Author Topic: Should we roll over my DH's 401k to an IRA now?  (Read 1467 times)

rubybeth

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Should we roll over my DH's 401k to an IRA now?
« on: March 15, 2016, 06:55:22 AM »
I asked a variation of this question before in Ask a Mustachian, but didn't get really clear answers, and I figured the investors forum might be a better place for this, anyway.

I am wondering if we should roll my husband's 401k into an IRA now, while he isn't working, so that, if he gets a job with the same employer and wants to work longer than me, we would have access to those funds in a Roth Pipeline situation.

My husband left his employer at the end of last summer to do his graduate program's internship. He got an unpaid internship with the same organization where he'd worked. He's fully vested in the 401k, but they employe recently switched providers. We got the updated plan documents, and his funds have been transferred from the S&P index fund with the old provider to another S&P index fund (Vanguard 500 Index Admiral, looks like maybe an annual fee of $20 plus .05% which is the lowest fee of all the fund options, not surprisingly). The possibility exists that he could once again be employed with this agency, and would keep adding to his 401k. He'll be graduating/job hunting soon, so I think we need to decide something now, even if it's just to decide to wait on making a decision.

My questions:

1) Since he's no longer an employee, and he's fully vested, we could just roll this into an IRA for him--should we? Or not?

2) What would be the advantages of a rollover (I am thinking accessing money would be easier because we would do a Roth Pipeline, but not sure)? We have accounts with both Vanguard and Fidelity, so a rollover would be easy in terms of paperwork. I am thinking it would be more convenient to have this independent of the 401k so we can do the Roth pipeline at some point, even if he doesn't leave the employer (for example, he could go part-time at some point, so he's still an employee and wouldn't have access to the funds in the 401k until he quits or retires; is this correct?).

3) Are "Admiral" shares of a stock really 'better' than regular investor shares? It looks like this might be slightly cheaper in terms of fees, but I'm thinking someone here could recommend an equivalent Vanguard or Fidelity fund. Again, I am pretty sure there's an annual fee of $20 and the expense ratio is .05% for VFIAX.

Any other advice/wisdom you can share.

For other background info., his 401k is a good chunk of our retirement savings (let's say 20%) and we are looking at retirement in 12-15 years, possibly sooner, around ages 45-50. DH may or may not continue working longer than me, since he's starting this new career at age 34. I work full time and contribute to my 457b, which we hope to max out as soon as he's employed.

NoStacheOhio

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Re: Should we roll over my DH's 401k to an IRA now?
« Reply #1 on: March 15, 2016, 08:12:18 AM »
I would've rolled it into an IRA right after separating, but that's just me.

The difference between admiral and investor shares is the fee. Admiral is cheaper. The $20/yr is probably from the plan administrator. You could roll it into a Vanguard tIRA and buy the same Admiral SP500 shares (or any other fund you like) and ditch the annual fee.

seattlecyclone

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Re: Should we roll over my DH's 401k to an IRA now?
« Reply #2 on: March 15, 2016, 11:09:28 AM »
1) Since he's no longer an employee, and he's fully vested, we could just roll this into an IRA for him--should we? Or not?

It depends. I'll explain more below.

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2) What would be the advantages of a rollover (I am thinking accessing money would be easier because we would do a Roth Pipeline, but not sure)? We have accounts with both Vanguard and Fidelity, so a rollover would be easy in terms of paperwork. I am thinking it would be more convenient to have this independent of the 401k so we can do the Roth pipeline at some point, even if he doesn't leave the employer (for example, he could go part-time at some point, so he's still an employee and wouldn't have access to the funds in the 401k until he quits or retires; is this correct?).

At this point, the big advantage of a rollover is that you could invest in whatever funds you want, rather than whatever the employer happens to offer. However VFIAX is a fine fund that could easily hold 20% of your portfolio, so the biggest near-term reason to roll over would be to get rid of the $20 fee. You could easily miss out on much more than this in market gains while the money is in transit between your 401(k) and IRA, so I wouldn't necessarily assume this transfer would be a win on numbers alone.

Quote
3) Are "Admiral" shares of a stock really 'better' than regular investor shares? It looks like this might be slightly cheaper in terms of fees, but I'm thinking someone here could recommend an equivalent Vanguard or Fidelity fund. Again, I am pretty sure there's an annual fee of $20 and the expense ratio is .05% for VFIAX.

Admiral shares invest in the exact same thing as Investor shares of the same Vanguard fund. The expense ratio is a bit lower. This is the only difference. Most Vanguard funds have a minimum investment of only $10,000 for Admiral shares. This should not be a very high bar to clear.

Quite frankly, if you don't have $10,000 to invest in a second fund, there's not much reason to branch out beyond your first fund. Wait until you have the cash and then think about multiple funds. When you're just getting started, a single fund is fine.

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Any other advice/wisdom you can share.

For other background info., his 401k is a good chunk of our retirement savings (let's say 20%) and we are looking at retirement in 12-15 years, possibly sooner, around ages 45-50. DH may or may not continue working longer than me, since he's starting this new career at age 34. I work full time and contribute to my 457b, which we hope to max out as soon as he's employed.

You're thinking about the right things with regard to how you will access your money during different phases of your life. I would suggest that in your situation, you don't need to be concerned about having too much money in the 401(k) of your husband's employer.

For one thing, if he will still be working, why not just live off of his salary during that time, rather than worrying about a Roth pipeline?

For another thing, you have access to a 457, which you can withdraw from at any age with no early withdrawal penalty. If you end up with enough money in here to last you until age 60, you may not need to mess around with the Roth pipeline strategy at all. Even if you do, you can likely use some of the other 80% of your retirement savings for the Roth pipeline.

Finally, your husband's return to the same company is far from guaranteed at this point. It may happen, it may not. There's no urgency here, not until he's seriously considering accepting an offer from them.

If you want to do a rollover to consolidate your money into fewer accounts, go for it. If you want to do a rollover to have more control over which funds you invest in, go for it. As long as you don't expect your income to be in the range where you'll want to do backdoor Roth contributions, there's little downside to the rollover. However since there is a decent index option in the existing account, there's little immediate upside. You can't go too wrong here.