401K Direct Transfer to IRA's (ROTH and Traditional)

[Mitchell777]

I have a 401K from a former employer (I’m retired and turning 73 in 2026). Vanguard is the administrator. Total value is $735K. $35K is after tax contributions. $700K is pre tax employee contributions, employer contributions, and earnings. I want to do a direct rollover to 2 new IRA's at Vanguard ($35K to a new ROTH IRA and $700K to a new Traditional IRA (Traditional will become taxable when RMD’s start at 73).

Just in case it matters: I currently have one other 401K at Fidelity and five IRA’s at Vanguard (two ROTH’s, one Rollover IRA with all pre-tax contributions, one Traditional IRA with all after tax contributions, one traditional IRA all pre tax contributions).

I’m told by the administrator, Vanguard, that my plan allows this transfer. I’ve read all I can on here and on line. Is there anything to watch out for in doing this transfer(s)? Thank you

[Alan S.]

I have a 401K from a former employer (I’m retired and turning 73 in 2026). Vanguard is the administrator. Total value is $735K. $35K is after tax contributions. $700K is pre tax employee contributions, employer contributions, and earnings. I want to do a direct rollover to 2 new IRA's at Vanguard ($35K to a new ROTH IRA and $700K to a new Traditional IRA (Traditional will become taxable when RMD’s start at 73).

Just in case it matters: I currently have one other 401K at Fidelity and five IRA’s at Vanguard (two ROTH’s, one Rollover IRA with all pre-tax contributions, one Traditional IRA with all after tax contributions, one traditional IRA all pre tax contributions).

I’m told by the administrator, Vanguard, that my plan allows this transfer. I’ve read all I can on here and on line. Is there anything to watch out for in doing this transfer(s)? Thank you

Well, you certainly do not need to open any more IRA accounts, as you already have too many. As for the direct rollovers, be sure to request them as a split distribution at the same time and be sure that they go to the correct accounts.

If you are retiring for good, and do not live in a state that provides limited protection for IRAs against creditors, you can combine all your TIRA accounts into one because they are treated as a combined single IRA for tax reasons anyway. Your non deductible TIRA contributions are tracked on Form 8606, and that form applies your ND contribution balance equally over all your TIRA accounts. Therefore, the direct rollover should go into an IRA you intend to keep, and the other TIRAs should be combined by direct transfer into that IRA as well*.

Same for the Roth IRAs, you only need one.

*Unique reasons for separate IRA accounts:
1) You have an IRA annuity which must be held at an insurance company
2) You want to have different beneficiaries on accounts for beneficiaries who do not cooperate well with each other
3) You live in a state that provides better creditor protection for rollover IRAs than for contributary IRAs.

After the direct rollovers are completed, immediately verify that the correct amounts went into the correct IRAs (no pre tax dollars to the Roth and no after tax dollars to the TIRA).

[Mitchell777]

I have a 401K from a former employer (I’m retired and turning 73 in 2026). Vanguard is the administrator. Total value is $735K. $35K is after tax contributions. $700K is pre tax employee contributions, employer contributions, and earnings. I want to do a direct rollover to 2 new IRA's at Vanguard ($35K to a new ROTH IRA and $700K to a new Traditional IRA (Traditional will become taxable when RMD’s start at 73).

Just in case it matters: I currently have one other 401K at Fidelity and five IRA’s at Vanguard (two ROTH’s, one Rollover IRA with all pre-tax contributions, one Traditional IRA with all after tax contributions, one traditional IRA all pre tax contributions).

I’m told by the administrator, Vanguard, that my plan allows this transfer. I’ve read all I can on here and on line. Is there anything to watch out for in doing this transfer(s)? Thank you

Well, you certainly do not need to open any more IRA accounts, as you already have too many. As for the direct rollovers, be sure to request them as a split distribution at the same time and be sure that they go to the correct accounts.

If you are retiring for good, and do not live in a state that provides limited protection for IRAs against creditors, you can combine all your TIRA accounts into one because they are treated as a combined single IRA for tax reasons anyway. Your non deductible TIRA contributions are tracked on Form 8606, and that form applies your ND contribution balance equally over all your TIRA accounts. Therefore, the direct rollover should go into an IRA you intend to keep, and the other TIRAs should be combined by direct transfer into that IRA as well*.

Same for the Roth IRAs, you only need one.

*Unique reasons for separate IRA accounts:
1) You have an IRA annuity which must be held at an insurance company
2) You want to have different beneficiaries on accounts for beneficiaries who do not cooperate well with each other
3) You live in a state that provides better creditor protection for rollover IRAs than for contributary IRAs.

After the direct rollovers are completed, immediately verify that the correct amounts went into the correct IRAs (no pre tax dollars to the Roth and no after tax dollars to the TIRA).

I Appreciate your insights Alan. The high number of IRA's occurred because two of them are inherited (one ROTH/one Traditional). Another is from a severance payout where the company was allowed to use funds from an overfunded DB pension, and so we were given the option to roll over the money to an IRA or increase our future DB pension payout. I chose the IRA rollover.

I planned to keep this "split distribution" separate from the other IRA's because I believe my state, PA, does offer ERISA equivalent protection to IRA's transferred from 401K's. The info below is from an article by Patti Spencer, a lawyer at Spencer Law Group in PA.

"Pennsylvania's statute provides significant protection against attachment and execution of judgments against IRAs by creditors. Pennsylvania law protects contributions to an IRA up to $15,000 per year. Contributions over $15,000 per year are available to creditors. Importantly, the Pennsylvania statute was amended in 1998 to provide that rollovers from qualified employer plans do not constitute "contributions" for purposes of the $15,000 limit. Thus, a direct transfer from a qualified retirement plan already subject to creditor protection (such as a qualified employer plan) to an IRA retains the same protection."