In 6 months or so I am thinking about leaving my job to go back to school. At that time, I should have about 13k in a Roth IRA (Vanguard Target Retirement 2050, until it gets big enough to split up myself) and in the 30k range in my 401k (Fidelity managed). I am 24, and plan on buying and holding until retirement, rebalancing once a year.
The 401k has decent fund choices, but not the exact funds I would like. A portfolio I am considering, which needs a 30k minimum for no fees, would probably be (from FundAdvice.com) 12.5% Vanguard 500 Index (VFINX) 12.5% Vanguard Value Index (VIVAX) 12.5% Vanguard Small Cap Index (NAESX) 12.5% Vanguard Small Cap Value Index (VISVX) 20.0% Vanguard Developed Markets Index(VDMIX) 20.0% Vanguard International Value (VTRIX) 10.0% Vanguard Emerging Market Index (VEIEX) In the future, if my retirement accounts got to 100k, I would probably like to diversify them even further.
It seems obvious that I should rollover my 401k to an traditional IRA to get the portfolio I want. But I am worried that there may be some minute differences between 401k and IRAs that I am not aware of/ don't care about now, but I might care about down the road. I was thinking along the lines of differences in borrowing to make a down payment on a home, or differences in ability to withdraw funds if I want to retire early.
What differences between 401ks and IRAs come to mind? Can you guys think of any compelling reasons for me to not do the rollover? Thanks!
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rocketwidget said:I was thinking along the lines of differences in borrowing to make a down payment on a home, or differences in ability to withdraw funds if I want to retire early.The ability to borrow is the major advantage of 401(k)'s. But it's only up to half of the account value (except for very small accounts), and no more than $50,000.
If you retire after age 55, then you can immediately take penalty-free withdrawals from your 401(k), but but have to wait until age 59 1/2 for IRA's.
On the other hand, IRA's give you: access to your money any time you want; freedom in picking investments; and the ability to convert to a Roth IRA (subject to income limits for the next 3 years) any time you want.
On the whole: stay with a 401(k) if there's some very special investment you can't get elsewhere; otherwise go to an IRA.
Another thing is to consider the funds in your 401(k). My Vanguard 401(k) has a fund selection of 75-100 funds from Vanguard, T. Rowe Price, and Dreyfus. In an IRA or brokerage, many of the funds are closed and/or require large minimum balances. Also, it is easier to allocate between funds and diversify without worrying about minimums per fund.
Vanguard charges an annual fee on individual retirement accounts; They hit you for EACH fund with balance <$5,000, they also hit you with a SEPARATE fee for index funds less than <10,000. If you have $50,000 in Vanguard they waive pretty much all fees. Just something to consider as it looks like you are rolling over less than the 50K, you don't want to be hit with multiple fees for putting smaller balances in more funds. If you choose one of their "fund of funds" that would work for diversification purposes and you can avoid the small fund balance fees...
Here's some other differences that I can think of: 1) Contribution limits- $15K for your 401K, $4K for IRA (but probably wouldn't apply to your situation 'cause once you leave, you probably can't contribute to the 401k anymore) 2) Expense ratios- usually 401k funds will have a lower expense ratios than regular individual mutual funds 'cause they invest on a more institutional level. 3) Lower minimums- the 401k probably has no minimums, as a normal mutual fund will. 4) Distributions- if i'm not mistaken, your 401k probably does not allow for an "equal payments" withdrawal like an ira does.
Note: Normally, rolling over the 401k has more pros than cons. But you always want to look at your options.
For old 401k's, from old employers after having left the job, I generally recommend rolling over to a Traditional IRA. Why? Because in the future, after you leave other employers, you can roll their 401k's over to the same IRA.
If you're at all employer-mobile (as many people are), then it makes it easier to keep track of everything.
tladle said:Once you roll over a 401K to an IRA is it possible to later roll it back into a 401k?
Yes, if your new 401(k) plan accepts roll overs from an IRA. Not all plans do. I've once done that, just to consolidate an IRA that didn't have much in it into my 401(k).
