What to do with old 401k?

[cancelthesky]

Hey all,

I have an old Fidelity 401k with a balance of about $48k that's been sitting idle since I left my last employer in 2014. About 1/5 of it was in company stock which I've been told is risky and I'd be better off rolling this into some type of IRA. I've also been looking at the expense ratios for my portfolio and they are crazy! I was thinking of rolling this into a Vanguard IRA but have a few questions

What funds would you all recommend? I'm 30 years old and would like to take a moderately aggressive approach to diversification. I've read VTSAX is a good, low expense ratio choice. Should I put 100% into this or some kind of blend? I've also seen VFINX come up in my reading. I'm sure the market will take a dip in the not too distant future, any advice on this? Ideally I'd like to pick my investments and forget it for the long run

If I do roll this into a traditional IRA I'm confused about future contributions. I make too much to deduct traditional IRA deposits from my taxes. Why would I want to essentially pay tax on the money I'm putting into the account and pay taxes again when I withdraw in the future? Wouldn't it be best to roll this into a traditional IRA and then open up a separate Roth IRA or taxable account for after tax contributions?

Any advice is appreciated!

[fatcow240]

Assuming that the funds are in a Traditional 401k (my company offers ROTH and Trad 401k), I would go with the plan of 100% VTSAX in traditional IRA.  This will get you out of the high fees and the 20% single company stock.
As for diversifying beyond VTSAX, you can work on this after you move it to VTSAX.  If you plan on being able to work for 5+ years, I wouldn't limit your returns by going to bonds.
If you want VFINX, use the admiral share of VFIAX that have a lower cost ratio.  VFIAX is less diverse than VTSAX.
You can still open a ROTH IRA and make new contributions to that.  You need to look at which bucket you will fall into each year.
Low tax bracket: ROTH
Medium Low: Traditional or ROTH
Medium High (can't deduct): Traditional
High (not ROTH eligible): Traditional

[MDM]

Wouldn't it be best to roll this into a traditional IRA and then open up a separate Roth IRA or taxable account for after tax contributions?

Yes.

If your income is below the Roth contribution income limit (see Retirement Topics IRA Contribution Limits), nothing you do with the old 401k will affect in any way your ability to do whatever you want with future IRA or 401k contributions.

If your income will be above that limit, see Backdoor Roth IRA - Bogleheads.  In that case, having money in a traditional IRA will interfere with the backdoor Roth.

[phred]

first, roll over the 401k into a IRA account.  I recommend Vanguard; they will tell you how to do it
Once the money is transferred, you can then pick the mutual funds you want it to go into (vtsax, etc)
You did not pay a tax on the money going into the 401k.  You will pay income tax on withdrawals from the IRA once you reach 70 1/2 (rule of thumb)
You can get a ROTH 401k and a Roth IRA with your new higher income.  You'll be using after tax money it is true, but gains from a ROTH are tax free

[MDM]

You can get a ROTH 401k...with your new higher income.  You'll be using after tax money it is true, but gains from a ROTH are tax free

Why would a generic person with higher income want to use a Roth 401k?

[phred]

Because Original Poster said he earned too much to be able to deduct IRA contributions from income taxes

[Joel]

Can you roll it into your new 401k?

[MDM]

You can get a ROTH 401k...with your new higher income.  You'll be using after tax money it is true, but gains from a ROTH are tax free

Why would a generic person with higher income want to use a Roth 401k?

Because Original Poster said he earned too much to be able to deduct IRA contributions from income taxes

If anything, a traditional 401k might reduce the MAGI for tIRA deductibility to a point at which the tIRA contribution becomes deductible.

Other than that, income limits on tIRA deductibility have no effect at all on whether one should use traditional or Roth 401k.  The higher the current income, the more likely a traditional 401k will be better than a Roth 401k.

[fatcow240]

If anything, a traditional 401k might reduce the MAGI for tIRA deductibility to a point at which the tIRA contribution becomes deductible.
Other than that, income limits on tIRA deductibility have no effect at all on whether one should use traditional or Roth 401k.  The higher the current income, the more likely a traditional 401k will be better than a Roth 401k.

I agree with MDM.  In my case I am 100% traditional 401k because of high income this year.  I am only in ROTH 401k in low income years.


