Job Change and 401K

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AtlantaP
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Job Change and 401K

Post by AtlantaP » Wed Oct 02, 2019 6:26 pm

I've tried searching this forum and also googled, but still torn on the best course of action. Hoping this is ok to post.

My husband is changing jobs and has the option to leave his existing 401K with Megacorp, or the usual options of transferring to new jobs 401K, rollover to an IRA, cashing out (not doing that), etc. He's actually pleased with the funds, it's performed well, and is tempted just to leave it. In all my research I'm not finding much of a downside other than having yet another account, but it's not like we're going to forget about it (it's at least 2/3 of our retirement funds). Whenever I've changed jobs I've moved my 401K funds to an IRA, so not much experience in leaving it as-is and interested in others experiences.

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Brianmcg321
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Re: Job Change and 401K

Post by Brianmcg321 » Wed Oct 02, 2019 6:28 pm

What are the funds and ERs he is in?
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

arsenalfan
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Re: Job Change and 401K

Post by arsenalfan » Wed Oct 02, 2019 6:33 pm

If it helps, I'm in a similar boat and leaving the funds in my old employer's 401k at Fidelity.
It really is a great plan, with self-directed brokerage and all the usual index/zero offerings.
I may move the Roth 401k money into my Roth IRA account though - Fidelity never setup a different account for the Roth 401k money, just called it a % of assets contributed. I never understood how they valued it, and prefer a distinct separate Roth IRA account going forward.
Obviously not rolling into IRA since I do backdoor roths annually.

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Wiggums
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Re: Job Change and 401K

Post by Wiggums » Wed Oct 02, 2019 6:56 pm

arsenalfan wrote:
Wed Oct 02, 2019 6:33 pm
If it helps, I'm in a similar boat and leaving the funds in my old employer's 401k at Fidelity.
It really is a great plan, with self-directed brokerage and all the usual index/zero offerings.
I may move the Roth 401k money into my Roth IRA account though - Fidelity never setup a different account for the Roth 401k money, just called it a % of assets contributed. I never understood how they valued it, and prefer a distinct separate Roth IRA account going forward.
Obviously not rolling into IRA since I do backdoor roths annually.
If you move the Roth 401k to a Roth IRA, I believe that the 5 year requirement starts over again.

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Wiggums
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Re: Job Change and 401K

Post by Wiggums » Wed Oct 02, 2019 6:58 pm

If it’s a good 401K, there is nothing wrong with leaving it there. Especially until you get familiar with the new 401k and are able to compared the two plans.

retired@50
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Re: Job Change and 401K

Post by retired@50 » Wed Oct 02, 2019 7:47 pm

I'm perhaps in the minority on this topic, but nobody else seems to discuss that 401k plans have fees BEYOND the expense ratios of the funds you're invested in. Now, with MegaCorp, they may be small, or perhaps even covered by MegaCorp, however that doesn't mean they don't exist. In one egregious example with the 401k provider (Mass Mutual) a friend is paying 0.31% on every dollar invested ON TOP of the expense ratios of the funds chosen. Treatment like this screams out for a rollover into an IRA at Vanguard with no account fees and low expense ratios. Of course, this would also require that the fees at the new employer are scrutinized as well before rolling money into the new plan. Do some reading about fee disclosure(s) in your current situation is the only way I can see to learn what you're actually paying, and to whom. End of rant... Best of luck.

lakpr
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Re: Job Change and 401K

