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Thread: 401K vs IRA

  1. #1
    Forum Supporter Jibralta's Avatar
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    401K vs IRA

    Has anyone rolled their 401K into an IRA and invested that way?

    I have three 401Ks. One is about 18 years old, from before I changed careers. The second is from my last job. The third is from my current job and is just in its infancy.

    The first 401K and the third 401K are both traditional 401Ks, and happen to be managed by the same company, Company A.

    The second 401K is actually two 401Ks: a traditional 401K and a Roth 401K. Both legs of the second 401K are managed by Company B.

    When I realized that my current employer uses Company A, I figured I would just roll both of my defunct 401Ks into my new plan.

    However, it turns out that I can't roll my Roth 401K into my current 401K.

    Today, I finally called Company B to discuss my options for the Roth account.

    I suspected that I'd be able to roll the Roth 401K into a Roth IRA. But I wasn't aware of the many IRA investment options that were available.

    My options get better if I roll both defunct 401Ks into IRAs with Company B.

    Has anyone done this before, and can you offer insight/advice?

  2. #2
    Platinum Member Wiseman2's Avatar
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    CPA fees are tax deductible.

  3. #3
    Forum Supporter Jibralta's Avatar
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    I am definitely going to talk to my accountant before doing anything.

  4. #4
    Gold Member thisisrichey's Avatar
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    I recommend rolling all non-active, non-current 401k's to IRA's (traditional to traditional or ROTH to ROTH - in some cases if you are far enough from retirement and the amount is small enough, it may be beneficial to convert a traditional to ROTH - defnitely consult a CPA for this).

    401k's, as far as I can tell, is nothign more than an employer-based limited offerings account to accomodate employer gifts/matches for pre-tax funds. If you're not as that employer anymore you're only hurting yourself by limiting your investment options to the ones chosen by that particular employer. Why limit yourself in investment avenues UNLESS one of the inactive employers offers some type of investment fund you LOVE and can't find in the open market? (It is highly unlikely any employer fund available can't be found on the open market.. ).

    The only other caveat to consider is the FDIC insured limit. If you have over $250k in tax-deferred or taxed money, you will want to separate those funds into different accounts or types of accounts to make sure as much of your money is "FDIC insured". Here is an article that outlines how this works: [Register to see the link] (I MYSELF need to do this and probably split some money into different accounts).

    I would speak and ask specificlly about ROTH TO ROTH rollovers just to make sure there are no surprises there (but i'm pretty sure that shouldn't be a problem).

    So yeah.. as long as you are no longer receiving matches or gifts from a past employer, move it to an IRA so you have more ways to control and invest that money.

    Good luck!
    Last edited by thisisrichey; 02-04-2019 at 03:53 PM. Reason: clarification

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  6. #5
    Platinum Member j.man's Avatar
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    I would never in my life contribute any more to a 401(k) than what is being matched by an employer. Might be a different story if I were in my 50s+, but definitely not at 32 with another 35+ years of faith backing it. I'd personally consider it a blessing to have the opportunity to roll the 491(k) into a Roth IRA. I manage my own equities and greatly prefer to keep my assets as liquid as possible, but if I were ever to go hard into a retirement account, it'd be that.

    But at the end of the day, you gotta do you. An accountant would definitely be good if for nothing more than advice.
    Last edited by j.man; 02-04-2019 at 04:20 PM.

  7. #6
    Gold Member thisisrichey's Avatar
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    i don't think you can contribute to a 401k when it's not with an active employer. i believe that is all pre-tax deductions from paychecks only.
    So it's not even possible to contribute to a 401k i dont' believe.. only re-invest it and move it to different investments as offered by that particular employer.

  8. #7
    Forum Supporter Jibralta's Avatar
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    Right, you can only contribute to 401Ks with active employers.

    The traditional 401K is pre-tax deductions, but the Roth is after-tax.

    I can actually withdraw the money I contributed to the Roth 401K without penalty. I just can't withdraw the earnings.

    But I don't want to withdraw any money. I just want to invest it.

    As for the FDIC thing, if I choose IRAs consisting of CDs and other low-risk instruments, they will be FDIC insured. However, I would go the mutual fund/ brokerage route, and those will not be insurable by the FDIC.

    So, that is something to think about. But 401Ks are not FDIC insured, anyway. So I'm not necessarily increasing risk. Actually, depending on how I break things up, the IRAs could theoretically be less risky than the 401Ks.

