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Rolling 401K advice, not mine


horn4life

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OK I'm too busy and I saw some notice regarding my daughter's old 401K with her former employer.  I guess she quit early last year and the termination just caught up to the 401K folks, that I also think just recently changed.  Anyhow if she does nothing, I think they send her a check.  Which might be too big a temptation.  It's not a lot of money maybe 10-12K, but better to let grow.  

She's finishing her Nursing Degree and just changed jobs, so tossing it into a new employer program (if is that possible) is a no go.  So wonder if anyone has some device on where to park the money?  I also thought about converting it to a Roth but from above you can see I don't shit shit about converting one.  But maybe an early tax hit now, for tax free later and more flexibility in offerings?

So thoughts? Suggestions? Warnings? all appreciated.

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2 hours ago, horn4life said:

OK I'm too busy and I saw some notice regarding my daughter's old 401K with her former employer.  I guess she quit early last year and the termination just caught up to the 401K folks, that I also think just recently changed.  Anyhow if she does nothing, I think they send her a check.  Which might be too big a temptation.  It's not a lot of money maybe 10-12K, but better to let grow.  

She's finishing her Nursing Degree and just changed jobs, so tossing it into a new employer program (if is that possible) is a no go.  So wonder if anyone has some device on where to park the money?  I also thought about converting it to a Roth but from above you can see I don't shit shit about converting one.  But maybe an early tax hit now, for tax free later and more flexibility in offerings?

So thoughts? Suggestions? Warnings? all appreciated.

Tell her to roll it into a Traditional IRA.  never roll it into a new employer 401k.  ever.  If she wants to convert to ROTH it's absolutely worth it so long as she's willing to pay the taxes now.    

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51 minutes ago, Trey3216 said:

never roll it into a new employer 401k.

The problem with absolutes is that they are not correct 100% of the time. 
 

Features a 401k provides that an IRA does not:

Creditor protection

Ability to loan against 

1 login and 1 coherent strategy (not everyone wants a separate login for a $12k account)

Investment lineup that is vetted by a fiduciary on an ongoing basis (or at least it should be)

 

A traditional IRA can often times be lower fees but not everyone wants to do it themselves or does a half decent job setting one up. 
 

Seen plenty of clients roll a legacy 401k into an IRA and then sit in cash for years. They would have been better off rolling it into their current employer and investing it like their current 401k is invested. 

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2 minutes ago, Firemans4Horn said:

The problem with absolutes is that they are not correct 100% of the time. 
 

Features a 401k provides that an IRA does not:

Creditor protection

Ability to loan against 

1 login and 1 coherent strategy (not everyone wants a separate login for a $12k account)

Investment lineup that is vetted by a fiduciary on an ongoing basis (or at least it should be)

 

A traditional IRA can often times be lower fees but not everyone wants to do it themselves or does a half decent job setting one up. 
 

Seen plenty of clients roll a legacy 401k into an IRA and then sit in cash for years. They would have been better off rolling it into their current employer and investing it like their current 401k is invested. 

You can use the vetting by your employer to adjust your fund companies if you choose.   
 

It is increasingly frequent that only contributed funds while at that employer are available on loan from the 401k plan, so that point is moot.  
 

“Vetted by a fiduciary” is almost comical as an argument.   
 

 

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Thanks All - I was aware of the 60 day turnaround period, before penalty.  

Very good thinking on the ability to borrow in the 401K.  Vanguard was also one of my first thoughts as I am familiar with some of their funds.  However they apparently have exited the individual 401K business, and only have IRAs.  She's barely working full time as she knocks out the last semester of her BSN, so this year will likely be the lowest tax year she will have.  And if there is a real emergency she can withdraw any contributions tax free.  She also may travel to other states to work, and putting money into a Roth with direct stock investment would be good for her to learn with.

I was completely unaware of the inability to access converted rollover 401K dollars via the loan process, if moved to employers new 401K!  So individual 401K or Roth is what it sounds like.

 

 

 

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21 hours ago, horn4life said:

OK I'm too busy and I saw some notice regarding my daughter's old 401K with her former employer.  I guess she quit early last year and the termination just caught up to the 401K folks, that I also think just recently changed.  Anyhow if she does nothing, I think they send her a check.  Which might be too big a temptation.  It's not a lot of money maybe 10-12K, but better to let grow.  

She's finishing her Nursing Degree and just changed jobs, so tossing it into a new employer program (if is that possible) is a no go.  So wonder if anyone has some device on where to park the money?  I also thought about converting it to a Roth but from above you can see I don't shit shit about converting one.  But maybe an early tax hit now, for tax free later and more flexibility in offerings?

