Russell Bailyn's Financial Planning Blog

I have a question in my college class I need to answer.

Create a regulation permitting employee's to be able to sell company stock from their employer matching contribution after a one-year waiting period, so that employee could use the sale to the stock to buy mutual funds or bonds that are less risky.

Kudos. Your writing is clear and the advice sound, a rarity for blogs and financial sites. Could you adress the very specific issue of whether a traditional 401k can be rolled into a Roth 401k, taking the tax hit now for tax-free growth later?

Hi Andrew,

Thanks for your kind words regarding my blog. As for your questions- if you currently have a 401k plan at work, you probably cannot "recharacterize" (as it is known) from a traditional 401k to a Roth 401k. What you can do when you retire or switch jobs is roll your 401k into an traditional IRA and then recharacterize to a Roth (which consists of paying the taxes). What you can do if your current employer rolls out a Roth option, is start making contributions to the Roth instead. Does that answer your question?

Best,

Russell Bailyn

Yes, your answer confirmed what I have heard at work. I will switch my contributions to the new roth 401k but I am contemplating taking the money out of the 401k and putting it into the roth 401k, taking the penalty and tax hit. I do not believe tax rates will fall in the future.

I was wondering if there was a way to roll over a 401k into a student loan? I understand the consequences etc., Interest rates on student loans and so on but my 401k is moving along pretty nicely with immediate matching/vesting, would really like to rid myself of the student loan payment.

First, let me say, that I concur with the poster above regarding the clarity of this blog. The writing is indeed clear and the advice appears to be sound.

I have a question regarding tranfering a 401k account to a traditional IRA upon changing jobs. Is there a difference between a "Traditional IRA" and a "Rollover IRA"? If there is a difference, can funds transfering from a 401k plan to either of the above IRA accounts subscequently be converted to a Roth IRA? Secondly, my previous employer had a seperate account known as a "Defined Contribution" account in which a match from my aggregate salary (5%) was contributed each year. Can this account also be moved into a traditional or rollover IRA as well?

the article on this page http://www.research401k.com/401k-direct-rollover.html provides a good example of the 10% early withdrawal penalty fee when rolling over your 401k and the local & fed state taxes.

You Receive 401k Cash Distribution = $100,000
20% Required Withholding Tax = $(20,000)
Your Check in the Mail = $80,000
10% Early Withdrawal Penalty Fee = $(10,000)
Federal Income Tax Extra of 10% = $(10,000)
7% Local State Income Tax = $(7,000)
You Receive = $53,000

Your posting states that "A 401k rollover refers to moving a 401k plan from a former or current employer into either an IRA or another qualified plan." Can you confirm whether or not it is actually possible to roll over all or part of a 401k into an IRA without leaving your job? Specifically, I was wondering if I can roll over part of my 401k into an IRA (penalty free), and then take a withdrawl from the IRA to use as a downpayment on my first home (which is a penalty-free way to withdraw money from an IRA). I suppose it would also be helpful to know the tax inmplications of doing this. And the readers should know that the maximum amount you can withdraw from an IRA for the purchase of a first home is $10,000.

Ah, the infamous "in-service" rollover question. The short answer is no, you cannot transfer 401k funds into an IRA without a qualifying event (reaching age 59 1/2 or leaving your job). Your best bet is probably to take a loan against your 401k if your plan has that feature.

I have left my job and have a few questions. If I leave my 401k in my existing account, will I be able to take loans and hardship withdrawls from it? Also, to avoid the taxing and other penalities, do I have to roll it into a traditional IRA? I don't understand your comments about a mutual or index funds.

So, if you take a loan against your 401k, can you then rollover all of that amount into a traditional IRA? How would this work? Could you then roll it into a Roth IRA, and pay the taxes now?

Previously you answered a person's question about "in-service" rollovers, and you said, "The short answer is no, you cannot transfer 401k funds into an IRA without a qualifying event..."
What is the long answer? I really want to take MY retirement money, which is 100% vested, and self-direct it in a qualified IRA. I don't understand why it's held captive by my employer, or why they would be bound by some legislation (IRS, etc.) to hold it captive.

I am "in-service" at my employer. Our 401k plan is switching providers, so we will have to transfer all our holdings to the new financial co. If my choices with the new co. are limited, I'd like to roll over my stocks into a self-directed brokerage IRA. Is a situation like that possible in the "long answer?"

If a company A sells it's assets to Company B, will Company B have to fully vest employees 401k that was with Company A?

thanks,
BJ

I have a 401k that I have made tax deffered contributions into. I want to move it to a ROTH. My custodian says they can tax the funds, send me a check and I can put into a ROTH. However the custodian I want to move the funds to says I need to put 401k funds into a Traditional then convert into a ROTH. Is this true?

