What's with all these retirement plans?

February 27, 2007 3:40 PM

I have a 401(k) from a previous employer. What should I roll it into?

I work for a public institution in Texas. I'm covered under the Texas Teachers' Retirement Plan, but I need to do something with this 401k. There's an optional 403(b) and 457 plan through my employer, or I can get a Traditional IRA from my bank or my previous employer's 401(k) vendor. I'm mostly looking for the ability to manage the plan and select the distribution of assets within the different funds of the plan, and I know to watch for fees. I just don't see what differences there are between the different types of plans.

Most of the comparisons between the different plans that I can see cover things that I don't need -- extended deferments, early withdrawal, protection from bankruptcy proceedings, so on and so forth.

I don't plan to be with this employer forever, which is why I like the idea of an individual IRA... I don't have to roll over and over and over, and I can roll my TRS into the IRA when I leave and eventually build up a nice big IRA.

Other considerations: This is a 'sheltering' activity for me in search of deductions, as I'm a consultant after-hours and have significant non-employer income.

What am I missing? Why are there so many different plans that all seem the same from my point of view? What matters to someone my age who intends to jobhop many more times before they retire?

posted by SpecialK to work & money (9 comments total)

someone my age

BTW, how old is that?

Anyway, I've done what you're considering, and starting up an individual IRA for my rollover seemed to work fine for me... but I'm not a CFP and can't counsel beyond that. However:

Other considerations: This is a 'sheltering' activity for me in search of deductions, as I'm a consultant after-hours and have significant non-employer income.

A tax-deferred retirement account is not such a great vehicle for this as you must put all the money in to it that you wish to protect from taxation, and then leave it until you retire. So while it does reduce your tax burden, it certainly doesn't open up assets for near-term consumption or major investment (like a house).

If that still sounds like what you want, talk to your local plan manager and inquire what the maximum contributions are, and make them; you may also want to talk to an outside accountant to make sure you're maxing the contributions on all your accounts if you end up with multiple ones.

While you've got an accountant on the line, ask about "home office"-type deductions for equipment and such that you use for your night job; I don't know what kind of consulting you do, but you can probably at least deduct computers, office supplies, maybe some office furniture, stuff like that, and rack up some deductions that way.
posted by rkent at 3:54 PM on February 27, 2007

Personally, I'd go with the IRA. Then you would have no further worries about rolling the investment into something else yet again when you move on. Fidelity & Vanguard have good IRA products with no loads and tons of fund options.

I'm in a 457 plan where I work (deferred compensation). It's administered through Nationwide Retirement. I would encourage you to get into your 403b or 457 even if you don't roll your 401k into it. The main quibble that I have with the system I'm in is that they slice fund shares into a gabillion units so you have to do a small bit of arithmetic to translate your holdings into real shares. Since you have some significant off-hours compensation, you can probably afford to put a nice share of your 9-to-5 earnings into it. I think the maximum per year is $15,000. And that is on top of your max IRA contribution, so you could potentially be socking away $19k per year, plus whatever you get thru your Retirement plan.
posted by brain cloud at 3:55 PM on February 27, 2007

I would just roll it into an individual IRA. You'll have full control over the selection of where the money is invested, and you can pick investment vehicles that meet your requirements for low expenses. Someday when you leave another job, you can roll the 401k money from that job into the same IRA. The primary advantage of a 401k is the employer matching, which is free money that nobody should pass up.
posted by Lokheed at 3:55 PM on February 27, 2007

Every time I've left a job, I've rolled my 401(k) into an IRA - you have more options that way (in terms of what to invest in). Then, one year when I had no income, I rolled that money into a Roth. I waited until I had no income so I was in a lower tax bracket b/c it gets taxed then, but if your income's ever low enough that you wouldn't get taxed much, definitely do that.
posted by echo0720 at 4:23 PM on February 27, 2007

Oh, my age is 27. I'm still in the 'aggressive investment' phase as far as I'm concerned; I'm working hard to build up the largest tax-deferred retirement fund as early as I can by aggressively managing my investment options.

Sounds like IRA it is. And maybe 403b as well. Thanks!
posted by SpecialK at 4:27 PM on February 27, 2007

All of those 401(k), 403(b) and 457 plans are relics from the past. Each sector -- private, teachers, public -- started their own plans. Now days they are pretty much the same with similar deferred contribution limits.

As others suggested, if you roll your former 401(k) into a traditional IRA you will have more control over how you invest those assets. You should contribute to your new 403(b) at least up the the maximum for employer matching, if there is one. You aren't eligible to set up a separate SEP for your self-employment income because you are a participant in your employer's plan. But your self-employment income might provide the resources to allow you to max out your 403(b) deductions from your salary -- up to $15,500 in 2007. When you leave your current job you can roll your 403(b) into the same IRA.

If you still have money left over, you can also contribute $4000 to a non-deductible Roth IRA if your adjusted gross income is less than $95,000 for singles and $150,000 for joint filers.

There is some debate about whether you should fund a Roth IRA or max out your 403(b) if you don't have enough money to do both. It depends on whether your deferred plan has good funds available with low expenses and some guesses about future tax rates. But you should certainly get any matching contributions from your 403(b) first because that is free money.
posted by JackFlash at 5:13 PM on February 27, 2007

... just roll it into an individual IRA. You'll have full control over the selection of where the money is invested, and you can pick investment vehicles that meet your requirements for low expenses.

I was hoping for some specific examples of these "investment vehicles" here.
posted by Rash at 5:15 PM on February 27, 2007

I was hoping for some specific examples of these "investment vehicles" here.

For most investors, an IRA = mutual funds. I.e., domestic stock funds, sector funds, index funds, bond funds, money market funds. Depending on who you choose to invest with, you can potentially have dozens of choices within those categories. I think nobody is likely to get any more specific than that in this particular thread because making those choices really depends upon the individual and what your limitations and goals are.
posted by brain cloud at 7:02 PM on February 27, 2007

Brain's right. When I referred to my investment profile as aggressive, it means that I invest in mutual funds whose managers aggressively seek profit by investing in companies who have a greater opportunity for profit. With greater opportunity comes greater risk, and these funds often do well for a while and then tank dramatically until the manager is fired and another is brought in. By carefully and aggressivly managing my fund portfolio (within the rules of my 401k provider on fund exchanges), I seek to increase my rate of return.

This obviously isn't for older investers who must be careful to preserve their retirement savings. It's not for people who don't want to do research on who fund managers are and how they got into the position they're in, and what the stated goals and prospects of a fund are. And I've even started shifting an increasing part of my 401k into funds that seek to meet or barely beat the interest rate as I get older (my 401k was stared at 21) to preserve it's capital. When I carefully manage the funds in my 401k, I can get a 17% Rate of Return. If I let things go (like I did in 3q2005... what a bloodbath!) I can lose hundreds, if not thousands, of dollars from the value of my 401k's portfolio.
posted by SpecialK at 7:30 PM on February 27, 2007