Post by lakpr » Wed Oct 02, 2019 8:28 pm

retired@50 wrote:
Wed Oct 02, 2019 7:47 pm
I'm perhaps in the minority on this topic, but nobody else seems to discuss that 401k plans have fees BEYOND the expense ratios of the funds you're invested in. Now, with MegaCorp, they may be small, or perhaps even covered by MegaCorp, however that doesn't mean they don't exist. In one egregious example with the 401k provider (Mass Mutual) a friend is paying 0.31% on every dollar invested ON TOP of the expense ratios of the funds chosen. Treatment like this screams out for a rollover into an IRA at Vanguard with no account fees and low expense ratios. Of course, this would also require that the fees at the new employer are scrutinized as well before rolling money into the new plan. Do some reading about fee disclosure(s) in your current situation is the only way I can see to learn what you're actually paying, and to whom. End of rant... Best of luck.
If making a backdoor Roth contribution every year is important to this person/couple, even a 0.31% additional fee is indeed reasonable. Let's say the balance in the old 401k is $500k, so the fees is $1550 per year. However, leaving the funds in the plan allow $6000 per year to be contributed, multiplied by say 20 years = $120k + all associated growth in the future being tax free.

This $1550, remember, is before tax, so should be discounted ideally by the person's marginal tax rate. Since we assumed the person is doing backdoor Roth, he/she is in at least a 24% tax bracket, with another 5% or thereabouts of state taxes = 29%. So the true annual cost = $1550 * 0.71 = $1100 per year. After 2026 when the tax rates return to 2017 levels, this cost is further reduced.

Remember that we have assumed a very high 401k balance. Quite likely that assumption may not be true. May be the person only has $200k balance in the 401k. If so, the cost is reduced to $440 per year.

One can further reduce that cost by smothering the growth in the old 401k plan. Invest it all in bond funds, where the growth is expected to be just barely ahead of inflation.

My bottom line is: do not let the "additional cost" let you lose sight of the actual prize -- leaving the funds in old 401k might be a better choice than rolling into an IRA. Of course, if the current 401k plan has reasonable choices, rolling over the old 401k plan to current 401k plan is the best choice.

HomeStretch
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Re: Job Change and 401K

Post by HomeStretch » Wed Oct 02, 2019 9:00 pm

If the old 401k and new 401k both have comparable low-cost diversified funds available then likely either 401k is fine.

If your spouse is between the ages of 55 and 59-1/2 and separated from the old employer at or after age 55, one reason for leaving the money in the old plan is that your spouse can request a penalty-free distribution under the “rule of 55”. The plan may or may not allow partial distributions.

If he stays with the old 401k plan, keep an eye on fees. Some former employer plans charge higher admin fees to former employee accounts.

Don’t rollover over to an IRA if your spouse wants the ability to do a backdoor Roth.

Topic Author
AtlantaP
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Re: Job Change and 401K

Post by AtlantaP » Wed Oct 02, 2019 9:05 pm

This is helpful, thank you!

The account has a little over 600K so the prior example was almost spot on.

retired@50
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Re: Job Change and 401K

Post by retired@50 » Wed Oct 02, 2019 11:21 pm

AtlantaP wrote:
Wed Oct 02, 2019 9:05 pm
This is helpful, thank you!

The account has a little over 600K so the prior example was almost spot on.
The open question is whether or not you're interested in doing a backdoor Roth every year? Personally, I never earned enough to have a Roth IRA contribution disallowed by IRS rules.

edudumb
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Re: Job Change and 401K

Post by edudumb » Wed Oct 09, 2019 12:34 pm

Wiggums wrote:
Wed Oct 02, 2019 6:56 pm
arsenalfan wrote:
Wed Oct 02, 2019 6:33 pm
If it helps, I'm in a similar boat and leaving the funds in my old employer's 401k at Fidelity.
It really is a great plan, with self-directed brokerage and all the usual index/zero offerings.
I may move the Roth 401k money into my Roth IRA account though - Fidelity never setup a different account for the Roth 401k money, just called it a % of assets contributed. I never understood how they valued it, and prefer a distinct separate Roth IRA account going forward.
Obviously not rolling into IRA since I do backdoor roths annually.
If you move the Roth 401k to a Roth IRA, I believe that the 5 year requirement starts over again.
I'm in a similar boat. What's the 5-year requirement may I ask?

And does anyone know if there's deadline (# days from leaving the job) by which we have to roll over?

Thanks.

LittleMaggieMae
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Re: Job Change and 401K

Post by LittleMaggieMae » Wed Oct 09, 2019 12:45 pm

I think part of the decision rests on your income and how likely you are to want to do a Back Door Roth at some time (when your income is too great to contribute directly).

