401k to IRA

[TXSG8R 3362]

I'm losing my 9-5 job and transitioning to my side business full time in a couple of weeks.  I got the official notice today, but we have known it was coming for a few weeks now.  I've always rolled my 401ks over to my new employer in the past, but obviously that's not an option for my small business, so I assume I have to roll it over to a 401k.  I started looking, but there's a shit ton of options so I'm looking for some recs on good IRAs. 

[TwiceHorn 31505]

3 minutes ago, TXSG8R said:

I'm losing my 9-5 job and transitioning to my side business full time in a couple of weeks.  I got the official notice today, but we have known it was coming for a few weeks now.  I've always rolled my 401ks over to my new employer in the past, but obviously that's not an option for my small business, so I assume I have to roll it over to a 401k.  I started looking, but there's a shit ton of options so I'm looking for some recs on good IRAs. 

An IRA is more of just a bank/brokerage account than a 401k.  There's really one option for this rollover, but there are other "types" of IRAs discussed below.  You cannot roll over into them easily, but you lose no advantage because of that .  An IRA still has the early withdrawal rules.  You can't borrow against it.  The investment choices in an IRA are unlimited (meaning choice of securities, etc.,) unless you open it at a place that somehow limits your options.

I would probably open one up where you do your non-401k investing.  Or if you don't have much of that, Schwab, Vanguard, or Fidelity.

Now, a separate issue, running your own business is what kind of 401k-equivalent plan can you open for yourself/your business, and some of those are known as SEP-IRAs.  That may entitle you to save/deduct more than your iRA.  Usually, as with your 401k, contributions to an SEP-IRA reduce the amount you can contribute and deduct in a regular IRA.

I would get advice on the self-employment retirement plan from a lawyer/CPA along with your business structure.

Finally, after you roll over your 401k to an IRA, you can consider converting some or all of it to a Roth IRA, which is taxed now, grows tax free and is not taxed on withdrawal.  A CPA/estate planner can help you figure out if that makes sense.

The above information is fairly accurate, @Brew and @Reagan1k can provide remote CPA and financial planning advice, if they are willing.

 

[TXSG8R 3362]

Thanks.  I know I have the ability to save pre-tax money through my business, but I wasn't sure I could roll my existing 401k into that.  I haven't done my offboarding with HR yet, so I don't know if I have the ability to let my existing 401k to stay there, or if that would even make sense to do.  I also started a Roth IRA through my company with the money above my company match for 401k, but I just started that last year so there isn't any serious money there.  I also need to find out what happens with that.  I assume that could stay as is since there no company ties?  

If I rolled a 401k over to a Roth, would it take the tax hit on the transfer?  Are there fees for all this stuff?  Are there any particular IRAs that have less/waived fees, better/worse performance, etc? 

[TwiceHorn 31505]

16 minutes ago, TXSG8R said:

Thanks.  I know I have the ability to save pre-tax money through my business, but I wasn't sure I could roll my existing 401k into that.  I haven't done my offboarding with HR yet, so I don't know if I have the ability to let my existing 401k to stay there, or if that would even make sense to do.  I also started a Roth IRA through my company with the money above my company match for 401k, but I just started that last year so there isn't any serious money there.  I also need to find out what happens with that.  I assume that could stay as is since there no company ties?  

If I rolled a 401k over to a Roth, would it take the tax hit on the transfer?  Are there fees for all this stuff?  Are there any particular IRAs that have less/waived fees, better/worse performance, etc? 

I could be wrong, but I don't think you can roll over into anything except a straight IRA.  No big loss there.  Most places will have you fill out an electonic transfer form that will "suck the funds ouf of" the 401k and land them right in your iRA.  That's probably a good idea, because you can incur penalties if you fuck around with a distribution check from your 401k and a lot of 401k plan admins make it a hassle to do it any other way.

The advantage of an SEP IRA, or something similar, would be that you could contribute more than the $6k to a regular or Roth IRA.  I believe the usual limit is 15% of your salary, which may help, or not, depending on how your self-employment compensation is structured.

