 401k is 500K and has expense ratios 0.5% higher than Rollover IRA, you're paying an extra $2500/yr in expense ratio to get $5500 into Roth IRA via the backdoor. At some point, it may be better to rollover to IRA to get lower expenses, skip the backdoor and invest $5500/yr in taxable which can be remarkably tax efficient.

Not all Fidelity 401k plans are equal. Some are high cost some are not.
Ok understood, but none are anywhere close to being that high, and fidelity index funds are in the .02-.05 MER range.

BAML etc, that's a different story.
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Re: 401K leaving employer

Post by DSInvestor »

airahcaz wrote:Ok understood, but none are anywhere close to being that high, and fidelity index funds are in the .02-.05 MER range.
Well, that's great. Those expense ratios are lower than anything you can get in an IRA even at Vanguard.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

Should an investor split the rollover (it is allowed), some to new employer 401K, some to IRA?
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Re: 401K leaving employer

Post by abuss368 »

Moving the assets to an IRA should provide more investment opportunities and possibly lower costs. You may also be able to convert to a Roth IRA.
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

airahcaz wrote:
DSInvestor wrote:
airahcaz wrote:What if one utilized the Backdoor in January of the same year that one leaves their company and rolls over the 401K to IRA?

Should the Backdoor be reversed?
Reversal of conversion would avoid the taxes due to prorata calculation but it would not remove the IRA basis. You'd need to undo the TIRA contribution to remove the basis. If you kept the conversion and did the rollover to IRA, you'd need to track the basis every year as you and your heirs withdraw from IRA and the prorata calculation would consume a little basis with each year that you withdraw.

I'd look for ways to isolate the basis and convert all of the basis to Roth IRA before rolling over to IRA.
1. keep the 401k assets in the old 401k.
2. Rollover to new 401k if it has low cost investment options.
3. If retiring, wait until after Dec 31, to rollover to IRA.
I wonder if I don't roll over to anything, how long would I have to roll over in the future, forever?
The answer to this is that there is no time limit, correct?
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airahcaz
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Re: 401K leaving employer

Post by airahcaz »

So I rolled it over from Traditional 401K to a Rollover IRA. I understand that I can further roll it over from there back into a new employer's 401K should there be a need to, perhaps in the event one needs lawsuit, bankruptcy, or creditor protection? Do folks do this as a tactic in the event someone is coming after them?

Thanks
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Re: 401K leaving employer

Post by furwut »

airahcaz wrote:So I rolled it over from Traditional 401K to a Rollover IRA. I understand that I can further roll it over from there back into a new employer's 401K should there be a need to, perhaps in the event one needs lawsuit, bankruptcy, or creditor protection? Do folks do this as a tactic in the event someone is coming after them?

Thanks
Provided your new 401k accepts rollover contributions. I think most folks roll IRAs into 401ks to allow them to make a backdoor Roth contribution.
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