So thoughts? Suggestions? Warnings? all appreciated.

One word of warning for anyone who changes jobs frequently. The switch might be needed or worthwhile but you frequently lose out on any retirement matching because you’re not fully vested yet. It needs to be considered with the overall decision.

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Roth conversion makes most sense IMO given her income situation.   Presuming she is single and stays below $49K of topline earnings (including the converted funds) that will keep her in that low 12% fed tax bracket and offset a lot of the negatives.

I am also 99% certain that she will NOT be subject to the 10% early withdrawal penalty as long as the converted funds remain in the Roth untouched for 5+ years...which further boosts the benefit in favor of moving out of the 401k.

I'm also 99% certain that the 401k admin will NOT do a federal/state withholding on conversions, so she will need to be disciplined enough to keep $1k or so extra 'cash-on-hand' when that tax finally comes due...or I guess hope that her tax refund is sufficient to cover that delta.

My advice to her would be to get that $10k into a Roth starting our as cash only.....then DCA $1k per month into a couple of standard index funds and then concurrently try to save-up $2k more over course of the year to finish Nov/Dec with similar "deposits".  This will give her a specific investment "goal" right off the bat and also get her some visibility into market trends without overwhelming her. 

Most importantly, the DCA strategy protects against the psychological outlier risk of her dropping $10k (which I assume is a lot of money in her mind) and then market immediately taking a shit and her potentially swearing off investing forever.

Building off that early momentum, I would then encourage her to build her career/budget framework with 5% auto-contribution to new employers 401K (assuming her company match will be somewhere in that range)...along with another 5% into her Roth going forward.  Given the $12k head-start she will have given herself with the Roth, the accompanying 401k should evolve into pretty nice pre/post tax combination for her long-term future.

 

Edited by Muny_Tex
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Thanks All - I was aware of the 60 day turnaround period, before penalty.  

Very good thinking on the ability to borrow in the 401K.  Vanguard was also one of my first thoughts as I am familiar with some of their funds.

1 hour ago, Muny_Tex said:

Roth conversion makes most sense IMO given her income situation.   Presuming she is single and stays below $49K of topline earnings (including the converted funds) that will keep her in that low 12% fed tax bracket and offset a lot of the negatives.

I am also 99% certain that she will NOT be subject to the 10% early withdrawal penalty as long as the converted funds remain in the Roth untouched for 5+ years...which further boosts the benefit in favor of moving out of the 401k.

I'm also 99% certain that the 401k admin will NOT do a federal/state withholding on conversions, so she will need to be disciplined enough to keep $1k or so extra 'cash-on-hand' when that tax finally comes due...or I guess hope that her tax refund is sufficient to cover that delta.

My advice to her would be to get that $10k into a Roth starting our as cash only.....then DCA $1k per month into a couple of standard index funds and then concurrently try to save-up $2k more over course of the year to finish Nov/Dec with similar "deposits".  This will give her a specific investment "goal" right off the bat and also get her some visibility into market trends without overwhelming her. 

Most importantly, the DCA strategy protects against the psychological outlier risk of her dropping $10k (which I assume is a lot of money in her mind) and then market immediately taking a shit and her potentially swearing off investing forever.

Building off that early momentum, I would then encourage her to build her career/budget framework with 5% auto-contribution to new employers 401K (assuming her company match will be somewhere in that range)...along with another 5% into her Roth going forward.  Given the $12k head-start she will have given herself with the Roth, the accompanying 401k should evolve into pretty nice pre/post tax combination for her long-term future.

 

Thanks for the detailed response.  Dollar Cost averaging was what I was telling her to do.  When she finds a stock she likes, buy a little bit every month.  What was the old Peter Principle something about investing in what you see in your industry before the rest of the market notices.  My other Pharmacist Daughter was all over LLY when it was barely over $300 for example.  

The 5 year Roth restriction was one I just realized today doing a little research.  Sort of locks her in to this as a long term deal.  Which is how I think she will view it.  I would guess she will make around $60K+ working 3 shifts a week.  And I know she will max out to at least the contribution match.  VERY GOOD point about how long it takes to vest for the Employee matching contributions!  That is something I had not thought to tell her to think about.  

I figure she is going to look at a couple aspects of nursing before settling in on what she wants to do long term.  So there may be a bit of transience the next few years job wise.  So maybe one of the best things about a Roth might be the regular paycheck contributions into it.  No matter where she was working.  If she really got into a bind my wife and I could probably help her out financially, but she has been very independent financially, and I expect that to continue.  

 

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