Author Topic: Post FIRE - Should I rollover my 401K to IRA or not?  (Read 7651 times)

Threshkin

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Post FIRE - Should I rollover my 401K to IRA or not?
« on: November 24, 2014, 11:53:30 AM »
In early 2015 I will be RE and will have the option of converting my 401k to an IRA.  I have been maxing my donations since the beginning so there is a significant amount money here.  About 30% of my total portfolio.  The 401k is about 75% traditional and 25% Roth.  The 401k investment choices are good, I have all the money in three Vanguard funds, VIIIX (46%), VTSNX (29%), VEMPX (25%).  The 401k is administered by Fidelity, there are no administration fees that I can find.

Should I move it into a rollover IRA or just leave it sit? 

I am asking because I remember reading something about it being bad (or good) to move the money.  My faulty memory tells me that the advice was tied to Traditional to Roth re-characterization or something similar but i cannot find the article anymore.

I don't need to access it until I am fully eligible to withdraw it.  I want to gradually move the money from Traditional to Roth before then to avoid the tax hit as much as possible.


Gone Fishing

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #1 on: November 24, 2014, 12:13:50 PM »
I am rolling all of mine over when the time comes (currently in Vanguard funds, but administered by a third party).  I figure it will be easier to deal with Vanguard directly vs the plan administrator.

GGNoob

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #2 on: November 24, 2014, 12:27:36 PM »
Most of the time you move the money from the 401k to an IRA because the options are better and the fees are lower. But no matter what, it might just make it easier to manage if all of your money was at Vanguard. Personally, I'd roll it over into the IRA.

One thing to look into...do you get to keep your money in those funds when you RE? Or will they move them into more expensive funds?

matchewed

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #3 on: November 24, 2014, 12:44:59 PM »
Rolling "tax treated like" accounts to identical "tax treated like" accounts will generally occur no penalty or negative side effect outside of being out of the market until the transaction occurs. For example a 401k to IRA or Roth 401k to Roth IRA will have no tax event to it.

So we've established no negative tax treatments. The risks generally with leaving investments in a 401k is that you are subject to the rules that the company the money is with has (in your case Fidelity, usually not a problem), and the employer's ability to negotiate with the administrator (again w/ Fidelity but what if they move to a different company, you could just pull out then).

I'm personally an illusion of control freak and would prefer to have all that in IRAs under my name. Given your last sentence it may benefit you to do so as you will be able to contribute and convert as you see fit.

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #4 on: November 24, 2014, 01:04:52 PM »
I'm confused, what's a reason not to move it over? I can't think of any.

The objectively best funds are with Vanguard. You can get these funds and control the money yourself with an IRA with Vanguard. Roll it over.

TexasStash

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #5 on: November 24, 2014, 01:42:52 PM »
It seems like the only reason not to move the money over would have been if it were a small balance that would benefit from being part of a group 401k plan that had no minimums, but since its indicated that it's a significant sum, I agree there seem to be no good reasons not to roll it over to a like account that won't incur tax or penalty.

Probably should keep digging - I find it hard to believe Fidelity doesn't have any admin fees, unless you're saying there'e no fee on top of the typical expense ratio cost. Which you should also consider comparing to the Vanguard IRA option.

Druid

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #6 on: November 24, 2014, 08:27:38 PM »
I am still a beginner so I am not qualified to give you advice, but this articles might give you more guidance...

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

My understanding is that only traditional IRAs can be converted to Roth IRAs, and that is one reason besides fund costs that might encourage you to switch over to a traditional IRA. People who are receiving all of their income at low capital gain rates can potentially convert traditional IRAs to Roth IRAs tax free. Based on my elementary understanding the amount that you can convert tax free depends on your total available exemptions/standard deductions and whether or not you are still in the zero tax bracket. If you successfully convert a traditional IRA to a Roth IRA you are paying no income tax on both your original investment and your later withdrawal(from the Roth).