In response to the above post concerning "in service" rollovers, you should request your plan documents to determine whether or not you can or cannot do an "in service" withdrawl. Many times within the plan document it will state that you CAN do "in service" withdrawls. This is actually something that very few people are aware of including most financial advisors.

It was actually something that I only recently became aware of after doing some research.

Hope this helps.

Bill Beavers

You have discussed the options of rolling the funds over into your new employers plan, or transfering it to a Rollover IRA but I think that the option of leaving the funds in the old plan is not for underestimation especially if you are pleased with your old management of the 401(k) investments and they give you good returns. Moreover, you might not have that much of a choice if your new employer doesn't offer a 401(k) possibility.

Also what you should consider (if you have any choice to keep you old job a little longer at all) is your vesting status. It might turn out to be better to keep your plan for a few more months. You should check when exactly you will be provided with a 100% vesting.
Here is an example from http://www.mutual-funds-advisor.com/401k-retirement-plan/effects-of-change-jobs-on-401k-plans.html that explains better the impact of being fully vested:
Tom is being 25% vested per year, over a four-year period. Tom's annual salary is $60,000 and he spares 12% out of his income for annual contributions, thus he allocates $7,200 every year for his 401(k) plan. His employer matches 100% of this amount. Tom has worked there for 2 years and 10 months but he wants to change his job. If he decides to leave now, he will receive 50% of the employer's match (since less than 3 years have passed). He will get $10,800 - 50% of the $21,600 ($7,200 x 3 years). If Tom decides not to leave his job for two more months, he will increase his earnings with additional 25% meaning (additional 5,400$ of employer match). And if he decides to stay another year, he will get additional $18,000.

Hi Steve,

Thanks for the comments. Your point about vesting schedules is right on target. An employee should always know when they are entitled to their 401k funds. If staying 3 more months at a job could enable access to thousands more dollars... that would obviously be something to consider.

As for leaving a 401k at an old job--this is an option as well. I've found that the rollover is generally a better option as you have much greater flexibility and control over your investment options. However, if you like your old plan, understand it, and it serves you well, most employer plans will allow you to leave your funds right where they are.

I am 32 and have a 401k account at a past employer that I want to rollover. Should I roll it over to a Traditional IRA or a Roth IRA? What are the key questions for making this decision?
Thanks.

My husband died in August 2007. I am the spousal beneficiary of his 401(k) and do not have an IRA account in my name. The 401(k) account is held by the administrator of his former employer. They referred me to "their" bank for the rollover and for opening an IRA in my name. They asked me to choose one of the following:

Beneficiary IRA or
My own IRA.

My husband was 68 years old at the time of his death, I am now 70-1/2 years old. I live from Social Security income.

Can you tell me what the difference is between these two IRAs and which would benefit me?

Thank you

Mark and John,

I understand your desire to rollover your 401k plan.
I used to work at Fidelity and have dealt with thousands of rollovers.

Here are a few ways you can rollover your 401k and still be active.

1. When you turn 59 1/2 you are usually able to rollover your contribution to your 401k plan. Every 401k plan is different, but if you work for a larger company this is usually the case.

2. Division sale - If you work for a division which goes through a merger, sale, etc. often time you are treated as if you left the company. This allows you to rollover your entire balance.

As Bill mentioned you can request your plan document. I would also suggest you contact the company that handles your 401k plan since they will be able to pull up the main bells and whistles of the plan itself.

I cannot stress enough learning more about the plan itself.

Scott

I am planning to leave my current employer. As it currently stands, I have a little over $22K in my 401K, and an additional $5K in a loan. My next employer has a IRA retirement plan. In a perfect world, I would like to be able to withdrawl a portion of the funds and rollover the remaining funds. Is this a possibility? In short, of the $22K, I would like to take a check for $10K and rollover what the remaining funds into the new IRA account. I would make the assumprion that this is not a likelihood or many people would take this route. The reason for this is taking a job that will initially pay less and a little hold back money would be nice, if I needed it.
Thanks in advance.

Toby,

You can actually do whatever you please. If you take a $10K withdrawal from your 401k, you'll have to pay an IRS penalty (10%) and income tax on the withdrawal. So you may actually have to withdraw $12,000 or more to get $10,000. You may also have to pay back the $5K loan before you can process a rollover. You shold call up your 401k provider and ask them what the rules are for paying back the loan.

Also, consider if your new employers IRA is the best place to rollover your funds. You may be better off rolling the IRA somewhere else and contributing to the new plan from scratch.

