Need advise on rolling over 401k from previous employer

[jamesbond007]

Hello fellow Mustachians,

I recently changed employers. My past employer provided our 401K through Empower retirement and my new employer through Fidelity. I have about $120K in vested balance at my past employer and I don't know if I want to leave it there with Empower or roll it over to my current 401K plan with Fidelity or roll it over to an IRA at Vanguard.

Can you suggest me what's the best course of action is?

Thanks,
JamesBond007

[Axecleaver]

Check the rates you're paying for funds at Newjob and Oldjob. Many 401k's finance themselves by charging employees higher fees on the offerings -either through monthly service fees or higher admin charges (or both). Best bet is very likely to be rolling it into a Vanguard IRA.

[boarder42]

roll to vanguard and be done.

[nereo]

If you roll it over into your Vanguard account you will have full control over that money, where it's invested, and (by extension) what fees you pay. You will not have such flexibility on a 401(k) plan; at best they may come close (but will rarely match) the low fees offered by Vanguard.

Therefore, it's almost always in your favor to roll it over into your Vanguard account.

[jamesbond007]

You 3 have confirmed my feelings. But what are the advantages and disadvantages of rolling over to an IRA vs keeping this in a 401K. Sorry is this questions is dumb but I am noob when it comes to investing. I'd rather ask a dumb questions now than suffer my entire life.

Some more detail that might help: I am 33, my wife is 29. Wife is a stay at home mom taking care of our 2 year old. My annual salary + bonus is $210K. No debt. Mortgage+property Tax+HOA fees account to about $2475 a month. I contribute about 10% to my 401K and have a good employer match. I cannot predict what I will be making at retirement. I plan to retire in about 18 years as soon as I send off my daughter to college.

[boarder42]

staying with your current vs leaving for vanguard or rolling to a new 401k all comes down to fees.  if we dont have the fee structure of your 2 401k options and the funds available we cant really help. but in 99% of cases vanguard will beat a 401k in fees so thats why we are pushing you that way.

Welcome to the forum.  You may benefit from doing a case study as you have a super high income. and you likely could retire far before you are planning to if you really evaluated your spending and optimized it.  Thats what we're about around here.  not retiring a few years early but destroying the idea of working til you're 60+ by cutting that number in half.

[nereo]

You 3 have confirmed my feelings. But what are the advantages and disadvantages of rolling over to an IRA vs keeping this in a 401K. Sorry is this questions is dumb but I am noob when it comes to investing. I'd rather ask a dumb questions now than suffer my entire life.

Some more detail that might help: I am 33, my wife is 29. Wife is a stay at home mom taking care of our 2 year old. My annual salary + bonus is $210K. No debt. Mortgage+property Tax+HOA fees account to about $2475 a month. I contribute about 10% to my 401K and have a good employer match. I cannot predict what I will be making at retirement. I plan to retire in about 18 years as soon as I send off my daughter to college.

If you roll it into a traditional IRA you can choose how that money is invested (e.g. in an index fund, bond fund, individual stocks (not recommending this!), actively managed fund, ETFs, REIT etc).  There's almost no limit to what you can invest in.  Rolling a 401(k) into a traditional IRA is a non-taxable event and does not count against your annual contribution limit (currently at $5,500 per person assuming you have earned income of at least this amount).  Once you roll your 401(k) into an IRA you have the option of doing a Roth pipeline (converting some of what's in your tIRA into a ROTH IRA to avoid taxes on it during retirement). 

There is no real advantage of keeping it in a 401(k).  you will be limited to the options that your employer chooses for you.  You will likely pay more in fees  for a similar fund.  The 401(k) company can change fees or what the funds are invested with little notice and without your consent.

You have an enviable salary - you certainly could be FI in less than 18 years if you want to be (for example at that level of income it might take us 5 years).  Just because you hit FI doesn't mean you have to stop working... you can continue to earn money but be unafraid of job loss, large expenses or 'forced' retirement.  Feel free to post a case-study and people can make suggestions about how to get you to your financial goals faster.

[mskyle]

There can be an advantage to keeping it in a 401k - like, if your 401k offers Institutional shares of low-cost Vanguard or Fidelity funds that you'd be investing in anyway you can save a hundredth of a percent or two in fees. There are some benefits for first-time homebuyers, too, but it sounds like you already own.

I have happily rolled all my no-longer-active retirement accounts to my Vanguard IRA, but none of them offered particularly attractive investments.

[Catbert]

There are some advantages to a 401k.  They  may be more protected in the case of going bk or being sued.  Federal law shields 401ks but IRAs are covered by state law which varies.  The possible extra protection is more important if you are in a high risk occupation.