Look at the 2015 tax brackets to see how you can potentially qualify for tax free conversions:

http://www.forbes.com/sites/kellyphillipserb/2014/09/17/2015-tax-rates-brackets-exemption-amounts-may-save-taxpayers-money/

Right now capital gains and qualified dividends are taxed at zero percent if a taxpayer(s) are in the 15% ordinary income bracket. For example a married couple in the 15% ordinary income bracket(up to $74,900) could live on $54,300 of qualified dividends and capital gains and then roll over up to $20,600 of their traditional IRA to the Roth IRA tax free. This couple in this scenario would pay zero income tax in 2015, while converting $20,600 of the traditional IRA to an account that won't be taxed at a later withdrawal date.

The rollover from the traditional IRA to the Roth IRA is technically a taxable event, however $20,600 of ordinary income can be offset by the $8,000 in exemptions and the $12,600 standard deduction for a married couple. If the married couple is itemizing deductions then they could still roll over $8,000 tax free by just using their exemptions. You can also use your children's exemptions as well for this purpose.

What I haven't figured out yet is if standard deductions and exemptions are first applied to ordinary income or capital gains income. If exemptions and standard deductions are first applied to ordinary income(or the roth conversion) than a person can theoretically still take advantage of paying a lower effective tax rate on Roth conversions while leaving the 15 percent ordinary income bracket. If standard deduction/exemptions are applied to capital gains first then the Roth conversion would be taxed at a minimum of 25% when leaving the ordinary income 15% bracket.

Disclaimer: I came across the concept of Roth conversion recently and part of my intent in writing this post is to see if my understanding is correct and allow people to correct any holes in my understanding. That being said I believe the Roth conversion concept is what you were referring to in your original post.
« Last Edit: November 24, 2014, 09:03:52 PM by Druid »

Threshkin

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #7 on: November 25, 2014, 09:07:53 AM »
I am still a beginner so I am not qualified to give you advice, but this articles might give you more guidance...

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
.....snip.....

Thanks Druid, this is along the lines of what i was looking for.

Regarding your Roth conversion analysis, what you state is what I understand as well.  I intend to start this conversion process in 2015 or possibly 2016 depending on how much income we have in 2015.

FIPurpose

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #8 on: November 25, 2014, 09:15:01 AM »
I'm confused, what's a reason not to move it over? I can't think of any.

The objectively best funds are with Vanguard. You can get these funds and control the money yourself with an IRA with Vanguard. Roll it over.

I believe the biggest difference is the withdraw age on the accounts:

401k - 55
IRA - 59.5

So if your close to that age it may be worthwhile keeping it in the 401k instead of having to use a workaround strategy.

Threshkin

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #9 on: November 25, 2014, 09:30:56 AM »
I'm confused, what's a reason not to move it over? I can't think of any.

The objectively best funds are with Vanguard. You can get these funds and control the money yourself with an IRA with Vanguard. Roll it over.

I believe the biggest difference is the withdraw age on the accounts:

401k - 55
IRA - 59.5

So if your close to that age it may be worthwhile keeping it in the 401k instead of having to use a workaround strategy.

Very good point FS!  This does not apply to me (57 with plenty in taxable accounts) but it could be VERY important for someone younger.

stuckinmn

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #10 on: November 25, 2014, 09:41:51 AM »
A few reasons I could think to not do a rollover-

1.  If the investment fees or options are better at your 401k.
2.  401k might get better bankruptcy lawsuit protection than an IRA (if you are sued they are less likely to be able to get at the 401k to pay a judgment).
3.  If you are doing a 72t election, but only want to do it for smaller amounts it is better to leave the IRA smaller so you will only be required to take out smaller amounts.
4.  If you are still working at the employer at age 55 and then retire, you can do penalty free withdrawals from the 401k, but you'll still owe tax.

In my case, I'm planning on leaving my 401k alone after I leave due to option 1.  I'm paying .04% for my index fund vs .05% at Vanguard for the same fund, plus the fixed income portion gets a slightly better yield.   

