Should I rollover my 401(k) into an IRA?

[her209]

I have a 401(k) from a previous employer. I am looking to purchase a home some time in about a year depending on home prices. I have a good amount of savings saved up and I'm trying to pay cash as much of the house as I can with the goal of paying off the house in less than 5 years from date of purchase.

I am not able to take out a loan against my 401(k) anymore since I have moved on to new employer. Doing some preliminary research, it looks like I can take a $10,000 withdrawl penalty free but I'd have to pay income taxes on the $10,000 so I'd really only get about $~7500 after taxes assuming a 25% effective tax rate.

I don't have a current 401(k) to roll it over into.

Is it worth it?

 

[brianmanahan]

roll it over into an IRA?

 

[her209]

roll it over into an IRA?

Yes. Should have included that in the OP.

 

[CraKaJaX]

I would search for a recent thread here about this. There was some really good stuff in there on exactly this situation. The only reason I remember is because I'm in the same exact boat, posted in that thread, but still haven't done anything with the cash in my old account - woops! I would search/link you to it but I'm on tapatalk/mobile and I wouldn't know where to begin.

I personally wouldn't withdraw - not worth it IMO unless it's an emergency situation... Which judging from your post seems not to be the case. Roll it into an IRA. What company is it with?

 

[her209]

I would search for a recent thread here about this. There was some really good stuff in there on exactly this situation. The only reason I remember is because I'm in the same exact boat, posted in that thread, but still haven't done anything with the cash in my old account - woops! I would search/link you to it but I'm on tapatalk/mobile and I wouldn't know where to begin.

I personally wouldn't withdraw - not worth it IMO unless it's an emergency situation... Which judging from your post seems not to be the case. Roll it into an IRA. What company is it with?

T. Rowe Price

 

[dullard]

I have a 401(k) from a previous employer. I am looking to purchase a home some time in about a year depending on home prices. I have a good amount of savings saved up and I'm trying to pay cash as much of the house as I can with the goal of paying off the house in less than 5 years from date of purchase.

I am not able to take out a loan against my 401(k) anymore since I have moved on to new employer. Doing some preliminary research, it looks like I can take a $10,000 withdrawl penalty free but I'd have to pay income taxes on the $10,000 so I'd really only get about $~7500 after taxes assuming a 25% effective tax rate.

I don't have a current 401(k) to roll it over into.

Is it worth it?

The rollover is probably worth it. IRAs generally give you more investment options and lower fees (not always, but usually). The loan from your retirement account is probably a very stupid move. Use it as collateral instead. Any good banker could help you with that.

Think about it. Your option: 25% hit, plus losses from not having it invested. My option: no hit, pay ~3% mortgage interest for ~5 years. The investment gains alone would likely pay for it.

 

[MomentsofSanity]

The rollover is probably worth it. IRAs generally give you more investment options and lower fees (not always, but usually). The loan from your retirement account is probably a very stupid move. Use it as collateral instead. Any good banker could help you with that.

Think about it. Your option: 25% hit, plus losses from not having it invested. My option: no hit, pay ~3% mortgage interest for ~5 years. The investment gains alone would likely pay for it.

This.

You don't want to take money out of retirement accounts unless you have to. As for rolling it over, if you have left your previous employer you may be required to soon anyway depending on the plan. You will get a wider range of options in an IRA for sure. If you have an existing 401K with your current employer they may allow you to roll it into that plan as well.

If you do the rollover have it sent direct from the QRP to the IRA custodian. This will code it as a direct rollover and avoid the 20% mandatory withholding if you withdraw direct from the QRP.

Disclosure: I'm a broker who specializes in retirement accounts.

 

[her209]

The rollover is probably worth it. IRAs generally give you more investment options and lower fees (not always, but usually). The loan from your retirement account is probably a very stupid move. Use it as collateral instead. Any good banker could help you with that.

Think about it. Your option: 25% hit, plus losses from not having it invested. My option: no hit, pay ~3% mortgage interest for ~5 years. The investment gains alone would likely pay for it.

This.

You don't want to take money out of retirement accounts unless you have to. As for rolling it over, if you have left your previous employer you may be required to soon anyway depending on the plan. You will get a wider range of options in an IRA for sure. If you have an existing 401K with your current employer they may allow you to roll it into that plan as well.

