Author Topic: Pros/cons of rollover to IRA or new 401k?  (Read 2812 times)

Scandium

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Pros/cons of rollover to IRA or new 401k?
« on: February 03, 2015, 07:25:25 AM »
My wife got a new 401k at work and due to the nature of the change can now either roll over into the new one, or into a personal IRA with Vanguard. The new plan is run through Edelman financial services. It looks like he's some sort of financial planner celebrity? Apparently been on Oprah etc. Despite this the plan is pretty good. It has admiral shares of total market and international (VTSAX, VTIAX) and some DFA bond funds with ~0.12% ER. She has about $45k in the account, but is starting to max it out now.

Is there any reason to roll this into a Vanguard IRA vs into the new plan? I keep going back and forth and so far have this list

401k pros
Better bankruptcy protection. (don't plan on it, but who does..)
Simpler, single account for everything (we both have Roths with schwab, no IRAs)
Can withdraw if quit at 55 (we're early 30s though)

IRA pros
Full control! If the 401k change to something awful in the future.

IRA Cons
There is some issue with doing a back-door roth? The Pro-rata rule? We will have to do this this year. Need to read more about it
http://www.marketwatch.com/story/the-pros-and-cons-of-rolling-over-a-401k-to-an-ira-2014-01-24

The one pro of the IRA is a big one though. Apparently they went with this Edelman guy because someone there use him as their advisor, and he offers some complicated 'portfolios' for most people (a mismash of mid-cap growth, small cap value international, large cap value etc etc). The ERs aren't bad (vanguard and DFA) but seems a bit random to me. Basically just 4-5 target date funds. The vanguard funds were only added because we and a few other people requested it. So may be taken away in the future..?

So gamble that the 401k will stay good, or ignore the minor advantages of the 401k and open an IRA? Is the pro-rata rule an issue?
« Last Edit: February 03, 2015, 07:43:12 AM by Scandium »

matchewed

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Re: Pros/cons of rollover to IRA or new 401k?
« Reply #1 on: February 03, 2015, 08:33:45 AM »
I'm not seeing the 401k pros you are. I think IRA's are also exempt from bankruptcy up to a certain point (I think it's near a million).

Single service as an advantage is really just a preference. There is no practical advantage.

You can withdraw @55 with IRA's too.

Also if someone is promising you great returns for heavy management that means they have to touch it more. Which means a higher expense ratio, which means less returns even if they're promising more (generally).

I'd stick w/ the IRA at whatever institute has cheap fees.

nereo

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Re: Pros/cons of rollover to IRA or new 401k?
« Reply #2 on: February 03, 2015, 09:12:04 AM »
I also don't see the positives in the 40(k) that you are.
If you use Vanguard as your broker and invest in a market index fund (e.g. SP500 or total market index), there's no chance it will go bankrupt unless every company in the index goes bankrupt.  Even if Vanguard goes belly up, you still own the shares, not Vanguard.

Quote
So gamble that the 401k will stay good, or ignore the minor advantages of the 401k and open an IRA?
well you've just summed it up there for yourself.  If you stay with your 401(k) you are hoping that Edelman can provide returns beyond what you can get by owning a low-cost index fund.  It could happen, but I agree it's a 'gamble'.  About 80% fail over 5 year periods... not very good odds.

skyrefuge

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Re: Pros/cons of rollover to IRA or new 401k?
« Reply #3 on: February 03, 2015, 09:30:12 AM »
IRA Cons
There is some issue with doing a back-door roth? The Pro-rata rule? We will have to do this this year. Need to read more about it
http://www.marketwatch.com/story/the-pros-and-cons-of-rolling-over-a-401k-to-an-ira-2014-01-24

Yes, this was going to be my point in favor of the 401(k) rollover (you must have added this in your edit?)  This point makes all the other 401(k) pros meaningless in comparison, and without it, I would have said IRA (and still might, but this one is definitely worth considering).

With $45k in a deductible, traditional IRA, 89% of this year's $5500 backdoor Roth IRA conversion would be taxed at your ordinary rate. If that $45k was in the 401(k) instead, then 0% of the Roth conversion would be taxed. If you had the money in the traditional IRA, I think it would make no sense to do the backdoor Roth, and you would just invest that money in a taxable account instead. So if the value putting away money each year into a Roth is greater to you than having it in a taxable account, then I would roll the $45k into the 401(k).

Maybe one thing to note though: are you sure there are no extra fees in the fancy 401(k)? My 401(k) also has Vanguard funds at their normal, low expense ratios, but I get charged an explicit, quarterly fee that's taken out of my account.

Finally, while Edelman had a pretty great game in the Super Bowl, it looked like he suffered a concussion on a blow to the head in the middle of the game, so I'm not sure how well the financial advisory business he runs in the offseason will continue to perform.

Scandium

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Re: Pros/cons of rollover to IRA or new 401k?
« Reply #4 on: February 03, 2015, 10:43:21 AM »
IRA Cons
There is some issue with doing a back-door roth? The Pro-rata rule? We will have to do this this year. Need to read more about it
http://www.marketwatch.com/story/the-pros-and-cons-of-rolling-over-a-401k-to-an-ira-2014-01-24

Yes, this was going to be my point in favor of the 401(k) rollover (you must have added this in your edit?)  This point makes all the other 401(k) pros meaningless in comparison, and without it, I would have said IRA (and still might, but this one is definitely worth considering).

With $45k in a deductible, traditional IRA, 89% of this year's $5500 backdoor Roth IRA conversion would be taxed at your ordinary rate. If that $45k was in the 401(k) instead, then 0% of the Roth conversion would be taxed. If you had the money in the traditional IRA, I think it would make no sense to do the backdoor Roth, and you would just invest that money in a taxable account instead. So if the value putting away money each year into a Roth is greater to you than having it in a taxable account, then I would roll the $45k into the 401(k).

Maybe one thing to note though: are you sure there are no extra fees in the fancy 401(k)? My 401(k) also has Vanguard funds at their normal, low expense ratios, but I get charged an explicit, quarterly fee that's taken out of my account.

Finally, while Edelman had a pretty great game in the Super Bowl, it looked like he suffered a concussion on a blow to the head in the middle of the game, so I'm not sure how well the financial advisory business he runs in the offseason will continue to perform.

Yes I forgot about the back door Roth point and added it, before anyone replied though. I've been reading more and it does seem like that is a pretty large factor in favor of the 401k. Probably enough for me to just do that. Like you say if we have this IRA sitting around an Roth conversion could cost $1000s extra in taxes. https://www.bogleheads.org/wiki/Back_door_Roth_IRA

Some confusion; by the 401k being "good" I meant allow low cost vanguard funds. I fear that at some point the management of my wife's employer might go with some horrid 2% ER plan. It could happen and the money would be stuck. But over all I don't think it's worth the hassle of messing up the roth conversion. We plan to add 50% of the rollover amount this year alone anyway, so not much point worrying over.

Of course it's no easy task to figure out what extra fees there are in the plan, but I'm pretty sure he only charge for the prepackaged portfolios. There is a "ModelxChange Fee" of 0.035% on top of the fund expenses. It says admin fees will be disclosed on quarterly statement, which we haven't received yet so will have to wait and see.

So by reading the internet I seem to have answered my own question; who would'da thunk? Appreciate all the input!