Author Topic: What to do with 401k after leaving a job  (Read 3908 times)

jo552006

  • Stubble
  • **
  • Posts: 146
What to do with 401k after leaving a job
« on: May 20, 2015, 09:15:42 AM »
My wife left her job in November.  At her last company she had a 401k with Merrill Lynch that is worth less than 50k as of right now.  We are still young and I expect between the 2 of us we'll have 5 or more retirement accounts with various companies before we are FIRE.  I am not sure what we should be doing with the account?  I guess we can keep it, or roll it over into another vehicle, and I'm just not sure which option to choose or why.  I'm not even sure what options there ARE.  (We definitely don't plan to take any money out).  Can she ADD to this account from her new job (that I don't think uses Merrill lynch for 401k)?

Also, I have a TSP.  If (when) I leave my job, should I just leave it there.  I *think* the consensus I've seen around here is that TSP has good investment options with very low fees, so basically manage it, but don't ever close my account or pull money out until I am ready to start withdrawing money.

I do LIKE the idea of having money centrally located so when we eventually retire we have 1 agency to deal with.  I could open an account and just roll over retirement accounts when we leave our jobs.  Can anybody help, even if it's just explaining what options are available it would be helpful.

P.S. I tried to search the forums prior to asking this question, but got a network error.  If there's a thread for this already, I can read that to ejumacate myself first if somebody can post a link.

thedayisbrave

  • Pencil Stache
  • ****
  • Posts: 700
  • Location: Raleigh, NC
  • CFO @ My Life
Re: What to do with 401k after leaving a job
« Reply #1 on: May 20, 2015, 09:30:45 AM »
My 'central location' has always been Vanguard.  Whenever I've left a position I've rolled over my 401ks and IRAs into my Vanguard accounts.  Simple to do and I like keeping track of it all in one place.

curler

  • Stubble
  • **
  • Posts: 111
Re: What to do with 401k after leaving a job
« Reply #2 on: May 20, 2015, 10:02:37 AM »
I think you are pretty much on the right track.  Generally, good IRAs (such as Vanguard) will have better investment options (lower fees) than 401(k)s, so I plan to roll my 401(k) into my Vanguard IRA.  The two exceptions I can think of are:
1) TSP.  TSP has lower fees than even Vanguard, so you are better off leaving money there, and even rolling a 401(k) into there if eligible.
2) ESPP.  Some 401(k)s have plans where you can buy or hold stock of your employer, which would not be available if you transfer the account.  That would be an individualized issue of if it is worth it in that case.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5285
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: What to do with 401k after leaving a job
« Reply #3 on: May 20, 2015, 11:00:25 AM »
The options your wife has are:
1) Leave the account alone. Your wife can keep her money invested in whatever funds the former employer provides as 401(k) options.
2) Roll the account into an IRA. This will allow your wife to invest in whatever she wants. One potential downside to this is that it can thwart the backdoor Roth IRA strategy (which is only a problem if your income is too high to make Roth IRA contributions directly).
3) Roll the account into her new employer's 401(k) or 403(b) plan. She will be limited to the new employer's investment options in this case, but she will still be able to do backdoor Roth IRA contributions.
4) Withdraw the entire sum and pay tax plus a 10% early withdrawal penalty on it. You probably don't want to do this. I'm just including it for the sake of completeness.

Making future contributions to the old employer's account is not an option. Unless the old account has super-low-cost institutional funds that are better than you can get as an individual, I would recommend either option 2 or 3, depending on whether the backdoor Roth is a concern for you. As you say, you'll probably each have multiple employers over your career and it makes sense to consolidate your accounts for the sake of simplicity.

CestMoi

  • Stubble
  • **
  • Posts: 102
Re: What to do with 401k after leaving a job
« Reply #4 on: May 20, 2015, 03:51:29 PM »
Re: Roll the account into an IRA. This will allow your wife to invest in whatever she wants. One potential downside to this is that it can thwart the backdoor Roth IRA strategy

--Not my thread, but can you explain a bit why rolling over a 401k into an IRA (traditional, I assume) would thwart the Roth IRA backdoor?

Exflyboy

  • Walrus Stache
  • *******
  • Posts: 6807
  • Age: 58
  • Location: Corvallis, Oregon
  • Expat Brit living in the New World..:)
Re: What to do with 401k after leaving a job
« Reply #5 on: May 20, 2015, 04:05:40 PM »
It looks to me like IRA money is not protected from litigation like a 401k is.

In other words, if you get sued you could loose it if you roll it into an IRA.

http://www.latimes.com/la-ira-story3-story.html



dandarc

  • Magnum Stache
  • ******
  • Posts: 3973
  • Age: 37
Re: What to do with 401k after leaving a job
« Reply #6 on: May 20, 2015, 04:49:45 PM »
Re: Roll the account into an IRA. This will allow your wife to invest in whatever she wants. One potential downside to this is that it can thwart the backdoor Roth IRA strategy

--Not my thread, but can you explain a bit why rolling over a 401k into an IRA (traditional, I assume) would thwart the Roth IRA backdoor?
When you convert from traditional to Roth IRA (step 2 of the Backdoor Roth IRA), the taxable / non-taxable portion is pro-rated.  If you have a large traditional IRA balance, and want to do a backdoor Roth, if you try and do it straight-away, you'll have a tax bill on most of the IRA contribution due to pro-rating the existing tIRA balance.

The simplest way around this is to add a step to the Backdoor Roth - step 0 is to move existing tIRA money into a 401K if possible.  If not possible to move the money from tIRA to 401K or similar, if the balances are small enough you might take the tax hit and just convert the whole thing in year one.

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: What to do with 401k after leaving a job
« Reply #7 on: May 20, 2015, 06:08:03 PM »
Merrill Lynch is usually really expensive. Just roll it over to a Vanguard IRA.