Yes, if you roll to a Roth, I believe you have to roll to a regular IRA, even if it's for minutes or seconds, and then to a Roth, and you would have to pay income tax on the entire balance.

The outfits I mentioned are all low cost low fee.  I only have direct experience with Fidelity.  There is no charge there to open an IRA, I doubt there's any at most places.  After you open it, you make the decision which securities or investments in which to put the funds in.  They do not, unlike some 401ks.

Edited February 19, 2021 by TwiceHorn

[Brew 3049]

You could roll it into a solo 401k or SEP IRA if you want to go that route going forward with retirement planning. You could also just roll it into an IRA and start funding a separate SEP, SIMPLE, Solo, etc. A lot of what you can do going forward depends on income, employees, etc.

[Reagan1k 3024]

Couple thoughts - may be able to circle back with more complete ideas later.

You can roll an old 401k to a new 401k if you so choose after an employment change. Seldom done if going from company a to company b as an employee because you have higher fees and fewer options than a rollover IRA for the old 401k and then just starting new contributions in company b’s plan.

your situation is different because you will be company B with a new qualified plan.  You can roll your old 401k into whatever plan you establish and then make future contributions as well.  That new plan may be a SEP-IRA, Solo 401k or other plan.  Doesn’t really matter-  a pro will show you advantages and disadvantages of each but regardless- you can roll the old funds in there once it is established.  

Now- another thought.  You could also play a little game of tax rate arbitrage if you have excess cash (outside of 401k or IRA).  If you anticipate 1st year income of the new entity will be well below anticipated future earnings due to ramp up and initial expenses, you might consider doing a Roth conversion of the old 401k.  
Roll it to a rollover IRA, then convert some or all to a Roth IRA - pay tax from outside savings at low rate due to reduced income in year one and maybe two and now that Roth is tax free when you presumably will be in a higher bracket.

Assumes you have cash to fund startup and pay tax bill, and would project to be in higher tax bracket eventually in retirement than you are in that one or two years of down income while getting your solo venture established.

Bottom line- you can a) do a standard rollover IRA b) roll the old 401k into a new 401k or SEP you establish or c) do the two step and convert the 401k into a Roth IRA and have some tax efficient income later.

Projected income, number of employees (including possibly a spouse)  etc.will be primary factors in what “new” plan you establish for your self employment. 

[Reagan1k 3024]

Other notes.  Roth you already established would roll from ok’d company to a new separate Roth account- rollover Roth IRA if you want to call it that-  keep that separate.

Fees on a rollover IRA are minimal at most-  it’s just a wrapper designating how it is treated for taxes.  You’ll pay a small custodial feed to Schwab, Fidelity, whoever at most.  Real fees will be contingent on trading costs and management fees of the actual investments you buy inside that wrapper.

Once you have a good idea of how much income you’ll have and the cash flow created by your new venture- sit down with a pro and go over all the possible plans.  Very different planning if you’ll have $10k-$25k to set aside annually vs. if you have bigger dollars that would otherwise be taxed as salary / corporate income. I’ve been involved in a venture that had two principals as the only employees and used a defined benefit plan (like the old pension plans) to sock away a fortune in a few years, well above traditional contribution limits any 401k or profit sharing plan would have allowed.  

Also investigate putting a spouse on the payroll as your 1st/only employee and look for additional contribution deductions there- a pro will see that clearly. 

[TwiceHorn 31505]

One thing we may not have made clear, although it's stated a couple ways a couple of times.

Unlike a 401k, which is managed by/for your employer under pretty rigorous fiduciary requirements, an IRA is an account with a label for tax purposes that you control pretty much like your bank account or another investment account.  I'm not sure why, exactly, but 401ks often have limited investment options or even mandatory ones, which is what the employer "bought into" when they selected the plan manager.  Not so with an IRA.  Similar rules do apply to withdrawing before you are 59 1/2 and distributions become mandatory at 70.  