Don't confuse ROTH IRA and ROTH 401k limits.
https://www.irs.gov/retirement-plans/roth-comparison-chart

[davenator]

Can you roll it into your new 401k?

Are there any advantages/disadvantages to rolling into existing 401k versus a tIRA? Does this affect the Roth ladder process later?

[fatcow240]

Can you roll it into your new 401k?

Are there any advantages/disadvantages to rolling into existing 401k versus a tIRA? Does this affect the Roth ladder process later?

If you roll it into a tIRA, you can start converting to rIRA in any year.  I can't roll any of my 401k to rIRA until I leave my job.


Compare the fees in the new 401k plan versus tIRA.


401k may offer better legal protection from creditors.

[MDM]

Can you roll it into your new 401k?

Are there any advantages/disadvantages to rolling into existing 401k versus a tIRA?

If you want to do a Backdoor Roth IRA it is better to have no pre-tax funds in a tIRA.  As fatcow240 said, though, a significantly worse set of fees in the 401k would favor the tIRA.

[davenator]

Thank you, Backdoor Roth IRA was what I was thinking of that might be a disadvantage for rolling 401k to tIRA. So if your 401k has good selection and low fees then it might be better to roll into your existing 401k.
I assume this is the same scenario for the Mega Backdoor Roth?

[MDM]

Thank you, Backdoor Roth IRA was what I was thinking of that might be a disadvantage for rolling 401k to tIRA. So if your 401k has good selection and low fees then it might be better to roll into your existing 401k.

Yes.

I assume this is the same scenario for the Mega Backdoor Roth?

A reasonable assumption, but in this case not correct.  The Mega Backdoor Roth goes by a completely different set of rules than the plain ol' Backdoor Roth.

[MilesTeg]

Hey all,

I have an old Fidelity 401k with a balance of about $48k that's been sitting idle since I left my last employer in 2014. About 1/5 of it was in company stock which I've been told is risky and I'd be better off rolling this into some type of IRA. I've also been looking at the expense ratios for my portfolio and they are crazy! I was thinking of rolling this into a Vanguard IRA but have a few questions

What funds would you all recommend? I'm 30 years old and would like to take a moderately aggressive approach to diversification. I've read VTSAX is a good, low expense ratio choice. Should I put 100% into this or some kind of blend? I've also seen VFINX come up in my reading. I'm sure the market will take a dip in the not too distant future, any advice on this? Ideally I'd like to pick my investments and forget it for the long run

If I do roll this into a traditional IRA I'm confused about future contributions. I make too much to deduct traditional IRA deposits from my taxes. Why would I want to essentially pay tax on the money I'm putting into the account and pay taxes again when I withdraw in the future? Wouldn't it be best to roll this into a traditional IRA and then open up a separate Roth IRA or taxable account for after tax contributions?

Any advice is appreciated!

Liberate this 401k ASAP. An IRA will always provide better investment options (including whatever is in the 401k) and can drastically reduce fees (401k plan maintenance fees are generally substantial and on top of the fund fees). If you do a rollover you won't pay any taxes on the current amount, and you don't have to contribute any more to the IRA (just keep contributing to your current 401k and/or regular taxable accounts).

I have an IRA that is the combination of 4 401ks (I switched employers a lot). I haven't contributed a dime to it in ~10 years; it's just growing.

The only reason to keep a 401k is because it is your active 401k (i.e. the one attached to your current employment).

[PizzaSteve]

If you want to do a traditional backdoor Roth contribution, but dont like or want to roll this 401k into your current employers plan, Fidelity and Schwab have relatively good, no fee personal (single person) 401k plans they support.  This requires some work and tax reporting (only if a larger balance is held), but avoids the IRA funds pooling issue with backdoor contributions (an after tax IRA contribution followed by tax free roth conversion of the after tax dollars).  Vanguard does not support fee free personal 401ks.

[MDM]

An IRA will always provide better investment options (including whatever is in the 401k) and can drastically reduce fees (401k plan maintenance fees are generally substantial and on top of the fund fees).
...
The only reason to keep a 401k is because it is your active 401k (i.e. the one attached to your current employment).