Hi. I realize I can only transition a 401K when changing jobs, etc. In my case, I changed jobs several years ago an rolled over my 401K into a T. Rowe Price. Can I now move that 401K over to another firm since it doesn't have anything to do with my current or former employer? (my motivation is T.R.P. is behind the times in their support of managing my account over the internet...no Mac support, no standard way of downloading transactions, etc).

I'd like to add one more benefit to those you listed above, Russell. When you roll a 401k into an IRA you usually have a much broader selection of investments to choose from. This makes it easier to achieve the appropriate level of diversification and to select the best investments in each asset class.

Russell,
You made a comment regarding variable annuities in reference to their high cost as compared to etf's or index's which don't really have much comparison in terms of product features. Relative to variable annuity product features, ie. living benefits for example, do you feel that variable annuities are good investments?

I am 61, can I take all or some of my 401K and roll it over to my wife's Bank of America CD without incurring any income taxes?

My age is 61. At what age can I start receiving my 401K. I have one from a privious employer that I do not have any options to move my funds to other options. I may be loosing my current job and may need to start receiving funds. Thanks

I am 62 yrs.old and planning to retire this year. I have a 401k plan and would like to roll over into some other qualified plan, without a lot of excess fees, that I would be able to take a set amount as monthly income while still gaining some interest income. Are there any options like this available? Thanks

how do you find out if you have a 401k account? or where is my 401k at?

DeeDee, ask your human resource director or boss if you have a 401k plan. They should be able to give you enrollment paperwork or tell you if you don't have a 401k plan.

I just left my job and want to tranfers my 401K out of the company's plan to an IRA with my bank. Do I have to set up an IRA account w/my bank first, do I have to put funds in there before the transfer, is the tranfer made as a direct tranfer or by a check and is there a time frame in which my old company has to take care of this?

How would I find out if I still have an old 401k from an old job. It was about 14 years ago and I completly forgot all about it? I don't even remember the name of it at this moment.

I had a 401k with a previous employer (1999-2001)and have some statements from that account with Frost Retirement Services (probably about $2000-3000 invested). However, in 2002 the company was bought out by a competitor and I have never recieved any information on what happened to my 401k. I called Frost and they no longer handle that account (or at least have no record of it). How can I locate and attain those funds?

My company is just now offering the Roth 401k plan option. Can I roll over my pre tax "traditional" 401k savings directly into my new 401K Roth plan. Of course, if possible there would be tax implications.

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I want to rollover a 401k plan from a previous employer. There is employer stock involved and I want to take advantage of the NUA. How do I find a CPA that has experience with this?

Hi, have a 401k plan worth $55,000 with an old employer and now I have opened a new 401k plan with my current employer. My question is, can I split a rollover? about $50,000 to the new plan and $5,000 to invest in a regular cash & margin brokerage account?

How do you locate a old 401k? I don't remember the company it was with. It was in 1999. Please help!

I have a 401K that I would like to rollover to a retirement savings vehicle. I will be looking for another job and expect to work for about 7-10 more years. Do you think that an annuity is a good / safe place to invest the existing 401k $$'s, or is there a "better" place?

How would I find out if I still have an old 401k from an old job. It was about 16 years ago and I completly forgot all about it? I was about 24 years old. I am POSITIVE the money was being taken out for the 401k(I had no clue what that was then.) I did the payroll, so I know it was taken out. I worked 3.5 years there.

Mrs. Thomas

Hi! My question is in regards to 401K and rollovers. Last year, I switched from one company to another and rolled my 401K in to an IRA, 100% of it. Am I to claim that amount as part of my income for 2007 to be taxed? I received a 1099-R showing only an amount in the Gross Distribution box, but I have my Fidelity account showing the exact amount now in a "Fidelity Rollover IRA." Please advise as to what I should do, if I should claim it as part of my income or if I should put $0/Rollover in the box called IRA distribution on the 1040 Income Tax Return Form. Please help!

My wife was terminated by her employer April 2007. The company put their matching contribution for 2008 into her 401K account in March of this year. She already has an IRA account with the same brokerage that her former company established her 401K at.

We filled out the paperwork to roll the 401k into her IRA, but the companies third party administrator said they cannot roll it until the annual plan valuation adminstration is complete,which will be complete in a few weeks. My question is,if each employee has their own account number at this broker and gets monthly statements that shows exactly what is in their account to the penny, why are they holding up the rollover ? They also mentioned that the plan states retired or terminated employees will be paid out their distributions in approximately 120 days after the annual valuation, they said they will waive that, yet I read every single page of the plan and nowhere does it even mention 120 days. Does this all sound right to you ?

Thanks.