LH2004 said:rocketwidget said:I was thinking along the lines of differences in borrowing to make a down payment on a home, or differences in ability to withdraw funds if I want to retire early.The ability to borrow is the major advantage of 401(k)'s. But it's only up to half of the account value (except for very small accounts), and no more than $50,000.
If you retire after age 55, then you can immediately take penalty-free withdrawals from your 401(k), but but have to wait until age 59 1/2 for IRA's.
On the other hand, IRA's give you: access to your money any time you want; freedom in picking investments; and the ability to convert to a Roth IRA (subject to income limits for the next 3 years) any time you want.
On the whole: stay with a 401(k) if there's some very special investment you can't get elsewhere; otherwise go to an IRA.
But an IRA, in particular a Roth IRA, gives you unique advantages from the standpoint of estate planning. There is no such thing as a stretch 401k, for example. For this reason alone, in my opinion it is almost always worth converting to an IRA.
psychtobe said:But an IRA, in particular a Roth IRA, gives you unique advantages from the standpoint of estate planning. There is no such thing as a stretch 401k, for example. For this reason alone, in my opinion it is almost always worth converting to an IRA.There are no meaningful estate-planning advantages to an IRA over a 401(k). "Stretch IRA" is a term some people use for an inherited IRA from which the beneficiary takes withdrawals over his initial lifespan; while, formerly, it was easier to get to one if you inherited an IRA than a 401(k), those rules have all been repealed, and, today, there's no meaningful advantage to inheriting an IRA over a 401(k) account.
LH2004 said:psychtobe said:But an IRA, in particular a Roth IRA, gives you unique advantages from the standpoint of estate planning. There is no such thing as a stretch 401k, for example. For this reason alone, in my opinion it is almost always worth converting to an IRA.There are no meaningful estate-planning advantages to an IRA over a 401(k). "Stretch IRA" is a term some people use for an inherited IRA from which the beneficiary takes withdrawals over his initial lifespan; while, formerly, it was easier to get to one if you inherited an IRA than a 401(k), those rules have all been repealed, and, today, there's no meaningful advantage to inheriting an IRA over a 401(k) account.
it is my understanding that if your child inherits your 401(k), your company can require him/her to withdraw that money within 5 years. In an IRA, that cannot happen; you have the life expectancy of the child to withdraw the money. Is this not correct?
psychtobe said:it is my understanding that if your child inherits your 401(k), your company can require him/her to withdraw that money within 5 years. In an IRA, that cannot happen; you have the life expectancy of the child to withdraw the money. Is this not correct?It is correct (in practice; an IRA could also require you to withdraw faster, but they generally don't do that). But it doesn't make any difference. If you die with a 401(k) account, your kids (or other heirs) can roll over the account into "inherited" IRAs, which will then function exactly the same as if they had inherited an IRA from you: they can take withdrawals over their life expectancies.
Under old law, it was not possible to do a rollover from an inherited 401(k) account: the heirs (other than a spouse) were stuck with whatever payout schedule the plan allowed. Under modern law, they can, and then will be treated exactly the same as if they had inherited an IRA. So if you prefer the investment options in your 401(k), there's no longer a good reason to roll over just because you might die.
In either case, it doesn't (and didn't) matter, if your account is inherited by your spouse (which is typically what you want): a spouse heir can roll over an inherited IRA or 401(k) to his own IRA, and therefore doesn't have to take any withdrawals until age 70 1/2. Typically, that's what you will want if you have a spouse (since it is the most favorable taxwise). So the law change is most important for the unmarried, and was welcomed as a major civil rights victory for gays. But it's useful for people who die simultaneously with their spouses, leaving a 401(k) to a contingent beneficiary, or possibly for people with elderly spouses and other, much younger heirs.
thanks for the clarification. When did this change? It seems that everything I have read, even published as recently as 2003-04, does not mention this. Does this apply for 403(b)s, 457(b)s, and 457(f)s as well? And does it matter if you die while you are still employed with the company (although in that case, there is no option to rollover to an IRA anyway)?
