What do people do with 401k funds at former employers as they get closer to retirement age but not exactly there yet? Specially if one of the plans is charging large fees and is not the best investment plan in general.
You can do a direct rollover to an IRA with the IRA-eligible investments of your choosing.
Yep. Roll over into a low cost brokerage IRA such as Schwab. The brokerage can help you set it all up. Make sure you set the account up first and then roll the funds directly into the account to avoid distribution taxes and penalties.
I rolled mine to a Vanguard account. Mr. B has a Schwab IRA for that same reason. It was a painless process for both of us. You will get a tax form from your old 401(k) showing a distribution, but you will not have to pay taxes if your do a direct rollover and follow the rules.
If I already have IRA account with Vanguard, can I roll it into this account or need to open a separate account?
You can roll it into the existing account.
Keep in mind that rolling over into an IRA may result in tax consequences if you are doing back-door Roth IRA conversions each year.
You should also check if your current employer’s 401k will accept rollovers - assuming your current 401k is more attractive than those at former employers.
And if you still have kids in college and are filling out the FAFSA - remember to CHECK THE BOX that this was a rollover!
PSA: I just met with my financial adviser this morning, and while there we called Fidelity & rolled recently-retired H’s 401k into an IRA. I know some people can handle their financial planning without a professional’s help, but H & I do not count ourselves among those people. We are grateful for his assistance, especially now that we are closer to having to live on our savings (not quite yet - I am still working & we are somehow making it so far without making IRA withdrawals). He helps us with our conversions from traditional IRA to Roth, tax strategies, etc. We didn’t have a planner until 2 years ago, and I wish we had done it sooner.
Sometimes you can’t get the same funds when you roll over, though. I have at least one account that I have not rolled over for this reason. Don’t want to give up a fund that has performed well.
Pay attention to fees, whether in the 401k or the IRA. They are insidious and not always well-disclosed. If you are changing funds when your roll to an IRA, you may not want to dump the entire balance into new funds all at the same time. Your advisor can suggest timing how you put those funds into the market. Ask how your financial advisor gets paid and take into account that he/she may benefit financially from steering you one way or the other. Are you managing the investments or will the advisor be trading for you?
Know your risk tolerance. Mutual and index funds can be a good way to diversify without you having to do tons of research on individual stocks. I’m not a stock market expert, so these options let me sleep well at night.
Perhaps, but what I did is open a separate IRA labeled “Rollover IRA” and rolled the 401K into that. This way if in the future you might want to roll the money back into a 401K at another employer you don’t have any conmingled money. And even if you don’t plan on doing this I don’t think there is any drawback to having more than one IRA account. If you give Vanguard a call they can advise you.
Thank you everyone for very helpful information!
kelsmom:
if you are interested in learning more about your own money, check out bogleheads.org
Thanks, @bluebayou . Others on CC have recommended that site, and I have checked it out. I am amazingly good with money and numbers. When it comes to investments, though, I find that I am much more comfortable letting the pro do his job. I will admit that I did not feel that way until I found the guy I am using … I used to do it myself, and I did okay. I didn’t protect myself properly, though, and I got hit hard in 2008. I have built back up, but I am no longer in a position where I can weather a huge downturn. My adviser is recognized as a Top 400 Financial Advisor, and his clients are regular folks … he built his practice helping GM salaried workers with their investments. He’s like that family doctor that you hope never retires!
If you know that backdoor Roths are in the future, would you choose to leave 401k funds in the employer managed fund? My understanding is there is a limit on your backdoor options based on $ in traditional IRA?
@kelsmom I also recently hired a financial adviser. It sound like yours is like him, a fee only in that he gives investment advice but does not handle investments and then take a percentage. I do have an investment guy that I now need to fire. The fee only financial adviser gave me a roadmap I found helpful with recommended low fee Vanguard funds and allocations. I can see him as little or much as I want. I wish I started with him rather than my investment guy who unfortunately, built a relationship with and making him more difficult to fire. I will see him again when contemplating retirement so I can figure out how to live on savings.
By now I have been through several retirement plans and IRA’s- was self employed eons ago. H likewise has experiences with his and our investments. It is great to consolidate with one firm you trust instead of having some costly plans (disinterested and naïve here back in the day). It really simplifies things. We have had great management with Fidelity over the years. H finally decided to get rid of so much self managed money- he had the interest (not me!) and things are working out well for us but things are more complex for us and worth handing the reins over.
I still find it funny that I ended up with multiple IRA accounts, all with the same firm. Don’t worry about having more than one account within a firm. The rules meant I couldn’t just roll everything into the same numbered account. And I chuckle with the accounts still listed with zero or one cent. As long as it costs nothing… Having a larger investment total with one company could mean lower overall charges for managing the multiple accounts.
Simplify.
I would check with my current employer and see if an IRA funded from a 401K rollover could be brought back into the 401K before doing the backdoor Roth. Otherwise, yes, keep it in the 401K assuming it is a plan without high fees and with decent fund choices.
The backdoor Roth is when you deposit $6,000 per person (2019 limit) in after-tax dollars into your IRA, then immediately do a conversion to a Roth. Since the $6K are after-tax dollars there is no additional tax owed unless the $6K has appreciated in value since the deposit; you avoid/minimize this by contributing it to a money market fund. The problem you are referring to is the requirement that you allocate IRA conversions across all your IRAs, so people doing a backdoor Roth make sure they don’t have more than one IRA.
I roll over into a 401k. Better from an asset protection standpoint. An, allows for the backdoor Roth (which I haven’t really been able to do yet).
I think the bogleheads site is excellent and think Vanguard is a great place. I used to be in finance – worked as an investment banker, for a wealthy family’s family office, and helped someone start a hedge fund – and hence am capable of making investments, but I am too busy working to manage my financial life so I also use with a fee-only financial advisor (I have another financial advisor who charges a piece of assets, a “wealth advisor” or something at a brokerage firm, but they mostly have money from two companies and a couple of small private equity fund investments I’ve made through them. I keep the latter one for the outstanding service with my companies (and kids) and the PE investments, but would not have them manage my money. My work has volatility with occasional big hits so my investments tend to be more conservative.