If you ever intend to do back-door Roth IRAs you should keep the money in the 401k.  A backdoor Roth is when you make too much money to do one direct so you contribute to a non-deductible IRA and then immediately convert to a Roth.  In an ideal situation no additional tax owed.  However if you already have other IRA money then the the amount of money which can be converted without a tax bill is a pro ration between new money and existing money.  You may owe some additonal tax money.  I know I'm not explaining this well, however, if this situation might apply to you in the future investigate further.

If you decide to leave in a 401k then I suggest moving to you new employer (if possible) b/c Fidelity is likely better than your existing brokerage and its easier to have 401k oney in one spot.

[jamesbond007]

I should understand this whole backdoor thing.

[Cpa Cat]

I agree with mary - There are serious advantages to keeping the money in a 401(k) if you want to do a backdoor ROTH.

If you can roll over into the new 401(k) and the new 401(k) is decent, then do that instead of an IRA.

Keep the ole backdoor open, even if you're not ready to use it yet.

[jim555]

Take advantage of the "rule of 55" if the new 401k allows it.  That is one reason to keep the funds in one big 401k.

[CanuckExpat]

Backdoor Roth IRA
Backdoor Roth Step By Step

It's really pretty simple. Five minutes total maybe? I do it across two different days, you could probably do it all in one day if you want.

[jamesbond007]

Here are my current 401K allocations in Fidelity. Vanguard Institutional Index Fund Institutional Shares VINIX (70% allocation) with expense ratio of 0.04% and a management fee of 0.04%, Vanguard Mid-Cap Index Fund Admiral Shares VIMAX (20% allocation) with expense ratio of 0.08% and management fee of 0.07% and Vanguard Small-Cap Index Fund Admiral Shares VSMAX  (10% allocation) with expense ratio of 0.08% and management fee of 0.06%

I just compared these choices at Vanguard and I am, for obvious reasons, paying double the fees by paying fidelity the "management fee".

Now that I have the fees for my 401K allocations, would it change your opinion on whether I should roll over to new 401K or roll over to Vanguard IRA?

[boarder42]

You answered your own question it's simple math

[Another Reader]

Is the management fee part of the overall expense ratio?  If it's a fund management fee, it should be.

This is a case where I would balance the advantages of the 401(k) previously described against possibly slightly higher fees.  Institutional shares are often less expensive than what are available to you as an individual anyway.  I would probably opt to roll the old 401(k) into the new one, based on what you have said.

[Cpa Cat]

Now that I have the fees for my 401K allocations, would it change your opinion on whether I should roll over to new 401K or roll over to Vanguard IRA?

No. Those fees are still very low.

The value of having a backdoor ROTH open to you exceeds a 0.04% management fee.

Now, if you have self employment income, you could open a Solo 401(k) at Fidelity with no fees and roll the 401(k) into that. But barring that option, I'd roll it into the 0.04% management fee one and start backdooring.

[LeRainDrop]

Sorry to hijack, but can I take this inquiry to the next level?  I've left my job for a summer sabbatical and need to decide what to do with my 401(k) investments.  I'm not going to a new employer for awhile -- haven't really even started looking yet -- so my two options are to stay in the current 401(k) or rollover to an IRA.  Now, I'm pretty sure I want to rollover the investments, but the bigger question is whether to go to a traditional IRA or a Roth IRA.  And also if there are any dollar limits on the rollover.

I'm going to use made-up numbers but in fair proportion here.  Say I have:  (1) $150k in my traditional 401(k) (Schwab), (2) $120k in my Roth 401(k) (Schwab), (3) $0 in a traditional IRA (because I've always contributed directly to a Roth IRA or immediately rolled over), (4) $50k in a Roth IRA (Vanguard), and (5) taxable investments (Vanguard).  So, my understanding is that the Roth 401(k) funds would definitely go into the Roth IRA (since taxes have already been paid on these).  But what about the traditional 401(k) funds?  Do all of those go into the traditional IRA?  Would I be allowed to put them all in the Roth IRA (and pay taxes now)?

This is further complicated because I had divided my stock investments and bond investments in different accounts for tax purposes, and now I guess that might get messed up if I move money from a traditional 401(k) to a Roth IRA.  I also have enough dollars invested with Vanguard for some free consultation or something -- is it worth asking them what to do about allocation?

Sorry for my rambling.  Thanks in advance to anyway who can offer knowledge on this matter.

[NoStacheOhio]

Is the management fee part of the overall expense ratio?  If it's a fund management fee, it should be.

