401K Termination/Conversion

They're not just rolling the old 401(k) into the new one?

If not, you'll need to setup an IRA somewhere and roll the 401(k) into that. If you want to manage it yourself, you can use ETrade or some similar site to help facilitate the process.


On E-Trade, when you open an account, there's an option to transfer funds from another account. It's relatively simple. Depending on who your current account is with, you might be able to do the whole process online. If not, you'll need to sign some forms and submit them, probably with a copy of your most recent statement.

There are quite a few factors to consider.

One factor deals with marriage. Are you married? Are you looking to get married? Are you thinking of getting a divorce? What's your state of residence?

With a 401K, you spouse is your automatic beneficiary. You can't change that unless your spouse agrees to sign a release of her rights. So, if you put your money in an IRA (especially before you're married), you can control it and she may not be entitled to any of it in the event of your divorce or death.

At the end of the day, most advisors will tell you to roll it over into an IRA. You'll have more control and can access it at any time. If you don't like the investment options, you can just roll it over into another IRA.

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One factor deals with marriage. Are you married? Are you looking to get married? Are you thinking of getting a divorce? What's your state of residence?

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Married

Plan to stay married

I'm good with all my money going to her if something should happen.

401(k)s are more restrictive in security selection and the ability to withdraw.

IRAs have way more investment choices, several more ways to access the money should particular hardships occur.

Expenses can vary between each. If you are DIYer then IRAs can be very cheap. An advisor is going to cost more but still likely less than the average 401(k) plan. Just be aware of your own limitations if your deciding which IRA route to take.

Are there any income limits with a traditional IRA like with a Roth?

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Married

Plan to stay married

I'm good with all my money going to her if something should happen.

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The issue comes into play if you either divorce OR your spouse dies and you want to remarry.

If, for example, your spouse passes away. If you look to remarry, your new spouse will become the automatic beneficiary of all that is in your 401K despite the fact that y'all just got married and you'd rather that money go to your kids. Pursuant to ERISA, some plans do require that you be married for a year before your new wife becomes entitled to your 401K benefits, however, it's not a mandatory rule and many plans do not contain it.

So, let's say you're 38 years old right now and you have the opportunity to roll your current 401K balance to an IRA when your account balance is $250K. When you are 40 your wife dies. At this point, you have 2 kids and $300K in your 401K because you didn't roll over that $250K balance when you had the opportunity. Let's say you meet someone when you are 53 when your 401K balance is $1 million. You marry this woman when you are 55 and the account balance is $1.2 million.

Had you taken the one opportunity to take out the balance in your 401K and roll it over to a IRA when the balance was $250K, that $250K balance is now $600K and your 401K balance is $600K, i.e., instead of having the entire $1.2 in the 401K.

If something should happen to you when you are 57, if you leave all the money in your 401K, all that money will AUTOMATICALLY go to your new spouse of 2 years. If you want your kids to get that money (because the vast majority was earned before you even knew this woman), it wouldn't matter. Pursuant to ERISA your new spouse is the beneficiary UNLESS she signs a waiver -- and asking your new spouse to sign a waiver on a $1.2 million account is extremely "tricky".

On the other hand, if you took the one opportunity to rollover your balance and now have a $600K balance in the IRA and a $600K balance in the 401K, at least you can leave the $600K in the IRA to your kids. IRAs are not subject to the same rules as ERISA plans and you can pretty much leave them to whomever you'd like because they're your separate property that you brought into that second marriage. You'll still have get your new wife to sign a waiver for the 401K if you want to leave that to your children -- good luck with that conversation!

Remember also that there is a Rule of 55. You can access your 401k assets penalty free if you leave your employer for any reason at age 55 or later. You have to wait until 59.5 to get your IRA assets without penalty.

Consider that it might make sense to roll your 401K assets into an IRA now, but you might want to roll them back into your current employers 401K when you are age 54 or so, so that you can plan an early withdrawal strategy. Maybe you want to pay off your house or something?

It is important to understand the rules or rolling over to an IRA, then back into a 401K in that situation.

Yep. I missed the boat on that one, but you don't have to.

Step 1: Open traditional IRA at separate brokerage firm (Etrade, Schwab, Fidelity, etc). Skip step 1 if you already have a Traditional IRA

Step 2: Call old 401k company. Request liquidation of assets in 401k and mail a check of proceeds to your AOR. Check should be made out to “Etrade/Fidelity/Schwab FBO (your name) Trad IRA”.

Step 3: Deposit check into new/existing Trad IRA. That check is a hot potato. Cash it quickly and NOT in a bank account. Only Trad IRA

Step 4: Buy new investments (stocks, bonds, mutual funds, etfs) with deposited funds.

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Thanks. Will be doing this.

Probably will open an IRA with Schwab.

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Needs to be a Rollover IRA account. With Fidelity (and I assume Schwab), alot of rollovers can be done electronically with your current 401k provider. I've rolled over two 401ks to Fidelity and it was all done online.