Company Cancelling 401K Program Question

[Trip]

Hello everyone,

I've been having a difficult time finding information on what to do in this situation. 

First some background.  I make $48,000 / yr.  I've already maxed out my Roth IRA this year, and was contributing $600 /month to my company 401k.  On top of that I have a significant amount of Student Loans that I'm throwing 500-1000 per month at depending on the month. 

So here's my question.  The company says that they're cancelling the company 401k program and that we'll have to either cash out or roll over into an IRA.  The amount of money in my 401K is small because I've only been able to contribute for 4 months, so I have about $2500 in there right now.  What would you do with the current 401k money and amounts I would have contributed in the coming months?  I was thinking of seeing if I can roll my 401k into my current Roth IRA and pay all taxes upfront, so that it doesn't come out of the 401k money (if possible) and then taking money I would be putting money that would go into the 401k in the future straight into paying off my fixed rate loans.

Current Financial Outlook

$12,000 Roth IRA
No traditional IRA
6 months of living expenses Emergency Fund
$42,000 Student Loans (about half at fixed 6.8% and half variable currently at 1.6%)

If you need any additional information, please let me know.

Thank you in advance for your recommendations,
TripWest

[matchewed]

I'd just roll the money into a traditional IRA, it's easier and you don't need the money for any immediate need. Why pay taxes on it now if you don't need to?

[tomsang]

I would consider looking for another employer.  If a company is eliminating an employee benefit, then what does that say about the health of the company or their view on employees.  I would be asking lots of questions to determine why they are eliminating the plan, whether they appear to be healthy, and what other benefits are going to be eliminated or cutback.  You hear stories of companies using Obamacare to transition the insurance payments from the employer to the employee in the name that Obamacare caused the spike in insurance.  When you dig in you find that the premium did not change, just the amount subsidized by the company.  Our health premiums have decreased for the first time in a decade and that is very consistent with my clients. 

For this account, roll it over into an IRA and save the tax and penalties.

[the fixer]

The trouble is that $2500 isn't a lot of money, so you would need to find a discount brokerage to host your IRA that would be able to deal with such a small amount. Vanguard won't do it, most of their funds have a minimum $3k investment.

You don't say where you're keeping the Roth, but if it's at Vanguard I would recommend just doing a 401k to Roth rollover/conversion. Yes you'll pay some taxes but IMO it's less hassle than having yet another financial account for not much money.

How long until the 401k goes away? Can you completely max out your contributions until then? That could get your over the $3k minimum needed for Vanguard funds and save you on taxes, and without a company retirement plan this is the last chance you'll have to do it. Even if you still decided to do a Roth conversion with the money, it would be like getting a bonus Roth contribution for the year.

[CB]

The trouble is that $2500 isn't a lot of money, so you would need to find a discount brokerage to host your IRA that would be able to deal with such a small amount. Vanguard won't do it, most of their funds have a minimum $3k investment.

Vanguard allows you to open an account with a $1k minimum in one of their Target Retirement funds (see here).  If it were me I'd just roll the $2500 in the 401k into a traditional IRA with Vanguard.

[Trip]

I'd just roll the money into a traditional IRA, it's easier and you don't need the money for any immediate need. Why pay taxes on it now if you don't need to?

My thought here was three-fold.

1.  2500 only qualifies me for the Target Date fund with Vanguard which I'm not a huge fan of.  I like being in total control of my stock/bond/real estate mix.
2.  I already have over 10K in the Roth IRA, so I qualify for the Admiral Shares
3.  I was thinking that if I could pay the taxes out of pocket, and transfer the full $2500 to a Roth, then $2500 in a Roth beats $2500 in a Traditional.  Again, I'm not sure if this is possible or not though

[Trip]

I would consider looking for another employer.  If a company is eliminating an employee benefit, then what does that say about the health of the company or their view on employees.  I would be asking lots of questions to determine why they are eliminating the plan, whether they appear to be healthy, and what other benefits are going to be eliminated or cutback.  You hear stories of companies using Obamacare to transition the insurance payments from the employer to the employee in the name that Obamacare caused the spike in insurance.  When you dig in you find that the premium did not change, just the amount subsidized by the company.  Our health premiums have decreased for the first time in a decade and that is very consistent with my clients. 

For this account, roll it over into an IRA and save the tax and penalties.

Funny that you mention this.  I have been interviewing around for a while because I haven't liked the direction of the company and have been through several rounds of interviews for full-time work with a couple of different companies and one consulting gig on the side.  So really I just view this as a minor inconvenience.

I appreciate everyone's feedback!

[the fixer]

3.  I was thinking that if I could pay the taxes out of pocket, and transfer the full $2500 to a Roth, then $2500 in a Roth beats $2500 in a Traditional.  Again, I'm not sure if this is possible or not though

Yes this is possible to do, but you might need to adjust your paycheck withholdings or something if you were already going to owe a hefty amount of taxes for 2013. If you usually don't owe (and definitely, if you received a refund last April) you'll be fine. Just opt on the rollover form not to have them withhold taxes. To be absolutely sure, you can ask your company's HR people, and ask for the copy of the rollover request form you'll need to fill out.

[alanwbaker]

1.  2500 only qualifies me for the Target Date fund with Vanguard which I'm not a huge fan of.  I like being in total control of my stock/bond/real estate mix.
2.  I already have over 10K in the Roth IRA, so I qualify for the Admiral Shares

TripWest, the key thing is to keep those tax-deferred dollars tax-deferred.  Either a Roth or traditional IRA is fine--just don't cash them out.

Why do you feel that a target date fund does not allow you control of your asset allocation?

[Trip]

1.  2500 only qualifies me for the Target Date fund with Vanguard which I'm not a huge fan of.  I like being in total control of my stock/bond/real estate mix.
2.  I already have over 10K in the Roth IRA, so I qualify for the Admiral Shares

TripWest, the key thing is to keep those tax-deferred dollars tax-deferred.  Either a Roth or traditional IRA is fine--just don't cash them out.

Why do you feel that a target date fund does not allow you control of your asset allocation?

The only real difference is that the Target Date fund invests a large chunk in the International Stock Market as well which is not really what I want to be doing at this point in time.  However, I want to stay heavily invested in stocks, and am waiting on another 10K minimum before I invest in bonds at all.

I know that I could balance these more as my stache grows, it just feels less than optimal for me at this moment in time.  The other downside is that the expense ratio is more than 3x higher than the VTSAX (probably not a huge deal as we're talking in basis points, however, every basis point matters when you've got years of compounding ahead).

After everything people have suggested here and after speaking with somebody at Vanguard, I've decided to go in the following route for the time being.

1.  Rollover my 401K into a traditional IRA with a vanguard target date fund (gives me more options in the future, keeps my future tax liabilities diversified, and avoids me a red flag with the IRA according to the Vanguard rep)

2.  Depending on what the future holds do one of two things:
a.  If I switch jobs immediately with no year of low income in between in the future and have to roll over another 401K, then I'll keep the traditional IRA to diversify my future tax risk if I get that balance over 10,000
b.  If I have a year of low income in the near future, then I'll convert the traditional IRA over into my Roth IRA

3.  Going forward I will continue to max out my Roth IRA.

4.  Going forward I will take all money that I would be putting into a 401K towards paying off my 6.8% interest student loans until I have another opportunity to contribute to a 401K

Thank you everybody for your thoughts and suggestions.