I had a substantial previous employer 401K that I finally rolled over to an IRA about 8 years ago. Now my income is too high to contribute to a Roth... but I can't do a Backdoor because of the lots of $$ sitting in my tIRA. :( Maybe I'm wrong about this..

If the new employer's 401K offers reasonable funds (and low fees) rolling the money to the new employer's 401K might be a better long term plan.

lakpr
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Re: Job Change and 401K

Post by lakpr » Wed Oct 09, 2019 12:53 pm

edudumb wrote:
Wed Oct 09, 2019 12:34 pm
Wiggums wrote:
Wed Oct 02, 2019 6:56 pm
If you move the Roth 401k to a Roth IRA, I believe that the 5 year requirement starts over again.
I'm in a similar boat. What's the 5-year requirement may I ask?

And does anyone know if there's deadline (# days from leaving the job) by which we have to roll over?
The 5 year clock is the same one that Congress mandated on Roth conversions. If you directly withdrew from a traditional account prior to age 59.5, you would have owed taxes and a 10% penalty. If you instead converted to Roth (owe taxes), and then withdrew (no penalty for withdrawing contributions), then in the absence of the 5-year rule, IRS would have been cheated out of the 10% penalty revenue. Congress passed this law specifically to prevent this two-step maneuver to sidestep the penalty. As a result, Roth amounts that are converted, aren't available for withdrawal for the next 5 years from conversion date.

In an IRA, the custodian will usually track these dates. If you are rolling over from a Roth 401k to Roth IRA, the custodian has no way to know on what portion of that amount came from direct Roth contributions and what portion from Roth conversions. I believe most receiving custodians instead elect to simply treat rollovers of Roth accounts as a form of Roth conversion -- triggering a 5 year clock from the date of rollover, before they are available for withdrawal.

Of course, if you are diligently maintaining your own records of when each contribution and/or conversion is made into this Roth 401k, may be you can convince the IRS that the amount that you withdrew was indeed qualified (either a conversion made more than 5 years earlier, or a direct Roth contribution).

To answer your last question: as long as the amount in the 401k is more than $5000 (and not indexed for inflation), IRS guidelines state that neither the employer nor the plan administrator can force you out of the plan. The best they can do is only to make you pick up the record keeping fees that the plan bears by default; but other than that, there is no deadline by which you must remove. If the amount is less than $5000, the grace period is specific to the plan.

Don't quote me on that, but I believe the $5000 can be required to be "contributions" only, and not include rollover amounts.

All this is, of course, moot if you never intend to withdraw from the retirement plans until age 59.5 (and everything becomes a 'qualified' withdrawal)

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ruralavalon
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Re: Job Change and 401K

Post by ruralavalon » Wed Oct 09, 2019 2:37 pm

AtlantaP wrote:
Wed Oct 02, 2019 6:26 pm
I've tried searching this forum and also googled, but still torn on the best course of action. Hoping this is ok to post.

My husband is changing jobs and has the option to leave his existing 401K with Megacorp, or the usual options of transferring to new jobs 401K, rollover to an IRA, cashing out (not doing that), etc. He's actually pleased with the funds, it's performed well, and is tempted just to leave it. In all my research I'm not finding much of a downside other than having yet another account, but it's not like we're going to forget about it (it's at least 2/3 of our retirement funds). Whenever I've changed jobs I've moved my 401K funds to an IRA, so not much experience in leaving it as-is and interested in others experiences.
It depends almost entirely on expenses and funds offered, information not provided in your post. 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, then it may be best to leave the old 401k where it is.

2) If the new 401k 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 you move 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

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Hector
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Re: Job Change and 401K

Post by Hector » Wed Oct 09, 2019 5:37 pm

401(k) generally has better protection than IRA.
If new 401(k) has better options, I would move there.
If not and if I am happy with funds in old 401(k), I would eave it.
I would move to IRA only if above options are awful.

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