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NEVER roll over your 401k to a new employer's plan!


By Patrick   Follow   Fri, 25 Jan 2013, 5:30am PST   3,270 views   27 comments
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I just started a real job in Janurary and joined their 401k, which is run by ETrade. 401k plans are a real benefit to workers because the income you put into it can grow untaxed until retirement.

But 401k plans are an even bigger benefit to Wall Street, because it allows brokerages to trap employees in limited and generally bad investment options, like mutual funds and bond funds, all of which take hefty hidden commissions. It's pretty much legalized theft from workers, but people put up with it because they don't know any better, and because they're getting the tax deferment.

I remember my utter joy and delight when I first realized after leaving Motorola that I could roll over the 401k money I had in the Motorola 401k plan to a completely personally controlled IRA at any brokerage of my choosing, and then trade stock without any taxes at all (at least until I eventually retire). Investing paradise!

So now my new employer set me up with an ETrade account and the first thing they want me to do is give up the liberty of my previous 401k money and trap myself in their high-fee mutual funds.

No way.

No fucking way.

Dear Patrick Killelea,
Account number ending in: xxxx

Whether you've changed jobs recently, or just haven't had a chance to move an old 401(k), rolling over to E*TRADE will enable you to make better decisions by viewing your most important assets together in one place.

Roll over your old 401(k) for better planning...

Comments 1-27 of 27     Last »

mell   Fri, 25 Jan 2013, 5:35am PST   Share   Quote   Permalink   Like   Dislike     Comment 1

I always cash out as long as the amounts are small and never participate when there is no matching (useless). For the big one I rolled it over into my own trading accounts and manage it myself entirely. I also founded an IRA-LLC which lets you invest and have accounts anywhere in the world. But I think there is a better vehicle called solo-401K, the IRA-LLC cost some $$ to set up, maintenance is not too bad if you don't use ripoff states like CA, e.g. Wyoming is like $100 per year total for everything.

Dan8267   Fri, 25 Jan 2013, 5:38am PST   Share   Quote   Permalink   Like   Dislike     Comment 2

Patrick says

NEVER roll over your 401k to a new employer's plan!

I typically roll over 401Ks to IRAs. I guess that's the same idea. Don't know if there are any significant differences or advantages between your method and mine.

RentingForHalfTheCost   Fri, 25 Jan 2013, 5:54am PST   Share   Quote   Permalink   Like   Dislike     Comment 3

Dan8267 says

Patrick says

NEVER roll over your 401k to a new employer's plan!

I typically roll over 401Ks to IRAs. I guess that's the same idea. Don't know if there are any significant differences or advantages between your method and mine.

Same here. Roll it to IRA, then in weak earning years convert to a Roth IRA. I believe taxes in the future will be higher, so paying at today's rate might become a smart move. Also, your future earnings then grow tax free until you need it. Most likely the biggest benefit.

The only thing I think I lost verses a traditional 401K was the ability to take out a loan. I actually took out 50K once a few years back because I lost all faith in the market and was basically all cash. I paid back the 50K plus the 6% rate to my plan and in effect ended up with the ability to sneak more money into my account above the yearly limits. Kinda sneaky, but works well in a boring market.

michaelsch   Fri, 25 Jan 2013, 6:07am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 4

There is one caveat though. If you are 55+ and you loose/change your job, you may withdraw money from your 401/403k w/o penalty as long as it is the original plan. If you roll over you loose this and you would have to pay your penalty.

drew_eckhardt   Fri, 25 Jan 2013, 6:16am PST   Share   Quote   Permalink   Like   Dislike     Comment 5

RentingForHalfTheCost says

Same here. Roll it to IRA, then in weak earning years convert to a Roth IRA. I believe taxes in the future will be higher, so paying at today's rate might become a smart move.

Roth conversions are also

1. A way to get more than the statutory limits into tax advantaged accounts. Roth conversion of your annual $17,500 401k contribution on which the proceeds will be taxed at 28% when you retire to a state without income tax is like having made a $24,305 pre-tax contribution.

2. A way to make your Social security benefits tax free (or preserve them when the inevitable means testing comes). Roth withdrawals don't count as income under the formula which subjects up to 85% of your Social Security benefits to taxes.

3. Estate planning. The balance sheet value of a Roth IRA providing a given benefit to your heirs is less than a retirement account with taxable benefits so it'll have less inheritance tax assessed.