While I think this is getting a bit OT, and estate planning deserves its own FWF master thread, another situation in which it would be better to leave an IRA or 401(k) to a child would be if your estate would otherwise be greater than 2 times the current maximum exclusion allowed under federal estate tax, as you could otherwise lose your individual exemption. Example: if current federal law allows an estate tax exclusion of $1 million, and you are married and have with your wife a total of a $2 million estate, you would be better off leaving as much as possible up to $1 million to your child in the event of your death. Then when your wife dies, her taxable estate is only $1 million and estate tax free, rather than $2 million with $1 million subject to estate tax. Please tell me if I am mistaken.
psychtobe said:thanks for the clarification. When did this change? It seems that everything I have read, even published as recently as 2003-04, does not mention this.It changed under the Pension Protection Act, and has been effective for all of 3 weeks now. But it had been planned for some time before that.Does this apply for 403(b)s, 457(b)s, and 403(f)s as well?All qualified plans, 403(a)'s, 403(b)'s, and 457's. There's no such thing as 403(f).And does it matter if you die while you are still employed with the company (although in that case, there is no option to rollover to an IRA anyway)?Yes (and there is an option if you're over 59 1/2 and your plan allows it, or with respect to employer contributions, roll-ins, after-tax contributions, or any other non-401(k) money). Anyone who inherits a qualified, 403, or 457 plan account can now roll over to an IRA.While I think this is getting a bit OT, and estate planning deserves its own FWF master thread, another situation in which it would be better to leave an IRA or 401(k) to a child would be if your estate would otherwise be greater than 2 times the current maximum exclusion allowed under federal estate tax, as you could otherwise lose your individual exemption. Example: if current federal law allows an estate tax exclusion of $1 million, and you are married and have with your wife a total of a $2 million estate, you would be better off leaving as much as possible up to $1 million to your child in the event of your death. Then when your wife dies, her taxable estate is only $1 million and estate tax free, rather than $2 million with $1 million subject to estate tax. Please tell me if I am mistaken.That's true -- IF you have no other appropriate assets that you could leave to the kids (for example, because you're right at $2 million including the 401(k)). If you have $1 million in non-IRA assets, like cash, your house, etc., you're normally better off leaving those to the kids (up to the exemption amount at least) and the IRA to the spouse.
The normal solution for taking advantage of the individual exclusion for both spouses is a "credit shelter trust," in which, basically, the surviving spouse has access to the principal if he ever needs it, but it's nevertheless treated as having gone to the kids if he doesn't; I don't know if there's a way to somehow stick an inherited account into something like that and get the best of both worlds.
markkundinger said:For old 401k's, from old employers after having left the job, I generally recommend rolling over to a Traditional IRA. Why? Because in the future, after you leave other employers, you can roll their 401k's over to the same IRA.
If you're at all employer-mobile (as many people are), then it makes it easier to keep track of everything.
why not roll over the old employer 401k to the new employer 401k (i'm not being smart, this is a serious question)?
leenga said:markkundinger said:For old 401k's, from old employers after having left the job, I generally recommend rolling over to a Traditional IRA. Why? Because in the future, after you leave other employers, you can roll their 401k's over to the same IRA.
If you're at all employer-mobile (as many people are), then it makes it easier to keep track of everything.
why not roll over the old employer 401k to the new employer 401k (i'm not being smart, this is a serious question)?
With an IRA, you can choose which investment firm to hold your account with. THis basically gives you unlimited flexibility concerning your investments. 401(k) plans will have a list of allowed investments provided by the company's plan, and these may not be the best options. For example, some plans are basically free for the employer to operate, but the mutual funds included in the plan have very high fees.
not sure if it's still the case, but it used to be several years ago that 401k was protected against your creditors, while IRA was not. I know that was going to change but not sure if it did.
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