What experiences have you had with 401(k) rollovers?

August 15, 2007 11:39 PM

What experiences have people had rolling 401(k)s over into traditional IRAs?

have you had second thoughts after the fact? i'm thinking of doing this with retirement money from my last job, but i thought i'd ask around. there's a dizzying array of advice to be had ... and i'm not sure i'll be more oriented after this question is posted.

it may help if you picture travis--of the cosmos!--asking this question.

posted by moz to work & money (11 comments total)

The are only a couple of advantages to leaving your money in the 401k. First, in some cases you can borrow from it, if for example you need a down payment for a house. Second, you can withdraw from it without penalty if you take early retirement between age 55 and 59 1/2. But that's about it.

On the other hand there are a lot of advantages to rolling to your own IRA. In fact, I've always considered one the the best benefits of changing jobs is that each time you have an opportunity to get direct control of your own retirement money.

Most 401k plans have a very limited number of investment options. In some cases, the only options are very poor ones. In an IRA you can do almost anything -- buy stocks, buy any of thousands of mutual funds, buy CDs, money markets, bonds or inflation protected treasuries. 401ks generally have very bad fee structures that significantly reduce your investment earnings. With an IRA you can go to a low cost mutual fund company like Vanguard that has the lowest costs in the industry, allowing you to keep all of your earnings for yourself. Finally, you have the option of converting your traditional IRA to a Roth immediately or any time in the future, if that makes financial sense for you.

If you have at least $3000, I would recommend rolling your 401k into an IRA at Vanguard using a money market fund as a temporary holding vehicle. This is an extremely safe investment that is currently earning a little better than 5%. This allows you as much time as you want to research how you want to divide up your investments without being under pressure to make a quick decision.
posted by JackFlash at 12:49 AM on August 16, 2007

I have traditional and Roth IRA's with Vanguard and Fidelity. One of the IRA's I now own was a rollover from a 401K plan from a previous job. If you do decide to move these funds, a temporary holding account may not be the way to go because you would technically have to "cash out" the 401k in order to do that. This may cause you to incur sizeable early withdrawl penalty fees. Typically, you do not have to move money out of the 401k immediately, so it might be better if you leave it alone until you decide what you would like to do.
posted by Womanscientist at 3:13 AM on August 16, 2007

Yes, be sure the money is rolled directly into the IRA or you could incur taxes. Vanguard's forms make this pretty easy, though.
posted by futility closet at 4:32 AM on August 16, 2007

The IRA is just a classification for an account. You can put money in your IRA and have that money in a money market account if you don't want to think too hard about how to classify your assets. Then later you can shuffle around without penalty. As long as you're moving from 401k to IRA or from IRA to IRA, you don't cash out and won't incur the penalties. But do be careful.

For the longest time I left my 401k with each company as I left, but earlier this year I rolled 3 401k's into a Vanguard IRA account. Two of the three of these were almost automatic. One I had to fill out one form, receive a check from the 401k (written out to Vanguard on behalf of me, not actually written to me) and then mail them in to Vanguard. All of this went very smoothly and now I just have my current job 401k and my Vanguard IRA and Roth IRA.

JackFlash's reasoning was very close to mine. I went from 401k's with limited investment choices and higher fees to a Vanguard IRA where I have a lot of choice and a lot of low fee index funds available.
posted by cmm at 5:21 AM on August 16, 2007

What Womanscientist said was not really a correction of JackFlash's recommendation for a "temporary holding vehicle". JF was careful to suggest rolling the money over into an IRA, where it can then be put into a money market fund while you consider how it should be invested. WS's point is that the owner has to be very careful when doing the rollover to ensure that there is no inadvertent premature withdrawal from the account. These are best done as a "trustee to trustee transfer", and as futility said, most if not all sizeable custodians will handle the paperwork for you.