Otherwise, it's your money in your account to invest as you please.  The usual investment/management fees at the institution will apply, but it should be a very low-cost proposition.  I don't believe Fidelity even charges a "custodial" or account-related fee.  A big part of their model is just having your money to lend institutionally on overnight or very short-term bases.  A lot of consumer-friendly houses seem to have adopted a similar model.

Sometimes people choose less tax-efficient investments for their IRAs because things won't be taxed.  They are also sometimes conservative because it is a long-haul account by its very nature.

[TXSG8R 3362]

9 minutes ago, Reagan1k said:

Other notes.  Roth you already established would roll from ok’d company to a new separate Roth account- rollover Roth IRA if you want to call it that-  keep that separate.

Fees on a rollover IRA are minimal at most-  it’s just a wrapper designating how it is treated for taxes.  You’ll pay a small custodial feed to Schwab, Fidelity, whoever at most.  Real fees will be contingent on trading costs and management fees of the actual investments you buy inside that wrapper.

Once you have a good idea of how much income you’ll have and the cash flow created by your new venture- sit down with a pro and go over all the possible plans.  Very different planning if you’ll have $10k-$25k to set aside annually vs. if you have bigger dollars that would otherwise be taxed as salary / corporate income. I’ve been involved in a venture that had two principals as the only employees and used a defined benefit plan (like the old pension plans) to sock away a fortune in a few years, well above traditional contribution limits any 401k or profit sharing plan would have allowed.  

Also investigate putting a spouse on the payroll as your 1st/only employee and look for additional contribution deductions there- a pro will see that clearly. 

That’s another wrinkle.  My business is a partnership, 51/49 with my brother. We had to do that to qualify as a veteran owned business.  He still has a day job, so he’s not jumping in full time like I am yet. We pay some guys as contractors to help on occasion, but we plan on hiring an employee or two at least part time this year, the work we do is rarely a one person job, I’ll be able to hold off on payroll through the end of the year due to loans to the company to get things off the ground and riding unemployment. 

[TwiceHorn 31505]

51 minutes ago, TXSG8R said:

That’s another wrinkle.  My business is a partnership, 51/49 with my brother. We had to do that to qualify as a veteran owned business.  He still has a day job, so he’s not jumping in full time like I am yet. We pay some guys as contractors to help on occasion, but we plan on hiring an employee or two at least part time this year, the work we do is rarely a one person job, I’ll be able to hold off on payroll through the end of the year due to loans to the company to get things off the ground and riding unemployment. 

Not a CPA or financial advisor, but have been involved with several small businesses as an employee and part owner. You might hold off on choosing an employment related plan, like an SEP IRA until you have your feet under you.  If you have employees, very broadly speaking, you have to do for them what you do for yourself, which is a fine idea, but could be a bit of a burden for a fledgling business.  When you've got things running steady state, then you can probably make an intelligent decision on the plan.  In the meantime, just use your Roth/IRA contributions to keep up savings, if you can.  

I was never directly involved with our 401ks at my various firms, but we often wound up using Fidelity for them, sometimes after going in other directions, as with employee-leasing etc..  They're good at it and the users tend to like them and they're low cost.

Also, a partnership is a pretty specific legal entity, not a general term for being in business with someone else.  By and large, you are probably better off forming a corporation or an LLC with that ownership split rather than being a partnership.  Partnerships can be fine in certain circumstances, but aren't what most small businesses want or need.

[TXSG8R 3362]

18 minutes ago, TwiceHorn said:

Not a CPA or financial advisor, but have been involved with several small businesses as an employee and part owner. You might hold off on choosing an employment related plan, like an SEP IRA until you have your feet under you.  If you have employees, very broadly speaking, you have to do for them what you do for yourself, which is a fine idea, but could be a bit of a burden for a fledgling business.  When you've got things running steady state, then you can probably make an intelligent decision on the plan.  In the meantime, just use your Roth/IRA contributions to keep up savings, if you can.  