This is a case where I would balance the advantages of the 401(k) previously described against possibly slightly higher fees.  Institutional shares are often less expensive than what are available to you as an individual anyway.  I would probably opt to roll the old 401(k) into the new one, based on what you have said.

This.

Fidelity recently changed the wording on their pricing info to make it more confusing, VINIX is 0.04% all-inclusive. Unless you have a separate fee in your 401k, you're paying 0.04%.

Source: my VINIX shares held at Fidelity (now VIIIX, but same fund).

[jamesbond007]

Is the management fee part of the overall expense ratio?  If it's a fund management fee, it should be.

This is a case where I would balance the advantages of the 401(k) previously described against possibly slightly higher fees.  Institutional shares are often less expensive than what are available to you as an individual anyway.  I would probably opt to roll the old 401(k) into the new one, based on what you have said.

This.

Fidelity recently changed the wording on their pricing info to make it more confusing, VINIX is 0.04% all-inclusive. Unless you have a separate fee in your 401k, you're paying 0.04%.

Source: my VINIX shares held at Fidelity (now VIIIX, but same fund).

I will call fidelity and confirm. If it is just 0.04% then I will just rollover to the new 401k.

Thanks for all the helpful suggestions. I will report back my findings.

JamesBond007

[boarder42]

Is the management fee part of the overall expense ratio?  If it's a fund management fee, it should be.

This is a case where I would balance the advantages of the 401(k) previously described against possibly slightly higher fees.  Institutional shares are often less expensive than what are available to you as an individual anyway.  I would probably opt to roll the old 401(k) into the new one, based on what you have said.

This.

Fidelity recently changed the wording on their pricing info to make it more confusing, VINIX is 0.04% all-inclusive. Unless you have a separate fee in your 401k, you're paying 0.04%.

Source: my VINIX shares held at Fidelity (now VIIIX, but same fund).

I will call fidelity and confirm. If it is just 0.04% then I will just rollover to the new 401k.

Thanks for all the helpful suggestions. I will report back my findings.

JamesBond007

why would you limit yourself like this.  now your money is tied to changes your employer chooses to make for better or worse.  why is it even a thought to put it here.  i'm super confused why someone would even consider this an option when you could just put it in vanguard.  sure you may have decent fund choices now that are the same cost as vanguard.. but why not then just put it in vanguard.

[boarder42]

Sorry to hijack, but can I take this inquiry to the next level?  I've left my job for a summer sabbatical and need to decide what to do with my 401(k) investments.  I'm not going to a new employer for awhile -- haven't really even started looking yet -- so my two options are to stay in the current 401(k) or rollover to an IRA.  Now, I'm pretty sure I want to rollover the investments, but the bigger question is whether to go to a traditional IRA or a Roth IRA.  And also if there are any dollar limits on the rollover.

I'm going to use made-up numbers but in fair proportion here.  Say I have:  (1) $150k in my traditional 401(k) (Schwab), (2) $120k in my Roth 401(k) (Schwab), (3) $0 in a traditional IRA (because I've always contributed directly to a Roth IRA or immediately rolled over), (4) $50k in a Roth IRA (Vanguard), and (5) taxable investments (Vanguard).  So, my understanding is that the Roth 401(k) funds would definitely go into the Roth IRA (since taxes have already been paid on these).  But what about the traditional 401(k) funds?  Do all of those go into the traditional IRA?  Would I be allowed to put them all in the Roth IRA (and pay taxes now)?

This is further complicated because I had divided my stock investments and bond investments in different accounts for tax purposes, and now I guess that might get messed up if I move money from a traditional 401(k) to a Roth IRA.  I also have enough dollars invested with Vanguard for some free consultation or something -- is it worth asking them what to do about allocation?

Sorry for my rambling.  Thanks in advance to anyway who can offer knowledge on this matter.

you roll the roth to roth and the trad to trad.  then while on sabatical you analyze your tax load and see if it makes any sense to move the trad to roth now vs just waiting til you FIRE. If you're living off your Roth contr. while on sabatical you should roll up to the max to pay 0 tax then analyze if you want to pay 10% tax on it now to roll it.  i likely would go up to the top of th 10% minimum and likely to the top of the 15% to minimize my tax load but i spend / plan to spend a bit more than most here.

[jamesbond007]

why would you limit yourself like this.  now your money is tied to changes your employer chooses to make for better or worse.  why is it even a thought to put it here.  i'm super confused why someone would even consider this an option when you could just put it in vanguard.  sure you may have decent fund choices now that are the same cost as vanguard.. but why not then just put it in vanguard.

borader42, I was thinking I could keep my options open for a backdoor IRA.

