401(k) after service termination: Alternatives to IRA rollover?

[Ursus Major]

I recently left my employer to RE at age of 49. My original plan was to keep all my money in my 401(k) (managed by Vanguard), instead of rolling it over into an IRA for the following reasons:

• Backdoor Roth: If I ever were to earn some money I want to preserve the opportunity to do a backdoor Roth in a tax-neural way
• Asset Protection: Unlike a 401(k), an IRA is not protectecd by federal law (ERISA) and California state law is particularly weak in regards to asset protection, in the (unexpected) case that it should become necessary: https://www.nolo.com/legal-encyclopedia/are-my-retirement-accounts-protected-from-judgment-creditors-california.html

The problem is now that I was engaging in a megabackdoor-Roth and I still have about 12500 USD in after-tax contributions in my account. Before I left my company I called the 401(k) provider, and asked about partial transfers after end of service, in particular, if I still could transfer the after-tax money out after end-of-service. While they told me "no" about partial transfers in general, they told me "yes" about the transfer of after-tax money. Now that I've left, they tell me that no partial transfer is possible and that there was a "misunderstanding" in that phone call.

So I am wondering, if there is any alternative to rolling the entire account over to an IRA.

One alternative I looked at is to open a Solo 401(k). I won't have any self-employment income (for the foreseeable time), so I can't make any contributions, but that apparently doesn't prohibit me from opening one and rolling my 401(k) in. However this unfortunately only solves problem 1 (backdoor IRA). It doesn't solve the asset protection problem, since Solo 401(k)s are apparently not subject to ERISA either and have the same (in my case weak) assets protections as IRAs.

Does anyone know any other options?

[MDM]

Backdoor Roth: If I ever were to earn some money I want to preserve the opportunity to do a backdoor Roth....

It's not only "some" money but a rather large amount that you would have to earn (particularly as a "retired" person) before you would need to use the back door instead of the front.

See https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2016.

[seattlecyclone]

Yes, I wouldn't worry too much about closing the back door unless you plan to earn six-figure sums of "side income" during your retirement. If that does become a "problem" you can see about opening a solo 401(k) that accepts traditional IRA rollovers at that time.

[Ursus Major]

I understand that at this point the backdoor isn't the main problem. However that doesn't solve the problem with poor asset protection in California. Any ideas for that?

[MoonShadow]

I understand that at this point the backdoor isn't the main problem. However that doesn't solve the problem with poor asset protection in California. Any ideas for that?

Move to a better state?  Or perhaps open the IRA in a single state institution with better asset protection laws.

For that matter, you could pick up a part time job at Lowe's or Walmart, and roll your 401k funds over there.  If you do this before 50, you could resign the part time job, leave those funds there, get the part time job again at 54, and retire at 55 without any withdrawal penalty at all.  But you have to have been working at the company that hosts the 401k during your 55th birthday, you have to retire after your 55th birthday, and rollover funds have to have 5 years to "age out".

IANAL, someone check my assumptions here before you take this path.

[MustacheAndaHalf]

Bankruptcy protection isn't normally the foremost thought of someone who retires.  If anything, you want minimal debt so bankruptcy is unlikely.  We're not talking ordinary expenses that can be met by going back to work, so what is driving your fear of bankruptcy protection?

If there's a real fear with an uncomfortable probability, you'll probably do better with estate planning with an attorney.  The Solo 401(k) with a business that earns no money will be tricky, and you'll need to decide if all this is worth the trouble.

[MoonShadow]

Bankruptcy protection isn't normally the foremost thought of someone who retires.  If anything, you want minimal debt so bankruptcy is unlikely.

He's not talking about bankruptcy, per se.  I assumed he was talking about getting sued in general.  In better states, retirement accounts are protected from legal judgements under most conditions.

[Ursus Major]

Bankruptcy protection isn't normally the foremost thought of someone who retires.  If anything, you want minimal debt so bankruptcy is unlikely.