Always be careful about "always". ;)

Some 401k plans provide access to institutional funds with lower fees than one can get in an IRA.  Or, if not lower, close enough that the ability to use a backdoor IRA outweighs the 0.01% or so difference in fees.

[MilesTeg]

An IRA will always provide better investment options (including whatever is in the 401k) and can drastically reduce fees (401k plan maintenance fees are generally substantial and on top of the fund fees).
...
The only reason to keep a 401k is because it is your active 401k (i.e. the one attached to your current employment).

Always be careful about "always". ;)

Some 401k plans provide access to institutional funds with lower fees than one can get in an IRA.  Or, if not lower, close enough that the ability to use a backdoor IRA outweighs the 0.01% or so difference in fees.

Thank you, good point

[Joel]

An IRA will always provide better investment options (including whatever is in the 401k) and can drastically reduce fees (401k plan maintenance fees are generally substantial and on top of the fund fees).
...
The only reason to keep a 401k is because it is your active 401k (i.e. the one attached to your current employment).

Always be careful about "always". ;)

Some 401k plans provide access to institutional funds with lower fees than one can get in an IRA.  Or, if not lower, close enough that the ability to use a backdoor IRA outweighs the 0.01% or so difference in fees.

Thanks for posting this. I was going to say the same thing.

[elysianfields]

An IRA will always provide better investment options (including whatever is in the 401k) and can drastically reduce fees (401k plan maintenance fees are generally substantial and on top of the fund fees).
...
The only reason to keep a 401k is because it is your active 401k (i.e. the one attached to your current employment).

Always be careful about "always". ;)

Some 401k plans provide access to institutional funds with lower fees than one can get in an IRA.  Or, if not lower, close enough that the ability to use a backdoor IRA outweighs the 0.01% or so difference in fees.

Case in point: the Federal Thrift Savings Plan (TSP), which has an expense ratio of 0.033%.

[cancelthesky]

Thanks for the replies everyone.

Right now I'm making about $k with 11% of my pretax going towards my 401k that has $k vested into Vangaurd Target Retirement 2055 VFFVX (0.15% expense ratio) and I am also maxing out my HSA (~$2500/year + company contribution).

My debt includes student loans at $k at 2% and an auto payment (not my best move) at $k at 3.29%. I plan to have these paid off in about 4-5 years. I'm also saving up to purchase a house in the next 2-3 years.

The old 401k I'd like to rollover is indeed traditional.

My MAGI appears to be about $k. I have a very stable and fairly predictable job, I can confidently predict a minimum of 2-3% yearly raises for the next few years unless the economy really dips

With all this being said what would be my best approach? I could see my salary potentially getting close to the Roth IRA limits but as I pay off my debt I should be able to increase my 401k contributions which would lower my MAGI back down a bit. Would it be safe planning to not contribute any pretax to tIRA accounts to keep the backdoor roth avenue open in the future? My old 401k expense ratios are crazy, some investments at 0.5%, my current 401k is more reasonable at 0.15% but that still doesn't compare to VTSAX in a Vanguard IRA.

[greydog]

Great work tackling this old 401(k) rollover head-on, cancelthesky. I just went over this rollover process myself (I detailed it another thread over in the Investment board, in case there's any info here that might help you):
https://forum.mrmoneymustache.com/investor-alley/getting-out-of-ameriprise-help-me-move-past-the-face-punch-stage-into-action/

Note: I was doing an IRA-to-IRA transfer (not a 401K-to-IRA transfer). But I was also rolling over to Vanguard so I think the basic process is similar. My advice: Call Vanguard and ask them for assistance. They helped me set up everything electronically, then they sent me some forms to fill out. I then sent the forms back to Vanguard, and they are now in the process of working with my old investment company to transfer over everything. I'd been putting it off for awhile thinking it was too overwhelming, but once I swung into action it was all really straightforward.

Once the funds are transferred over to Vanguard, I'm going to do an 80% VTSAX (Vanguard total stock index) / 20% VBTLV (Vanguard total bond index) allocation of that IRA. JL Collins of THE SIMPLE PATH TO WEALTH fame would say I'm being too conservative and urge me to put 100% (or close to it) into VTSAX, but this is the allocation that feels most comfortable me right now.