If you do the rollover have it sent direct from the QRP to the IRA custodian. This will code it as a direct rollover and avoid the 20% mandatory withholding if you withdraw direct from the QRP.

Disclosure: I'm a broker who specializes in retirement accounts.

Any recommendations? Are there any comparison websites that compares costs and fees between different IRAs?

 

[DaveSimmons]

Vanguard.com is all you need. Get a low expense ratio fund, leave the money there until retirement.

https://investor.vanguard.com/401k-rollover/how-to-roll-over

You can avoid general fees if you choose electronic delivery of documents
https://investor.vanguard.com/401k-rollover/401k-to-ira-rollover-rules

You can get fully diversified with a single Target mutual fund, which is a fund of their other index funds - US and foreign stocks plus a small amount of bonds that increases as you get closer to retirement:
https://investor.vanguard.com/mutual-funds/target-retirement/#/

The expense ratio of the Target fund is very low, and since it is 100% index funds there is no stock picker trying and failing to outperform the S&P 500.

Minimum investment is only $1,000.

You should not touch your 401k money, you should move 100% of it into the IRA. You can only contribute so much tax-sheltered money each year, and if you take that shelter away you can't get it back.

 

[s0me0nesmind1]

The rollover is probably worth it. IRAs generally give you more investment options and lower fees (not always, but usually). The loan from your retirement account is probably a very stupid move. Use it as collateral instead. Any good banker could help you with that.

Think about it. Your option: 25% hit, plus losses from not having it invested. My option: no hit, pay ~3% mortgage interest for ~5 years. The investment gains alone would likely pay for it.

Taking out loans on 401k's is FAR from stupid. You are essentially paying yourself interest instead of paying a bank interest. Where do you pull this "25% hit from?" There is no 25% hit. The only hit is money that could be generated from the market during the time in which you are paying it back. The market is RIDICULOUSLY stale right now, and many are spelling doom for summer months. Hell, it could work out in your favor if you have lucky timing.

I think it's incredibly smart under the presumption that you aren't stupid as balls and plan to actually pay it back as quickly as possible.

I understand it for a home down payment, I mean. If I buy a $300k home, it's not like I have $60k floating around I can freely toss to get the 20% down payment. So use most of the cash assets (say, 30-40k), then take a partial $20k loan from the 401k to pay back.

Personally, unless you have a shit employer 401k that has high fee's, etc.. I try to always stick with a 401k. There are many many benefits that IRA's do not typically have.

Of course, you could just roll your IRA over to a 401k later....

 

[dullard]

Vanguard.com is all you need. Get a low expense ratio fund, leave the money there until retirement.

Vanguard is a pretty good choice.

You don't know which companies / funds will do best (no one does). If you did, you wouldn't be here asking questions. So, you can't really know which are the good funds.

But you can know which funds are the bad funds. Those are the ones with high fees. The typical investor doesn't make much, but the typical investment firm makes billions in fees. Think about it.

Vanguard is well-known for very low fees. Maybe you'll do poorly there. But at least your educated guess of the best fund for you at Vanguard will likely do far better than your educated guess of a fund at a high fee location.

 

[dullard]

Taking out loans on 401k's is FAR from stupid. You are essentially paying yourself interest instead of paying a bank interest.

Post the math both ways. I'll come back tomorrow and see your result. Please use realistic numbers including taxes.

 

[Yossarian]

One probably minor point to consider is that if you ever do a backdoor Roth, it is not as beneficial if you have an IRA as opposed to a 401k.

I think it would be a poor financial move to either withdraw from your 401k or take a loan against it. Is there any particular reason the house "must" be paid off in 5 years? If you need to withdraw from the 401k, you are spending a lot for what may be just peace of mind.

 

[s0me0nesmind1]

Post the math both ways. I'll come back tomorrow and see your result. Please use realistic numbers including taxes.

I'm not pulling out math (partially from drinking tonight). But it's simple logic. Your losses is _ENTIRELY_ dependent on how the market performs during the time in which you are paying back the loan.

I mean, feel free to toss out bullshit like "Dur hur 6% average return for the market". Except that 6% is based on...