EBGuy   Fri, 25 Jan 2013, 6:33am PST   Share   Quote   Permalink   Like (2)   Dislike     Comment 6

Our fearless leader said: I remember my utter joy and delight when I first realized after leaving Motorola that I could roll over the 401k money I had in the Motorola 401k plan to a completely personally controlled 401k at any brokerage of my choosing
To be clear, you didn't put it in another 401k, you rolled it over into an IRA. I would change the language in the original post

BayArea   Fri, 25 Jan 2013, 7:16am PST   Share   Quote   Permalink   Like   Dislike     Comment 7

Patrick,

You make a good point. However, by rolling-over the 401K you will immediately (or eventually depending on the plan) get employer matching.

So your mutual fund take 0.9% in fees but if your employer matches 3% for example...

Sure, you are stuck with the limited funds they offer however.

gbenson   Fri, 25 Jan 2013, 7:26am PST   Share   Quote   Permalink   Like   Dislike     Comment 8

You can also roll it into a self directed IRA plan which gives you even more flexibility (ie to buy real estate).

mbodell   Fri, 25 Jan 2013, 7:52am PST   Share   Quote   Permalink   Like   Dislike     Comment 9

There can be advantages if your employer is huge and has access to funds that a common person wouldn't. In general, the larger your employer's 401K fund, the better your options and treatments. When I was at Microsoft they had a pretty good plan that included both some very good low cost index funds as well as a brokerage account through which you could make your own trades. At a smaller employer with a newly created 401K all the funds have like 1% fees.

I agree it would be an exception to want to roll over, and usually you wouldn't want to do that, but a really great 401K plan might actually be good or neutral to roll over.

APOCALYPSEFUCKisShostikovitch   Fri, 25 Jan 2013, 8:25am PST   Share   Quote   Permalink   Like (4)   Dislike     Comment 10

Isn't there also the danger the an employer would force you to buy crap they're shorting and know is going to implode?

Mark D   Fri, 25 Jan 2013, 8:33am PST   Share   Quote   Permalink   Like   Dislike     Comment 11

agreed. count your shares from one statement to the next.

zzyzzx   Fri, 25 Jan 2013, 9:25am PST   Share   Quote   Permalink   Like   Dislike     Comment 12

mbodell says

There can be advantages if your employer is huge and has access to funds that a common person wouldn't

Not true at Wells Fargo.

zzyzzx   Fri, 25 Jan 2013, 9:28am PST   Share   Quote   Permalink   Like   Dislike     Comment 13

NEVER roll over your 401k to a new employer's plan!

You are just figuring out this now???

Mark D   Fri, 25 Jan 2013, 9:29am PST   Share   Quote   Permalink   Like   Dislike     Comment 14

zzyzzx says

NEVER roll over your 401k to a new employer's plan!

You are just figuring out this now???

yeah. obviously not a Leykis student.

mell   Fri, 25 Jan 2013, 9:41am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 15

Leykis or not, he has some useful things to say ;)

Patrick   Fri, 25 Jan 2013, 10:11am PST   Share   Quote   Permalink   Like   Dislike     Comment 16

EBGuy says

To be clear, you didn't put it in another 401k, you rolled it over into an IRA. I would change the language in the original post

You are right. Corrected.

BayArea says

You make a good point. However, by rolling-over the 401K you will immediately (or eventually depending on the plan) get employer matching.

So your mutual fund take 0.9% in fees but if your employer matches 3% for example...

No, matches generally match only some percent the amount taken from your paycheck, not rollover. But anyway my employer is pretty lame about the 401k and doesn't match my contributions at all.

gbenson says

You can also roll it into a self directed IRA plan which gives you even more flexibility (ie to buy real estate).

I think that's what I have. It's just an IRA, and I direct it into anything I want. I trade in it, and have bought CDs, corporate bonds, and options.

B.A.C.A.H.   Fri, 25 Jan 2013, 12:06pm PST   Share   Quote   Permalink   Like   Dislike     Comment 17

A hipster explained it to me: You can borrow against the amount you "roll-in" to your new 401K.

justme   Fri, 25 Jan 2013, 12:12pm PST   Share   Quote   Permalink   Like   Dislike     Comment 18

B.A.C.A.H. says

A hipster explained it to me: You can borrow against the amount you "roll-in" to your new 401K.

AFAIK, the borrowing feature is the *only* advantage in rolling one employer 401k into a new employer 401k.