    As for the Roth IRAs.... I'm not hell-bent on them. I could convert the traditional 401Ks into traditional IRAs into backdoor Roth IRAs, but I would have to pay tax on that money and the money I convert could be counted as income. So, I probably won't go that route. I'll just have the one Roth IRA.

  9. #8
    Gold Member thisisrichey's Avatar
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    you can withdraw from ROTH without penalties? hmm.. that's weird (makes sense.. but weird). I'm wondering what the heck is different from a ROTH to sayyyy... .a checking account then lol. Effectively there is no advantage or difference to a ROTH. OH NO WAIT.. DIV and INT are not taxable under a ROTH.. ok that's the diff.

    Ah hah! thanks for clarifying on FDIC insurance. But that right there is more than reason to roll-over to IRA's - the FDIC insurance coverage! :) So there you have your BIG REASON to roll them over!

    Yeah.. converting existing traditionals to ROTHs is tricky.. you'd want a down year on your income (or a year you decide to sell off capital gains losses) and convert accounts with low balances (that way the tax hit and income increase hit is minimal). Any substantial balance in traditional would not make sense to convert at all (which is why i'm ROTH-free.. i don't find it worth the tax or income increase for tax calculations to convert any of my traditionals).

    It's a good problem to have ... sounds like you have a huge handle on it already.

  10. #9
    Platinum Member lostandhurt's Avatar
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    You are actually talking about a conversion not a rollover. There are serious tax implications that need to be considered and you certainly do not want a big surprise at the end of this year.

    I use my Roth as tax safety net for the future. When I retire and I still have enough things to write off to adjust my income I will my 457 plan which I didn't pay the taxes on upfront but if I don't have enough to write down my gross adjusted I will use my Roth as income.

    The problem is tax law is a moving target so if you have a trusted adviser or your company has investment people you can make an appointment with I would go that route. Some of this stuff can make your head spin when trying to keep your tax load now and during retirement as low as possible.

    The one thing I will tell you is right now you know what your budget is, what you can afford to pay in upfront taxes and tax penalties and you have solid income to cover them but in retirement things are not as certain so far off.

    When you figure it out let me know...

    Lost

  11. #10
    Forum Supporter Jibralta's Avatar
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    Originally Posted by thisisrichey
    you can withdraw from ROTH without penalties?
    Yes BUT. I can only withdraw my contributions without penalty. If I withdrew the interest or dividends, I would be penalized.

    Originally Posted by thisisrichey
    thanks for clarifying on FDIC insurance. But that right there is more than reason to roll-over to IRA's - the FDIC insurance coverage! :) So there you have your BIG REASON to roll them over!
    Only the low-return IRAs would be insured though, like 2% APY. Which is still something.

    In googling "conversion" vs "roll-over," I found a pretty good article which, among other things, reminded me of a 401K benefit that I forgot about: I can borrow against my 401K funds. And it's a pretty sweet deal really, because the way it works is that I would pay myself the interest on that loan.

    I don't think that will change my mind, though.

    And actually, now that I think about it, I believe you can only borrow against an active 401K.

    Another benefit is that a 401K can offer a higher level of protection against creditors. I don't typically have creditors banging down my door, but I guess if there was some crisis that turned my financial situation upside down, that protection might come in handy....

    [Register to see the link]

    Originally Posted by lostandhurt
    You are actually talking about a conversion not a rollover.
    Maybe? I keep seeing it referred to as a roll-over. But I think we are all on the same page about what I mean, regardless.

    Originally Posted by lostandhurt
    The problem is tax law is a moving target so if you have a trusted adviser or your company has investment people you can make an appointment with I would go that route.
    Well, that's the question that nobody can answer. Which is why I opted in part for the Roth 401K at my last job. Even advisers are hesitant to make a prediction. I usually get an answer like, "Well, some people think that they will be making more money by the time they retire, and be in a higher tax bracket. So, they opt for the Roth. But you never know what the leadership is going to do, whether they'll raise or lower taxes.... yada yada yada..."

    Originally Posted by lostandhurt
    The one thing I will tell you is right now you know what your budget is, what you can afford to pay in upfront taxes and tax penalties and you have solid income to cover them but in retirement things are not as certain so far off.
    That is definitely something to consider. Like, maybe it could make sense to do small-scale backdoor Roth IRA conversions, bit by bit. I always forget that most of my 401K balance is tax-deferred and that a third of it will vanish when taxes are ultimately levied on it.

    That's gonna hurt.

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