1. YoY returns, not months in which you are paying back your loan (again, depends on how long the user wants to take to pay back the loans)
2. Oh rook - the S&P has been up and down all this year.
3. Again, if a recession occurs during the loan, it could work out IN YOUR FAVOR.

 

[DaveSimmons]

Vanguard is a pretty good choice.

You don't know which companies / funds will do best (no one does). If you did, you wouldn't be here asking questions. So, you can't really know which are the good funds.

But you can know which funds are the bad funds. Those are the ones with high fees. The typical investor doesn't make much, but the typical investment firm makes billions in fees. Think about it.

Vanguard is well-known for very low fees. Maybe you'll do poorly there. But at least your educated guess of the best fund for you at Vanguard will likely do far better than your educated guess of a fund at a high fee location.

That's why I only own index finds. An S&P 500 fund for example is just the 500 largest US companies, no stock picker trying to guess which companies will do well. All I need to count on is that the US economy does not completely collapse, forever. I'm investing for decades so I don't care about recessions. Actually I do because that's a great time to buy at a discount

Short of a Mad Max / Fallout future, you'll do OK with broad market stock index funds. It's the lowest-risk bet you can make on stocks.

The Target <year> fund is even more diversified. S&P 500 + small-cap + foreign index + bond index. All index-based so you're betting that civilization doesn't collapse not betting on whether Zynga can pull out of its tailspin.

One tip with the target fund is if you want to be more aggressive and lower the starting % of bond fund: Lie about your age. If you will retire in 2045, pick the Target 2050 or 2055 fund instead. That starts with less bonds and takes longer to shift money to them.

 

[s0me0nesmind1]

That's why I only own index finds. An S&P 500 fund for example is just the 500 largest US companies, no stock picker trying to guess which companies will do well. All I need to count on is that the US economy does not completely collapse, forever. I'm investing for decades so I don't care about recessions. Actually I do because that's a great time to buy at a discount

Short of a Mad Max / Fallout future, you'll do OK with broad market stock index funds. It's the lowest-risk bet you can make on stocks.

The Target <year> fund is even more diversified. S&P 500 + small-cap + foreign index + bond index. All index-based so you're betting that civilization doesn't collapse not betting on whether Zynga can pull out of its tailspin.

One tip with the target fund is if you want to be more aggressive and lower the starting % of bond fund: Lie about your age. If you will retire in 2045, pick the Target 2050 or 2055 fund instead. That starts with less bonds and takes longer to shift money to them.

You should ALWAYS have a 3-tier system when investing for retirement. It's one of the many ways of not putting all your eggs in one basket. If your retirement fund consists of nothing but an S&P Index you're retarded.

% to US Equity
% to International Equity
% to Bonds

Adjust yearly as you get older.

 

[MomentsofSanity]

Taking out loans on 401k's is FAR from stupid. You are essentially paying yourself interest instead of paying a bank interest. Where do you pull this "25% hit from?" There is no 25% hit. The only hit is money that could be generated from the market during the time in which you are paying it back. The market is RIDICULOUSLY stale right now, and many are spelling doom for summer months. Hell, it could work out in your favor if you have lucky timing.

I think it's incredibly smart under the presumption that you aren't stupid as balls and plan to actually pay it back as quickly as possible.

I understand it for a home down payment, I mean. If I buy a $300k home, it's not like I have $60k floating around I can freely toss to get the 20% down payment. So use most of the cash assets (say, 30-40k), then take a partial $20k loan from the 401k to pay back.

Personally, unless you have a shit employer 401k that has high fee's, etc.. I try to always stick with a 401k. There are many many benefits that IRA's do not typically have.

Of course, you could just roll your IRA over to a 401k later....

Did you not read the OP? He can't take a loan from the 401K. His only option is to take a distribution which would be subject to taxation as ordinary income. Thus the 25% which the op stated would be his federal tax rate. He would also get the 10% as the home buyer exception does not apply to a 401K.

IRAs don't permit loans. Just one rollover per social per rolling 365 days. His intent is not to roll it back in 60 days so again, if he rolled it to an IRA and took a distribution it would still be ordinary income taxed at his federal rate.

So in this circumstance it's ill advised to take the money out of his retirement planning as the loss of potential future growth plus taxation would almost certainly outweigh any interest savings by reducing mortgage costs.