I always roll any existing 401k into an IRA with a stock brokerage. Then there are no limitations on what stocks or funds I can buy.

B.A.C.A.H.   Fri, 25 Jan 2013, 12:56pm PST   Share   Quote   Permalink   Like   Dislike     Comment 19

well justme, I suppose but even when the hipster shared his knowledge with me, I did not see the "advantage" in it.

swebb   Fri, 25 Jan 2013, 1:22pm PST   Share   Quote   Permalink   Like   Dislike     Comment 20

mell says

and never participate when there is no matching (useless)

I don't have a matching 401K, but I don't think that makes it useless. It still gives you the tax deferred treatment, which is important. Unless you have headroom left in your IRA contribution, I'd say the 401K is a great idea.

swebb   Fri, 25 Jan 2013, 1:28pm PST   Share   Quote   Permalink   Like   Dislike     Comment 21

B.A.C.A.H. says

well justme, I suppose but even when the hipster shared his knowledge with me, I did not see the "advantage" in it.

Sure it's and advantage, at least in some circumstances.

I'm more aggressive with my retirement contributions, "neglecting" my emergency fund because I know I can take a 401K loan if I had an emergency. By contributing more to my 401K than I otherwise would, I end up in a better position down the road (assuming no emergency) because I was able to contribute more to the 401K. You can't get your contribution limits back..once they are gone, they are gone. So use them while you have them, and take a loan out if it turns out you need the money for an emergency or whatever.

Same thing with saving for a house. Max out your retirement funds first, and take a 401K loan if you need to for the down payment. Your contribution base is "locked in" and the interest you are paying goes to you, not the bank.

It's really not some exotic "out there" idea. It really makes good sense as far as I can tell.

mell   Fri, 25 Jan 2013, 1:37pm PST   Share   Quote   Permalink   Like   Dislike     Comment 22

swebb says

mell says

and never participate when there is no matching (useless)

I don't have a matching 401K, but I don't think that makes it useless. It still gives you the tax deferred treatment, which is important. Unless you have headroom left in your IRA contribution, I'd say the 401K is a great idea.

It depends on how you project taxes going forward and how much the instant availability is worth for you. Or if you need help managing retirement money by putting it out of instant reach ;) If there is no matching and I don't participate then I can use the money right away and invest it more diversely. I also think taxes have nowhere but to go up.

B.A.C.A.H.   Fri, 25 Jan 2013, 4:09pm PST   Share   Quote   Permalink   Like   Dislike     Comment 23

swebb says

I'm more aggressive with my retirement contributions, "neglecting" my emergency fund because I know I can take a 401K loan if I had an emergency. By contributing more to my 401K than I otherwise would, I end up in a better position down the road (assuming no emergency) because I was able to contribute more to the 401K.

Me too.
When your employment is severed, it becomes an IRA, which as you said, an emergency fund. Under your own personal control and discretion.
I really don't see the benefit of turning it over to the 401K at the new job.

B.A.C.A.H.   Fri, 25 Jan 2013, 4:14pm PST   Share   Quote   Permalink   Like (2)   Dislike     Comment 24

swebb says

Same thing with saving for a house. Max out your retirement funds first, and take a 401K loan if you need to for the down payment.

It's "innovations" like this that've kept the housing game going on for a lot longer than we all could afford. (10% down, adjustables, PMI, full time working moms, etc., one innovation at a time)

taxee   Fri, 25 Jan 2013, 8:26pm PST   Share   Quote   Permalink   Like (2)   Dislike     Comment 25

B.A.C.A.H. says

It's "innovations" like this that've kept the housing game going on for a lot longer than we all could afford. (10% down, adjustables, PMI, full time working moms, etc., one innovation at a time)

The hamster is hardwired to run. The bankster invents novel new wheels.

SoftShell   Fri, 25 Jan 2013, 10:03pm PST   Share   Quote   Permalink   Like   Dislike     Comment 26

Unless your new employer is offering a "Paychex" 401K, whereby you can move your 401K cash into a "paychex 401K self directed brokerage account", where you can trade mutual funds and stocks.....don't know if any other 401K plans offer this option, mine does...

Patrick says

No way.

No fucking way.

SoftShell   Fri, 25 Jan 2013, 10:04pm PST   Share   Quote   Permalink   Like   Dislike     Comment 27

http://www.401khelpcenter.com/cw/cw_self_directed.html

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