I bet in most cases it makes sense to rollover to a cheap IRA but see if any of the above apply to you before you do.

Edit- just saw you are 57 with plenty of taxable accounts to last 2 more years, so ignore 3 and 4 above.
« Last Edit: November 25, 2014, 09:44:20 AM by stuckinmn »

Druid

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #11 on: November 25, 2014, 10:53:10 AM »
If you are already 55 you could also spend enough of your 401k to offset your exemptions and standard deductions and then use your taxable accounts for the rest of your withdrawals. You would still get to withdraw the 401k tax free without worrying about the Roth conversion. If capital gain rates stay at zero this will give you the same affect as the Roth conversion, since your taxable accounts are not taxed when you are in the 15% ordinary income bracket and you will not be depleting your "taxable" accounts as rapidly. I think people who mainly benefit from Roth conversions are people who don't have enough money in "taxable" accounts to do most of their withdrawals at zero capital gain rates.

You might not need to worry about Roth conversion, because you can effectively do 401k withdrawals right now tax free as long as they equal exemptions/standard deductions and the rest of your withdrawals can be taxed at zero capital gain rates.Theoretically you can just have your 401k withdrawals equal your exemptions and standard deduction all through your retirement if the minimum withdrawal amount doesn't hit you.  If it is possible I would try to pull the Roth component of of your 401k plan out and transfer it to a Roth IRA. That way it will be clear to the IRS that all of your 401k withdrawals that are offsetting exemptions/standard deductions are from non-Roth 401k funds.

On the other hand if you plan to spend very little each year where your standard deductions and exemptions are not being used then you might as well take advantage of the Roth conversion. Zero capital gain rates might not be here forever.

Thinking about this stuff has influenced me to believe that everyone should have at least a small chuck of money in a traditional IRA since it's potentially the only retirement fund that can be tax free going both in and out. The goal of perfect retirement planning is to have at least enough in traditional accounts to offset every exemption and standard deduction you take in retirement. This conclusion of course is assuming that capital gains rate stay at zero for the people in the 15% ordinary income bracket. For most people who plan to be frugal in retirement the Roth is simply a hedge against capital gain rates rising from zero.
« Last Edit: November 25, 2014, 11:40:52 AM by Druid »

skyrefuge

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #12 on: November 25, 2014, 11:28:35 AM »
The 401k investment choices are good, I have all the money in three Vanguard funds, VIIIX (46%), VTSNX (29%), VEMPX (25%)

You should have posted the expense ratios for these funds. It would have prevented the 15 responses that said "I can't think of any reason to keep it in your 401(k)".

Most people are probably just not familiar with Vanguard's Institutional class, which is what all those are (Vanguard even sort of hides them on their website). If you have a crappy 401(k), yes, your fund options are probably better in a Vanguard IRA than a crappy 401(k). But if you have a great 401(k) (which you do), you have access to funds with crazy-low expense ratios that simply are not available in an IRA.

VIIIX (S&P 500): 0.02% (vs. 0.05% for Admiral shares)
VTSNX (Total International): 0.12% (vs. 0.14% for Admiral shares)
VEMPX (Extended Market): 0.06% (vs. 0.10% for Admiral shares)

The dollar amount you have in that 401(k) will show how much it would "cost" to move to an IRA where you'd only have access to Admiral shares. If you have $500k, it would "cost" you something on the order of $150/year. Is having all your accounts consolidated worth $150/year? I don't think it would be for me, so in that case I'd probably just keep the 401(k). I also might keep it simply for the bragging rights. "haha, you pay 0.05% for your 500 Index fund? LOLOL sukka!!!"

Threshkin

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #13 on: November 25, 2014, 12:07:56 PM »
I also might keep it simply for the bragging rights. "haha, you pay 0.05% for your 500 Index fund? LOLOL sukka!!!"

Thanks Sky.  You made me laugh!  "0.05%? sukka!"

seattlecyclone

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #14 on: November 25, 2014, 12:32:14 PM »
My understanding is that only traditional IRAs can be converted to Roth IRAs, and that is one reason besides fund costs that might encourage you to switch over to a traditional IRA.