Nice job with your 11% pretax going into VFFVX -- I also really like the Vanguard target-retirement funds. I've decided to use similar Vanguard target-date funds for my  401(k) at my current job, and use Vanguard total stock / bond index funds for the IRAs from my old jobs, similar to what you're planning.

Re. the Roth IRA / tIRA tipping point question: I wonder if it makes sense to re-evaluate in December 2018. You can fund a 2018 IRA (either Roth or traditional) until 4-15-2019, so you can wait and see how much overtime you earn in 2018 and what your total salary is, and then decide from there which IRA option is optimal. Also, if you are worried about hitting that Roth IRA salary limit, it looks like you have room to contribute about 6K more to your 401(k), which will further lower your MAGI. Good luck.

[schmerna]

...With all this being said what would be my best approach? I could see my salary potentially getting close to the Roth IRA limits but as I pay off my debt I should be able to increase my 401k contributions which would lower my MAGI back down a bit. Would it be safe planning to not contribute any pretax to tIRA accounts to keep the backdoor roth avenue open in the future? My old 401k expense ratios are crazy, some investments at 0.5%, my current 401k is more reasonable at 0.15% but that still doesn't compare to VTSAX in a Vanguard IRA.

Roll the old 401k into an IRA now to take advantage of the low fees.  If/when you are close to the Roth IRA limits, you can roll the IRA into your current 401k to take advantage of the backdoor Roth IRA.

[MDM]

Would it be safe planning to not contribute any pretax to tIRA accounts to keep the backdoor roth avenue open in the future? ...my current 401k is more reasonable at 0.15% but that still doesn't compare to VTSAX in a Vanguard IRA.

You could justify either using or not using the tIRA.  A difference of 0.1%/yr on $10,000 is $10/yr.

[cancelthesky]

Roll the old 401k into an IRA now to take advantage of the low fees.  If/when you are close to the Roth IRA limits, you can roll the IRA into your current 401k to take advantage of the backdoor Roth IRA.

I apologize for I haven't read more into this but is there anything stopping someone from rolling over an account multiple times? For example roll my old 401k into a tIRA and in a few years roll that into my current 401k? Assuming there are no rollover fees I think this might be a great idea, leading into my overall strategy of:

• Roll over old 401k into Vanguard tIRA vested 100% into VTSAX
• Begin contributing to Roth-IRA (I won't be able to contribute max right away while saving for house and paying debt off)
• If I reach income limit for Roth IRA contributions, increase 401k contributions to lower MAGI
• If there ever comes a point where I am maxing my 401k and still am exceeding the Roth IRA income limit, roll tIRA into current 401k and begin backdoor Roth

Is this a sound strategy? Would there be any benefit to contributing non deductible contributions to a tIRA now instead of Roth?

[fatcow240]

• Roll over old 401k into Vanguard tIRA vested 100% into VTSAX

Yes.

• Begin contributing to Roth-IRA (I won't be able to contribute max right away while saving for house and paying debt off)

Depending on your current tax bracket, you may consider 401k before ROTH.

• If I reach income limit for Roth IRA contributions, increase 401k contributions to lower MAGI

Again, consider the tax rate you will pay on that money today, plans for ROTH ladder conversions, and taxes in the future.

• If there ever comes a point where I am maxing my 401k and still am exceeding the Roth IRA income limit, roll tIRA into current 401k and begin backdoor Roth

This doesn't make sense.  You can backdoor ROTH from tIRA.  Also, if you in that high of a tax bracket that you can't contribute to ROTH, you probably don't want to convert your old tIRA funds at that tax rate.

Is this a sound strategy? Would there be any benefit to contributing non deductible contributions to a tIRA now instead of Roth?

If you have maxed out your 401k and HSA, you could contribute to a tIRA without taking the deduction and convert to ROTH.  This is where you would want to have had rolled your old 401k to new 401k.  The conversion to ROTH takes into account all funds in tIRA to determine taxes.

[Sturv]

An IRA will always provide better investment options (including whatever is in the 401k) and can drastically reduce fees (401k plan maintenance fees are generally substantial and on top of the fund fees).
...
The only reason to keep a 401k is because it is your active 401k (i.e. the one attached to your current employment).

