My 401k to IRA Rollover Decision Process

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A couple of people have asked me about rolling over their 401(k) plans into an IRA. I actually went through the decision process myself back in the middle of 2005, but that was 500 posts ago so nobody can find it anymore! Here they are:

Part 1 – Stay put with old 401k?
Part 2 – Maybe Rollover into Fidelity?
Part 3 – Vanguard Options
Part 4 – Final Decision

The main differences between then and now is that (1) there are more low-cost ETF options available now that cover just about every asset class, and (2) more brokers that offer cheap or free trades. If you are rolling over a lump sum and don’t plan to trade very much, ETFs may present a lower-cost alternative. Still, if I had to make the decision again today I think I would end up at the same conclusion. My expense ratios are already low, and I make enough trades that the net cost difference is minimal. I continue to be very happy with the competent and helpful support from Vanguard. My portfolio has since changed from their Target Retirement funds to something slightly more complicated.

I should add that I also opened a Self-Employed 401k with Fidelity last year, and have also been very satisfied with their customer service. I still wish they would expand their Spartan index fund lineup, though, and if Vanguard offered a low-cost Self-Employed 401k option I would have went with them.

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  1. Jon Morrow says

    Have you considered turning it into a Roth IRA and using it to buy real estate? I just recently started investing money into mine, so the balance isn’t very high, but I have several friends that are using the money for down payments and then join venturing it with themselves to split the profits. One friend has made over $300,000 tax-free over the last three years.

  2. Jason Coleman says

    I just rolled over my old 401k into an IRA. Do you know if I can still contibute to my IRA for 2006? Or does the money I had invested in my 401k now count towards my $4k IRA limit?

    We’re also considering starting a self-employed 401k of some kind. We’re actually an LLC now, so it might be different. We have all of our stuff in E*Trade, so I’ll see what they offer. But I’ll look into Fidelity if E*Trade doesn’t have 401k accounts. I really need to do some more research on this. And soon, before TAX DAY.

  3. I just posted on my blog on a great deal tdameritrade if offering. If you rollover your 401k before April 17th. You can get up to $500 and free trades for 45 days! link

  4. My Roth IRA balances are probably too small to bother starting a Self-Directed IRA.

    No, Rollover amounts do not count towards the $4,000 IRA limits.

    Self-Employed 401k’s need to be opened by the end of the 2006 for contributions of 2006 salary/profits. You can still open a SEP-IRA and put in 2006 money.

    Brad – Interesting, not many IRA deals out there. But if you have less than $100,000 to roll over, then you only get $100. After 45 days, the trades are about $5 more expensive than other brokers, and it costs $50 to leave later for someone cheaper.

  5. Using Retirement money to buy real estate is a BAD idea (unless we are talking REITs). The biggest advanatages to owning real estate with a mortgage are the tax writeoffs – which owning in a retirement account nullifies. Owning real estate with multiple people is a bad idea since you don’t have control over the investment. Real Eastate should be part of your assets, not the majority – too many eggs in one basket.

    One of the biggest reasons to always roll over your 401(k) to an IRA is for estate planning purposes. You are able to inherit IRAs much more tax efficiently than 401(k)s. The other major reason to do this, is that you can choose your own funds for the IRA as opposed to being stuck with your old employer’s funds.

    100 Free Trades a year at WellsFargo seems to be the best deal I’ve seen. You can invest exclusively in ETFs and rebalance without taking a hit.

    For the long haul – it will probably be worth converting traditional IRAs in 2010 to Roths if you can afford the taxes.

  6. Jon Morrow says

    I disagree with you there, JT. Buying real estate with your retirement money is a bad idea if:

    a) You’re inexperienced with real estate and are unsure of how to buy, manage, and sell an investment property.

    b) You can’t make the time to manage an investment property. In this case, hands-off investments are generally better.

    Also, I believe the largest advantage of buying real estate is the money you make from it. When you combine its profit power with the tax advantages of an IRA, you get a truly special investment vehicle.

  7. your topic is interesting. If you plan to live, not resell in your homested property, how much $$ do you put down? Do you put minimum and use interest at tax time, or pay the dang thing off and save more money into IRA or 401K each month?


  8. I too, would like to learn more about this. I have about 7 years to age 59.5 at which time retiring is advantageous to my life style. I found property in central america and wondered if I could roll over my 401K into an IRA, and roll that into property? This would become a residence for us at retirement, but until then, it could or could not be rental and/or supplemental type of income into the IRA to manage/pay/receive monies.

    I have no real understanding of this sort of thing, and wondered how this works, the tax implications, etc…



  9. I’m about to quit my job and leave the US for good. Any chances you can suggest how I can save myself from tax and penalty by rolling my 401k to other investment. I don’t need to use that money anytime soon. Also, is there any difference if I rollover now for wait a couple of years until the market is doing better?


  10. Jon Morrow must be doing awesome with his “investment” properties by now *laugh* using his retirement money no less.

  11. I currently have a 401k from a previous job and I am wanting to roll it over into an IRA. My income will be significantly less this year compared to last year so I was thinking of rolling it into a Roth IRA and taking the Tax hit this year. Do you think that I should use a Roth IRA as opposed to a traditional IRA. I plan to back my IRA in Commodities and Stocks.

    My Income should increase next year. I am Self employed now as a Realtor and will claim income under my Sub S Corp.

    Thanks for any help.

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