I was never directly involved with our 401ks at my various firms, but we often wound up using Fidelity for them, sometimes after going in other directions, as with employee-leasing etc..  They're good at it and the users tend to like them and they're low cost.

Also, a partnership is a pretty specific legal entity, not a general term for being in business with someone else.  By and large, you are probably better off forming a corporation or an LLC with that ownership split rather than being a partnership.  Partnerships can be fine in certain circumstances, but aren't what most small businesses want or need.

Sorry, I was speaking generally, we are an LLC, sub S Corp.  the partnership piece is what complicates the profit sharing. It was pretty straight forward with us working equally. Now things will be unequal WRT workload, so we have to figure out a better method once payroll comes around to share things without him incurring a larger tax burden than he earned. 

[davidg 4038]

Also research options regarding leaving in existing 401k vs converting to ira regarding being protected in bankruptcy or other legal judgements against you.   

[TwiceHorn 31505]

10 hours ago, davidg said:

Also research options regarding leaving in existing 401k vs converting to ira regarding being protected in bankruptcy or other legal judgements against you.   

Good point.  A 401k is exempt from creditor claims in bankruptcy or elsewhere under the federal law that created them.

In Texas, and many but not all other states, all IRA variants are exempt from creditor claims under Texas law, without reference to the amount in them.  Except that, to the extent you "overstuff" them, meaning contribute over the annual deductible limit, that portion is subject to creditor claims.

[TwiceHorn 31505]

10 hours ago, TXSG8R said:

Sorry, I was speaking generally, we are an LLC, sub S Corp.  the partnership piece is what complicates the profit sharing. It was pretty straight forward with us working equally. Now things will be unequal WRT workload, so we have to figure out a better method once payroll comes around to share things without him incurring a larger tax burden than he earned. 

OK cool, quit that.

I'm not a corporate lawyer, but I deal with a lot of small businesses, and I can't tell you how many of them call themselves partnerships or my partners without realizing that without a comprehensive partnership agreement, a partnership is a really disadvantageous arrangement.  And if you sling the term around too freely around creditors, you can actually be legally treated as part partnership and part corporation or other entity when they sue you.

[Reagan1k 3024]

Couple of other quick points to file away.  If/when you end up with employees, their level of participation (deferral)in a 401k (if you go that route) will to some degree dictate your level of participation.

discrimination testing can be a bitch and even if you want to defer the max, you may get some kicked back out of the plan and taxed as income  if your employees aren’t participating in a given year.  (Contributions - not existing funds).

 The remedy is to “safe harbor” and make company contributions to everyone at a certain level that exempts your from the discrimination test, but that costs money.

Bottom line- the more buy-in and deferrals you get from your employees, the more you can defer from salary up to the limit so keep that in mind as you hire and how you push the plan from an HR standpoint. 

[TwiceHorn 31505]

7 minutes ago, Reagan1k said:

Couple of other quick points to file away.  If/when you end up with employees, their level of participation (deferral)in a 401k (if you go that route) will to some degree dictate your level of participation.

discrimination testing can be a bitch and even if you want to defer the max, you may get some kicked back out of the plan and taxed as income  if your employees aren’t participating in a given year.  (Contributions - not existing funds).

 The remedy is to “safe harbor” and make company contributions to everyone at a certain level that exempts your from the discrimination test, but that costs money.

Bottom line- the more buy-in and deferrals you get from your employees, the more you can defer from salary up to the limit so keep that in mind as you hire and how you push the plan from an HR standpoint. 

Have definitely heard this can be an issue with "aggressive" compensation schemes in small businesses.  Sometimes by accident when business expands a little, and independent contractors start looking more like employees without getting the full employee benefits.  Sometimes just flat greedy behavior by owners.

[TXSG8R 3362]

6 hours ago, TwiceHorn said:

OK cool, quit that.

I'm not a corporate lawyer, but I deal with a lot of small businesses, and I can't tell you how many of them call themselves partnerships or my partners without realizing that without a comprehensive partnership agreement, a partnership is a really disadvantageous arrangement.  And if you sling the term around too freely around creditors, you can actually be legally treated as part partnership and part corporation or other entity when they sue you.