Always be careful about "always". ;)

Some 401k plans provide access to institutional funds with lower fees than one can get in an IRA.  Or, if not lower, close enough that the ability to use a backdoor IRA outweighs the 0.01% or so difference in fees.

Is it possible to get *more* money into an old 401k with those nice institutional funds? I'm leaving my current company, and, if possible, would like to roll the 401k here into the 401k at my old company (with the institutional funds).

Every time I try Googling my question, the results all pertain to rolling forward.

[MDM]

Is it possible to get *more* money into an old 401k with those nice institutional funds? I'm leaving my current company, and, if possible, would like to roll the 401k here into the 401k at my old company (with the institutional funds).

Every time I try Googling my question, the results all pertain to rolling forward.

While (I think) there is no IRS prohibition about an old employer's plan accepting a rollover, in practice most (all?) plans do not allow this.  Best thing for you is to call the old employer (or plan administrator) and ask.

See Roll Over an IRA to a 401(k): The Pros and Cons - NerdWallet for more and some links.

[Sturv]

Is it possible to get *more* money into an old 401k with those nice institutional funds? I'm leaving my current company, and, if possible, would like to roll the 401k here into the 401k at my old company (with the institutional funds).

Every time I try Googling my question, the results all pertain to rolling forward.

While (I think) there is no IRS prohibition about an old employer's plan accepting a rollover, in practice most (all?) plans do not allow this.  Best thing for you is to call the old employer (or plan administrator) and ask.

See Roll Over an IRA to a 401(k): The Pros and Cons - NerdWallet for more and some links.

Awesome, thanks for the link!

[cancelthesky]

• Roll over old 401k into Vanguard tIRA vested 100% into VTSAX

Yes.

• Begin contributing to Roth-IRA (I won't be able to contribute max right away while saving for house and paying debt off)

Depending on your current tax bracket, you may consider 401k before ROTH.

Right now my marginal tax bracket will remain 24% for the foreseeable future even if I max my 401k contributions (I guess my effective tax rate would drop a bit though). How should I consider this when comparing 401k vs Roth IRA?

• If I reach income limit for Roth IRA contributions, increase 401k contributions to lower MAGI

Again, consider the tax rate you will pay on that money today, plans for ROTH ladder conversions, and taxes in the future.

• If there ever comes a point where I am maxing my 401k and still am exceeding the Roth IRA income limit, roll tIRA into current 401k and begin backdoor Roth

This doesn't make sense.  You can backdoor ROTH from tIRA.  Also, if you in that high of a tax bracket that you can't contribute to ROTH, you probably don't want to convert your old tIRA funds at that tax rate.

What I meant by this was roll my tIRA (at that point consisting of 100% of my pre-tax rolled over 401k) into my current 401k, allowing me to make non-deductible contributions to my tIRA which will be tax free when converted to backdoor roth. How does my tax rate affect converting non-deductible tIRA contributions? I thought this would be tax free

[MDM]

Right now my marginal tax bracket will remain 24% for the foreseeable future even if I max my 401k contributions (I guess my effective tax rate would drop a bit though). How should I consider this when comparing 401k vs Roth IRA?

Ignore your effective rate - it has no bearing on this decision.

The comparison of interest is between your current marginal rate and the marginal rate you expect to pay when withdrawing from traditional accounts.  See Traditional versus Roth - Bogleheads.

What I meant by this was roll my tIRA (at that point consisting of 100% of my pre-tax rolled over 401k) into my current 401k, allowing me to make non-deductible contributions to my tIRA which will be tax free when converted to backdoor roth. How does my tax rate affect converting non-deductible tIRA contributions? I thought this would be tax free

It doesn't - your thought is correct.

[fatcow240]

What I meant by this was roll my tIRA (at that point consisting of 100% of my pre-tax rolled over 401k) into my current 401k, allowing me to make non-deductible contributions to my tIRA which will be tax free when converted to backdoor roth. How does my tax rate affect converting non-deductible tIRA contributions? I thought this would be tax free

I didn't realize that you were planning on converting tIRA after tax dollars.  You are correct.  It is better to only have after tax dollars, and your tax rate won't matter in this case.

[cancelthesky]

Thanks all, I'll be calling up Vanguard soon!