[boarder42]

do you even save enought that a backdoor IRA is necessary.  most people wont spend enough for it to even be valuable as if you're in the 15% tax bracket you dont pay tax on your LTCGs and QDs.  and why would having an IRA limit the back door IRA. 

[teen persuasion]

do you even save enought that a backdoor IRA is necessary.  most people wont spend enough for it to even be valuable as if you're in the 15% tax bracket you dont pay tax on your LTCGs and QDs.  and why would having an IRA limit the back door IRA.

Psst, Boarder, his income is $210k/yr! OP needs all the retirement account space he can scrounge.


OP, your new job 401k sounds pretty good to me (DH's 401k expense ratios start at .79 and go up from there).  Keep your backdoor option open.  Maybe investigate if a mega backdoor Roth is also an option.

[boarder42]

do you even save enought that a backdoor IRA is necessary.  most people wont spend enough for it to even be valuable as if you're in the 15% tax bracket you dont pay tax on your LTCGs and QDs.  and why would having an IRA limit the back door IRA.

Psst, Boarder, his income is $210k/yr! OP needs all the retirement account space he can scrounge.


OP, your new job 401k sounds pretty good to me (DH's 401k expense ratios start at .79 and go up from there).  Keep your backdoor option open.  Maybe investigate if a mega backdoor Roth is also an option.

back door rothing isnt necessarily a deal breaker unless you plan to live on alot more than the 15% bracket plus standard deductions which right now is pushing 96k

[seattlecyclone]

do you even save enought that a backdoor IRA is necessary.  most people wont spend enough for it to even be valuable as if you're in the 15% tax bracket you dont pay tax on your LTCGs and QDs.  and why would having an IRA limit the back door IRA.

Psst, Boarder, his income is $210k/yr! OP needs all the retirement account space he can scrounge.


OP, your new job 401k sounds pretty good to me (DH's 401k expense ratios start at .79 and go up from there).  Keep your backdoor option open.  Maybe investigate if a mega backdoor Roth is also an option.

back door rothing isnt necessarily a deal breaker unless you plan to live on alot more than the 15% bracket plus standard deductions which right now is pushing 96k

Not so!

First of all, the 0% capital gains tax bracket was only invented in 2008; there's no guarantee it will last forever. If it doesn't, Roth will outperform taxable in most cases. Also many states can and do tax capital gains at a non-zero rate even in lower tax brackets.

Secondly, most index investments will pay out dividends every year. Those dividends can be taxed at 15% or more every year until retirement while you're still in a higher tax bracket. Putting some of those investments in a Roth account will reduce the tax drag in the intervening years.

Roth contributions do have value. I think it's reasonable to keep pre-tax money in a low-fee 401(k) if that's what you have to do in order to make Roth contributions. Sure, the employer could replace the low-fee index funds with a collection of expensive actively-managed funds, but this seems unlikely for most employers. They have a fiduciary responsibility, and would have to be able to justify any change through the lens of serving their employees better.

[boarder42]

do you even save enought that a backdoor IRA is necessary.  most people wont spend enough for it to even be valuable as if you're in the 15% tax bracket you dont pay tax on your LTCGs and QDs.  and why would having an IRA limit the back door IRA.

Psst, Boarder, his income is $210k/yr! OP needs all the retirement account space he can scrounge.


OP, your new job 401k sounds pretty good to me (DH's 401k expense ratios start at .79 and go up from there).  Keep your backdoor option open.  Maybe investigate if a mega backdoor Roth is also an option.

back door rothing isnt necessarily a deal breaker unless you plan to live on alot more than the 15% bracket plus standard deductions which right now is pushing 96k

Not so!

First of all, the 0% capital gains tax bracket was only invented in 2008; there's no guarantee it will last forever. If it doesn't, Roth will outperform taxable in most cases. Also many states can and do tax capital gains at a non-zero rate even in lower tax brackets.

Secondly, most index investments will pay out dividends every year. Those dividends can be taxed at 15% or more every year until retirement while you're still in a higher tax bracket. Putting some of those investments in a Roth account will reduce the tax drag in the intervening years.

Roth contributions do have value. I think it's reasonable to keep pre-tax money in a low-fee 401(k) if that's what you have to do in order to make Roth contributions. Sure, the employer could replace the low-fee index funds with a collection of expensive actively-managed funds, but this seems unlikely for most employers. They have a fiduciary responsibility, and would have to be able to justify any change through the lens of serving their employees better.

back door roth may not be around forever that loop hole closing has been on alot of proposals in congress recently.

[seattlecyclone]

Sure, but it's here now so you might as well take advantage of it while it exists.