Should I roll over my 401k? Part 4 – Final Decision

(Want to catch up? Continued from Parts One, Two, & Three)

Ok, last part, I promise. After doing a lot of research, mostly on ETFs, I’ve decided to choose option #1 and roll my 401k over to Vanguard and stick it in one fund, their Vanguard Target 2045 Fund (VTIVX). Here are my reasons:

1) It’s already my desired asset allocation, and if I split it up into multiple funds I’d be buying basically the same funds anyways, and paying more in fees.
2) After rolling it over to a Traditional IRA, I plan on converting to a Roth IRA gradually as the income limits allow. If I bought ETFs I’d have to pay commissions to buy each year as I fund my IRA, and again to sell when converting to Roth.

I’m sure everyone has their own way of doing stuff, I think keeping it simple (stupid) is my way for now.

It doesn’t sound like this will be a quick process, though. I wanted to have them send the check directly to Vanguard (a trustee-to-trustee transfer), since if I don’t transfer the money within 60 days after getting the check, I get to pay income taxes on it and a 10% early-withdrawal penalty.

But they don’t do that. The reason why the guy said I couldn’t just have the check sent directly to Vanguard is because supposedly once some guys wife transferred it to her own brokerage account or something. Whatever, I don’t see how sending a $16,000 check to my house is a better idea. And I have to wait 6-8 weeks for it?!? At least since I am making the check out directly to Vanguard, they don’t withhold any of the money in case I cash it and run to Mexico or something. Gotta keep an eye on this transfer.

Comments

  1. Anonymous says:

    This sounds stupid. So your previous employer would not do a trustee-to-trustee transfer? Have you called Vanguard and see if Vanguard will take care of this process?

  2. wannabe ceo says:

    Are there a lot of hoops to jump through to convert from one type of IRA to the other?

  3. I should clarify… They will make a trustee to trustee transfer, in that they will make the check out to Vanguard, but they will not send it directly to Vanguard. They’ll mail it to me, and then I have to send it on to Vanguard. Yes, it is stupid, sending $16,000 checks back and forth, it’s just asking for trouble. This is what Vanguard told me is their experience with Fidelity rollovers. I did this all with Vanguard.

  4. Would it be a bad idea to take a loan out from my 401k to pay off credit cards and IRS back pays?

  5. savvy saver says:

    I’ve been in the process of rolling my fiance’s Simple IRA from AIM to Fidelity since he switched jobs. I haven’t had to communicate anything to AIM, Fidelity has been able to handle everything from their end. I gave them instructions to liquidate the entire account and transfer the funds, and they are working with the originating company to complete the request. Maybe you could see if Vanguard will do this for you?

    erin

    Savvy Saver

  6. ceo – depends on your definition of “a lot”, if you already have your traditional IRA in the place you want your Roth to be I don’t think it’s that bad. You’ll have to pay taxes on your conversion, and make sure your under income limits.

    Anon – lots of opinions on this, depends on how stable your job is, etc. I wouldn’t want to say yes or no. Check this link out.

    Erin – It all rests on how easy the place you’re LEAVING makes it. Fidelity in your case probably asked AIM to send them the funds directly, and AIM said yes. Funny how when another company ask them to do the same, Fidelity says no. Grr.

  7. Good luck on your transfer.
    I might have to transfer money from a previous 401k into one of my existing IRAs in the near future or leave it there (the fund allocation was good anyway… mostly SP 500).

    If I do roll it over… It will be either to my Vanguard 500 account (same thing), or into my Ameritrade brokerage IRA where I will invest half into SPY and the other half into moderate risk, medium capitalization, value priced stocks.

  8. Dawn Wang says:

    Hi,

    The information you provide are very helpfull to me. Anyway, if you do not mine that I ask you one more question. If I do transfer my 401k to IRA, the company stock in the 401k is loss a lot ( if I sold the single stock in 401k before transfer out),can this lose be reported to the IRS ?