He's not talking about bankruptcy, per se.  I assumed he was talking about getting sued in general.  In better states, retirement accounts are protected from legal judgements under most conditions.

Exactly. I do not have any debt and the risk I am talking about is indeed getting sued in general. The risk might be tiny, but the protection in a 401(k) is essentially free, so I am reluctant to give that up.

[Indexer]

Creditor protections:  You are correct that a 401(k) has better protection than a traditional IRA.

However if you roll a 401(k) into a rollover IRA and you never commingle that money with your own contributions it keeps the same protections the 401k(k) had... infinite.

This is why IRAs you contributed to yourself should always be kept separate from rollover IRAs that have old employer plan money.

[Ursus Major]

Creditor protections:  You are correct that a 401(k) has better protection than a traditional IRA.

However if you roll a 401(k) into a rollover IRA and you never commingle that money with your own contributions it keeps the same protections the 401k(k) had... infinite.

This is why IRAs you contributed to yourself should always be kept separate from rollover IRAs that have old employer plan money.

Hi Indexer,

That sounds interesting. Where can I find more information about that?

[Indexer]

Creditor protections:  You are correct that a 401(k) has better protection than a traditional IRA.

However if you roll a 401(k) into a rollover IRA and you never commingle that money with your own contributions it keeps the same protections the 401k(k) had... infinite.

This is why IRAs you contributed to yourself should always be kept separate from rollover IRAs that have old employer plan money.

Hi Indexer,

That sounds interesting. Where can I find more information about that?

Best read: http://www.racklaw.com/pdfs/Law_Library/estate-planning/IRA%20Creditor%20Protection.pdf

Extra source if you want it: http://www.thetaxadviser.com/issues/2014/jan/naegele-jan2014.html

Article written for Financial Planners: https://www.onefpa.org/journal/PublishingImages/Pages/Journal%20Articles/Creditor%20Protection%20for%20Retirement%20Accounts%20ERISA%20the%20Kitces-Supreme%20Court%20and%20the%20Bankruptcy%20Act%20of%202005.pdf


PS. I would say most people in the investment industry don't even know this. When I first rolled over an account to Vanguard their rollover specialist didn't know about. They kept trying to get me to lump everything together and didn't realize why I was so insistent on opening a rollover IRA separate from my traditional IRA.


Now going back to the original question I eventually moved that money back into my new employer 401(k) so backdoor Roth IRA contributions would be an option(my trad that I contributed to is pretty small so I can always convert it if needed). I guess I should add that in. Many companies will let you roll an IRA into a 401k if that IRA is only made up of previous employer plan money.

[Ursus Major]

Best read: http://www.racklaw.com/pdfs/Law_Library/estate-planning/IRA%20Creditor%20Protection.pdf

Extra source if you want it: http://www.thetaxadviser.com/issues/2014/jan/naegele-jan2014.html

Article written for Financial Planners: https://www.onefpa.org/journal/PublishingImages/Pages/Journal%20Articles/Creditor%20Protection%20for%20Retirement%20Accounts%20ERISA%20the%20Kitces-Supreme%20Court%20and%20the%20Bankruptcy%20Act%20of%202005.pdf


PS. I would say most people in the investment industry don't even know this. When I first rolled over an account to Vanguard their rollover specialist didn't know about. They kept trying to get me to lump everything together and didn't realize why I was so insistent on opening a rollover IRA separate from my traditional IRA.


Now going back to the original question I eventually moved that money back into my new employer 401(k) so backdoor Roth IRA contributions would be an option(my trad that I contributed to is pretty small so I can always convert it if needed). I guess I should add that in. Many companies will let you roll an IRA into a 401k if that IRA is only made up of previous employer plan money.

Hi Indexer,

Thanks so much for the links. However when I read them, it appears to me that the extra protection afforded to Rollover IRAs are due to BAPCPA and thus aren't applicable to creditors' claims outside of bankruptcy (e.g. due to a court judgement). Or am I misreading or missing something here?