Another very important reason to move the money to your own IRA: you can then designate your beneficiaries as you choose. A 401(k) plan requires that a married participant designate the spouse as beneficiary, and many of them impose beneficiary designations beyond that point that are at odds with what the participant would want. Sometimes, though rarely, these requirements include full distribution of all funds within a very short time.
posted by yclipse at 5:39 AM on August 16, 2007

I was on the phone doing this just yesterday, taking my 401K from my last job that ended a few years ago and putting it into an IRA at Fidelity. I think this is the second time I've started this process and I'm always amazed at what an assload of paperwork is associatd with it, especially the amount of stuff I had to fill out for Fidelity [I already have a Roth IRA as well as mutual funds there] who already knows all my personal information but made me write it all down again. I'm not a financial super genius but the little things that were worth knowing for me were.

1. Make sure the 401K people write you out a check to your new IRA and not to you. Even though you'd think they'd advise you on all sorts of "um you'll take a huge tax hit if we write the check to you" my 401K people didn't offer this information, I had to specifically ask.
2. There may be a fee for moving your money out of your 401K even without the tax hit and whatever. Mine took something like 2% for a transfer fee or some nonsense.
3. the people who will be setting up your IRA are the motivated ones to help explain all this stuff to you. Make sure you understand all the parts. Since I haven't really done this before, I filled out the forms with the Fidelity gal on the phone with me and she was happy to do this and it helped me be more confident that I was doing it right. Fidelity also has forms you can fill out online but I found that they were a pain to fill out AND when I went to print them they were mostly empty for whatever reason.
4. YMMV but Fidelity asked me a bunch of nonsense "personal financial profile" questions that were just marketing and that I refused to answer. Feel free to ask if all the parts of your application are mandatory or not.
posted by jessamyn at 6:53 AM on August 16, 2007 [2 favorites]

Thanks, yclipse. I should have made more clear that the Vanguard temporary money market fund should be in your IRA account. It is just a convenient and safe investment option while you take your time to study other investment possibilities. I recommend low cost index funds or lifecycle target retirement funds. After you decide how to split up your investments at your leisure, you can just go online at Vanguard and with a couple of mouse clicks transfer from your money market fund to other Vanguard funds within your IRA.

As jessamyn said, you should do a direct rollover to your new IRA account. In this case your 401k plan will do a wire transfer of the funds to the IRA. You won't even see it. If you have the 401k plan write you a check instead, you have 60 days to do the transfer yourself without penalty, but they will also withhold 20% of the money for taxes. The direct rollover is better.
posted by JackFlash at 9:46 AM on August 16, 2007

Rolling a 401k over to an existing IRA over at Vanguard was incredibly easy for me. The check was mailed to me, (Made out to Vanguard, FBO: me) I sent it off to the appropriate address with a few instructions (My account number, and the number of the fund I wanted it invested in) and about a week later, it popped up. Give their customer service a call, and they'll be happy to walk you through the process. Keep in mind you can only roll it over into a traditional IRA. Since Roths are post-tax, and 401ks are pre-tax, they're in a different category.
posted by fnerg at 10:13 AM on August 16, 2007

I agree with everything JackFlash said. I think he's suggesting a "holding account" because you can control your investments but as long as you haven't mingled it with any non-401k money, you can roll it back into a 401k if you want. I don't know why you'd want to, but some people do.

I'm going out on a limb, because I've only had to deal with this situation a couple of times, but I would more strongly encourage you to keep that money separate (though still in an IRA, so you can invest it as you like) if there is any chance of you needed to "buy" your way into a defined benefit plan. Defined benefit plans aren't the norm these days, though, so unless you are planning to work for a government agency or a Fortune 500 company that still as a defined benefit plan, it probably won't come up.
posted by small_ruminant at 11:00 AM on August 16, 2007

Oh, and in general, the company providing the IRA account will make rolling your 401k to them very easy.

Sometimes you have to get your old company's HR department to sign off saying you don't work for them any more. That's the biggest hassle you'll probably run into.
posted by small_ruminant at 11:02 AM on August 16, 2007

thanks everyone! (i should also point out my new job -- been there for a while, too! -- doesn't afford easy access to metafilter, so it's tough to come back here during the day.) i really appreciate all the advice.
posted by moz at 11:03 PM on August 16, 2007