  9. Dawn Wang – I’m not sure if the loss from your stock will be reported to the IRS. I imagine it will only be reported when you need to pay taxes on it (ie, when you take distributions from the 401k).
    I do know that the 401k needs to be fully liquidated to cash and then rolled over to an IRA – you can’t roll over non-cash assets (stocks, mutual funds, etc).

    If you can take the tax hit, you might want to roll over your 401k to an IRA, and then convert it to a Roth IRA (and pay taxes on the amount). Then you’ll be able to access the contributions in your Roth IRA at any time, yet let the interest grow tax-free (if left in until age 59.5). A Roth is a very flexible investment with a lot to offer.

    Scott

  10. PS – If your 401k has significant value in it, and you have children or heirs in mind, you may want to roll the 401k over into a stretched IRA. This shields your account from taxation somewhat if you pass away.
    A 401k would need to be cashed out, taxed heavily, and passed to your estate/heirs. A stretched IRA is passed to your estate/heirs, but rather than a lump sum distribution that incurs high taxes, it can be set up to pay out only 2-3% of its value annually, thus 1. reducing taxation, and 2. permitting the bulk of the IRA to continue to grow for your heirs.

    Scott

  11. Congrats! I have my Roth IRA at Vanguard, and the majority of it is in the 2045 Target Retirement fund. I’ve been very pleased with Vanguard and that particular fund.

    But FYI, you don’t pay more fees by having more funds with Vanguard–in fact you don’t pay ANY account fees if you sign up for electronic statements. The only fee variance will be the expense ratio of the various funds you choose. I have the Total REIT index, the Total International Index, and the 2045 fund.

  12. the important thing is that the check is from trustee to trustee. pain in the arse, but still the same.

    we moved all of my wife’s 401k into TIRA then converted to RIRA.

    wannabe ceo: the conversion itself is simple; however, you have to take some important things into consideration. You have to take your MAGI into account in order to qualify; otherwise you are going to pay some stiff penalties if you do not qualify and you have converted. second, you have to consider the tax on the converted amount. you should establish a decision point around october to make a reconversion decision point. if the amount converted has lost value over the preceding months, then reconvert. no use in paying taxes on a loss. if the amount has appreciated by october, then keep the conversion. you will only pay taxes on the initial conversion amount.

    anon: cashing out 401k to payoff cc and irs back pays is something you have to do the calculations on. you will be charged income taxes along with 10% early withdrawal penalty. normally, dipping into 401k is not a wise thing to do; however, your situation may merit it if the back pays and cc’s are high.

    Dawn Wang: you could claim the converted amount loss; however, you will still have to pay taxes as well, because the money was pretax.

    a good website for IRAs, 401k, and taxes is http://www.fairmark.com

  13. YMYL Disciple :) says:

    Ditto with my 401k rollover. The check actually arrived via first-class mail!

    The check must be made out to VFTC FBO IRA – ie, to Vanguard Fiduciary Trust Company – and not to you directly; I just want to reiterate this very crucial part. FBO stands for “for benefit of.”

    You can halve your fund fees in 10 years IMHO if you eventually buy the underlying funds in Vanguard Target 2045; granted the 3 fund balances are each >50k in 10 years. Vanguard’s discounted fees via admiral shares kick in if your fund account (eg, account in VTSMX) is at least 10 years old and has >50k.

    Thanks for the site!

  14. CHRISTINE says:

    IF THE PREVIOUS EMPLOYER 401K IS AT A LOSS, IS IT BETTER TO LET IT SIT AND INCREASE PRIOR TO ROLLOVER TO TIRA? THEY CASH IT OUT AND TRANSFER THE CASH TO THE NEW ACCOUNT, RIGHT? SO, THE SAME THING AS SELLING STOCK, AND GOING TO BUY ANOTHERONE ? THE PERMANENT LOSS IS THERE, RIGHT? PLEASE CLARIFY FOR ME…

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