 

[MomentsofSanity]

One probably minor point to consider is that if you ever do a backdoor Roth, it is not as beneficial if you have an IRA as opposed to a 401k.

I think it would be a poor financial move to either withdraw from your 401k or take a loan against it. Is there any particular reason the house "must" be paid off in 5 years? If you need to withdraw from the 401k, you are spending a lot for what may be just peace of mind.

You know I talk to so many people who aren't aware of the pro rata rule you're referencing when trying to backdoor into a Roth. Usually it's only after it has bitten them in the ass.

Something anyone considering doing backdoor contributions ever should educate themselves on.

 

[DaveSimmons]

You should ALWAYS have a 3-tier system when investing for retirement. It's one of the many ways of not putting all your eggs in one basket. If your retirement fund consists of nothing but an S&P Index you're retarded.

% to US Equity
% to International Equity
% to Bonds

Adjust yearly as you get older.

You're recommending the Vanguard Target <year> fund then . That's what it does.

I used the S&P 500 as an example, a comparison to active funds and stock-picking. Of course I have small-cap, foreign and bond index funds, plus a "high" (gah) interest savings account for emergency funds.

 

[s0me0nesmind1]

Did you not read the OP? He can't take a loan from the 401K. His only option is to take a distribution which would be subject to taxation as ordinary income. Thus the 25% which the op stated would be his federal tax rate. He would also get the 10% as the home buyer exception does not apply to a 401K.

IRAs don't permit loans. Just one rollover per social per rolling 365 days. His intent is not to roll it back in 60 days so again, if he rolled it to an IRA and took a distribution it would still be ordinary income taxed at his federal rate.

So in this circumstance it's ill advised to take the money out of his retirement planning as the loss of potential future growth plus taxation would almost certainly outweigh any interest savings by reducing mortgage costs.

It was an off-topic remark from someone that downplayed the usefulness of a 401k loan. It didn't apply to OP obviously.

In regards to the OPs situation, he is stupid for paying off a mortgage. It's a lot like my wife. They look at debt and say "It's the Devil!!!". When in reality, it's a very useful tool. Unless your mortgage rate is incredibly high, to which I would say re-finance rather than pay it off.

And yes, withdrawing is ALWAYS stupid. Taking a loan out has it's uses.

 

[s0me0nesmind1]

You're recommending the Vanguard Target <year> fund then . That's what it does.

I used the S&P 500 as an example, a comparison to active funds and stock-picking. Of course I have small-cap, foreign and bond index funds, plus a "high" (gah) interest savings account for emergency funds.

It's what every Target fund is. It's what anyone that knows anything about retirement diversification knows.

Read Bogleheads if you want more details. It's not a Vanguard phenom. This is something you shoot for regardless of having a Target fund or not.

http://www.bogleheads.org/wiki/Three-fund_portfolio

 

[Jeff7]

Vanguard.com is all you need. Get a low expense ratio fund, leave the money there until retirement.

https://investor.vanguard.com/401k-rollover/how-to-roll-over

You can avoid general fees if you choose electronic delivery of documents
https://investor.vanguard.com/401k-rollover/401k-to-ira-rollover-rules

You can get fully diversified with a single Target mutual fund, which is a fund of their other index funds - US and foreign stocks plus a small amount of bonds that increases as you get closer to retirement:
https://investor.vanguard.com/mutual-funds/target-retirement/#/

The expense ratio of the Target fund is very low, and since it is 100% index funds there is no stock picker trying and failing to outperform the S&P 500.

Minimum investment is only $1,000.

You should not touch your 401k money, you should move 100% of it into the IRA. You can only contribute so much tax-sheltered money each year, and if you take that shelter away you can't get it back.

 

[Skyclad1uhm1]

I'd suggest the Real IRA instead.

 

[NesuD]

I have a Brokerage IRA with Fidelity and have made it a practice to always do a direct transfer my 401K funds to the brokerage IRA whenever I have changed jobs. Far easier to track and manage and the Brokerage IRA has far more investment options than your typical 401K plan. In addition if your new employer offers a 401K that is administered by Fidelity you can access your account management in the same portal as the Brokerage IRA. Been a pretty good deal for me all around.

 

[CraKaJaX]

FWIW, Here's the other thread I was talking about....

http://forums.anandtech.com/showthread.php?t=2423078&highlight=