This is not correct. You can do direct transfers from a traditional 401(k) to a Roth IRA. These conversions are taxed the same as if it was a traditional IRA to Roth IRA conversion. I think this may have been a new option as of a few years ago, but it is definitely allowed now.

I believe the biggest difference is the withdraw age on the accounts:

401k - 55
IRA - 59.5

The age 55 rule for 401(k) accounts only applies if you leave the employer after you turn 55. If you retire earlier than 55, you may not withdraw the 401(k) money penalty-free until age 59.

--------------------------------

As skyrefuge pointed out, your 401(k) has investment options with better expense ratios than most humans can qualify for on an individual basis. If I were in your shoes, I would do partial Roth conversions each year as desired for tax optimization, but leave the bulk of the funds in the 401(k) as opposed to a traditional IRA.

Druid

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #15 on: November 25, 2014, 12:45:58 PM »
Thanks seattlecyclone for the correction I still have a lot to learn..

Does anyone know in what order we are supposed to withdraw from a 401(k) that has mixed Roth/Traditional characteristics(assuming no Roth conversion)? Would the withdrawals first come from the traditional component or would it pro rata?
« Last Edit: November 25, 2014, 12:52:15 PM by Druid »

Scandium

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #16 on: November 25, 2014, 12:53:03 PM »
hah, with my 401(k) having one whole index fund with an ER of 0.65%(!) the concept of better options in the 401(k) than in an IRA didn't even occur to me! Didn't know such things even existed. Don't all employers just take kickbacks/poor advice and screw their employees over? strange.

seattlecyclone

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #17 on: November 25, 2014, 01:08:39 PM »
hah, with my 401(k) having one whole index fund with an ER of 0.65%(!) the concept of better options in the 401(k) than in an IRA didn't even occur to me! Didn't know such things even existed. Don't all employers just take kickbacks/poor advice and screw their employees over? strange.

I think most employers are just looking for a plan that doesn't cost them much to administer. There are providers that will offer cheap 401(k) services to small and medium-sized employers, with the trade-off being that the mutual funds have high fees, and part of these fees goes to the plan sponsor to pay their costs. The bigger employers are managing enough money that they can negotiate good deals with Vanguard or Fidelity directly and offer low-fee funds in the process.

My previous employer went through this cycle. When I started working there, the company only had a couple hundred employees. The 401(k) was managed through a company called Ascensus and none of the funds had expense ratios below 0.5%. Then when the company grew past a thousand employees, they were able to switch the 401(k) over to Fidelity and we got to choose from a good selection of Spartan funds. Now I'm at an even larger company and I have access to some of the same Vanguard Institutional Plus funds that Threshkin has.

skyrefuge

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #18 on: November 25, 2014, 01:19:11 PM »
hah, with my 401(k) having one whole index fund with an ER of 0.65%(!) the concept of better options in the 401(k) than in an IRA didn't even occur to me! Didn't know such things even existed. Don't all employers just take kickbacks/poor advice and screw their employees over? strange.

Yeah, that's why I should have jumped in this thread sooner; I've worked for several different employers over the years, so I'm "lucky" to have first-hand knowledge of a pretty wide variety of 401(k) plans, including my second company's 401(k), which I still have despite not working for them for years, because it has the same Vanguard Institutional funds.

Well, not quite the same funds. Two of Threshkin's are actually "Institutional Plus" funds, which are even a step above the "Institutional" funds I have. The minimums for the 500 Index and Extended Market funds are $200MM and $100MM respectively. That indicates Threshkin's company is likely one of the biggest companies in the world (total plan assets are probably greater than $1 billion).

I think at that level, 401(k) providers are probably tripping over themselves in their competition to manage to that hoard of cash. So they're able to provide extremely low prices, because they "make it up on volume". 0.04% of $1 billion is still $400k, after all. In contrast, for smaller/younger companies with much smaller pots of 401(k) money, the providers have to make up the money in other ways (since the companies probably aren't willing to pay hundreds of thousands each year outright to provide a 401(k)).