So what do you call your partner in an LLC sub S?  Our operating agreement set us up as a multi-member LLC, we added the sub S our first year after talking to a CPA. Just member?  We use the term managing partner on business cards and correspondence.  Our CPA told us to use anything besides owner, so what should be used? 

[Reagan1k 3024]

7 hours ago, TwiceHorn said:

Have definitely heard this can be an issue with "aggressive" compensation schemes in small businesses.  Sometimes by accident when business expands a little, and independent contractors start looking more like employees without getting the full employee benefits.  Sometimes just flat greedy behavior by owners.

Yep-  having contractors reclassified as an employees can be ugly.  Get very clear guidance and follow it. 

What will really chap your ass is having employees, treating them as such and providing a benefit like a 401k.  Then they don’t participate by deferring income.  Owners defer the max, employees don’t participate enough and Owners get some of their deferral back along with a 1099 that’s basically a love note from the IRS saying- sorry- you can’t put away that much of your own money because your employees didn’t put away enough of their own either.

You're then forced to live with higher taxes / less tax deferred savings, or making a safe harbor matching contribution to everyone’s account to avoid that, even if the employees don’t have any skin in the game.  Not fair, but that’s what the discrimination test does. 

[kmac30 416]

Yep-  having contractors reclassified as an employees can be ugly.  Get very clear guidance and follow it. 
What will really chap your ass is having employees, treating them as such and providing a benefit like a 401k.  Then they don’t participate by deferring income.  Owners defer the max, employees don’t participate enough and Owners get some of their deferral back along with a 1099 that’s basically a love note from the IRS saying- sorry- you can’t put away that much of your own money because your employees didn’t put away enough of their own either.
You're then forced to live with higher taxes / less tax deferred savings, or making a safe harbor matching contribution to everyone’s account to avoid that, even if the employees don’t have any skin in the game.  Not fair, but that’s what the discrimination test does. 

You can have 3% safe harbor for all (including non-participants) or 4% for those who participate. That way you’re not contributing to those who have no skin in the game.

[Reagan1k 3024]

Yeah-  I guess I got a little overzealous in my description there.  It’s just aggravating when you pay a good wage, provide a good benefit, and can’t get people to pony up for their own benefit.

I understand the spirit of the rule- keeping employers from being the only ones who benefit from a plan, but in practice either can be a bitter pill to swallow.   Hell, we already provide a match and have years where we still can’t get contribution levels up.

Rant over....

[Kennythetiger 9394]

On 2/19/2021 at 4:53 PM, TwiceHorn said:

An IRA is more of just a bank/brokerage account than a 401k.  There's really one option for this rollover, but there are other "types" of IRAs discussed below.  You cannot roll over into them easily, but you lose no advantage because of that .  An IRA still has the early withdrawal rules.  You can't borrow against it.  The investment choices in an IRA are unlimited (meaning choice of securities, etc.,) unless you open it at a place that somehow limits your options.

I would probably open one up where you do your non-401k investing.  Or if you don't have much of that, Schwab, Vanguard, or Fidelity.

Now, a separate issue, running your own business is what kind of 401k-equivalent plan can you open for yourself/your business, and some of those are known as SEP-IRAs.  That may entitle you to save/deduct more than your iRA.  Usually, as with your 401k, contributions to an SEP-IRA reduce the amount you can contribute and deduct in a regular IRA.

I would get advice on the self-employment retirement plan from a lawyer/CPA along with your business structure.

Finally, after you roll over your 401k to an IRA, you can consider converting some or all of it to a Roth IRA, which is taxed now, grows tax free and is not taxed on withdrawal.  A CPA/estate planner can help you figure out if that makes sense.

The above information is fairly accurate, @Brew and @Reagan1k can provide remote CPA and financial planning advice, if they are willing.

 

Jesus. Is there anything you DON’T know about???