So while it's possible that some of these giant mega-corps might also be wiser or more-benevolent than small employers with shitty 401(k)s, I think most of the difference is just a direct consequence of scale.

ETA: TL;DR: what seattlecyclone said.
« Last Edit: November 25, 2014, 01:21:53 PM by skyrefuge »

Threshkin

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #19 on: November 25, 2014, 01:32:52 PM »
Well, not quite the same funds. Two of Threshkin's are actually "Institutional Plus" funds, which are even a step above the "Institutional" funds I have. The minimums for the 500 Index and Extended Market funds are $200MM and $100MM respectively. That indicates Threshkin's company is likely one of the biggest companies in the world (total plan assets are probably greater than $1 billion).

So while it's possible that some of these giant mega-corps might also be wiser or more-benevolent than small employers with shitty 401(k)s, I think most of the difference is just a direct consequence of scale.

Yes, I do work for a pretty (very) large company.  The founder recently bought a fairly substantial island.  The company does not have a great external reputation and is not known for paying well compared to upstarts in the industry, but we do have some decent benefits.  I knew these funds were good, but did not realize they were that good! 

I still do not want to postpone my FIRE though. 

Druid

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #20 on: November 25, 2014, 01:40:45 PM »
I will have some of the same opportunities as Threshkin when I start my new job. You guys want to make some suggestions on how to balance my portfolio? I was kind of leaning towards 60% VIIIX and 40% VSCPX. Maybe a traditional IRA with REITs. I kind of want to go aggressive in my "early" years.

https://retirementplans.vanguard.com/VGApp/pe/faces/PubFundChart?site=deloitte/9144

« Last Edit: November 25, 2014, 01:46:51 PM by Druid »

seattlecyclone

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #21 on: November 25, 2014, 01:58:24 PM »
It looks like you're trying to put some emphasis on the small-cap stocks to try for larger returns in the long run. Seems like a decent plan. I would probably go with VITSX (total stock market) instead of VIIIX (just the biggest 500 companies). With VIIIX and VSCPX you're invested a lot in the huge companies and the small companies, but you're completely ignoring the middle. VITSX makes it a bit more balanced.

skyrefuge

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #22 on: November 25, 2014, 02:14:10 PM »
Yes, I do work for a pretty (very) large company.  The founder recently bought a fairly substantial island.  The company does not have a great external reputation and is not known for paying well compared to upstarts in the industry, but we do have some decent benefits.

ha, yeah, so my "$1 billion of plan assets" estimate was a bit low then. Your plan's VIIIX holding alone is $1.1B! Total plan assets are $11B, with 44,000 active participants. Given that my current company has $0.006 billion in assets and 72 active participants, my fairly crappy plan actually seems not all that bad; they could be dicking a tiny minnow like us over a lot worse!

Interesting coincidence that a company in the same industry (whose founder these days is trying to save/improve the lives of those living on some distant islands, rather than buying them or sailing around them :-) ) also has $11B in their plan. Continuing the random factoids, 7.5% of that plan is invested in company stock, while 12.3% of your plan is; interpret that however you'd like!

401(k) plan data found here: https://www.efast.dol.gov/portal/app/disseminate

Threshkin

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Re: Post FIRE - Should I rollover my 401K to IRA or not?
« Reply #23 on: November 26, 2014, 10:37:13 AM »
Total plan assets are $11B, with 44,000 active participants.

401(k) plan data found here: https://www.efast.dol.gov/portal/app/disseminate

Interesting information thanks for sharing this.  You are obviously much more knowledgeable about the workings of these plans.

Factoids:  Based on these numbers (assuming US employees only), the 401k participation rate at my company is about 87% and the average account balance is around $250K.  Not only do we have a good plan, but we also have smart employees! 

Except for the roughly 6,600 idiots who do not participate.