Unless I missed something, this comment is a little outside the scope of the OP’s inquiry, because I don’t think think the OP mentioned having pre-tax funds in the account. I also don’t know what a “backdoor Roth IRA maneuver” is. If it refers to converting an IRA to Roth IRA, I disagree with this assertion. Converting an IRA with pre-tax contributions to a Roth IRA is exactly the same process as converting an IRA with no pre-tax contributions. But converting from an IRA to a Roth IRA is a taxable event. The pre-tax contributions in your account will reduce the amount of income tax owed on the conversion. Thus, it might make more sense to convert an IRA with pre-tax contributions to a Roth IRA.
Just one bit of redirection to Tired and Crankys post: some investments in 401k accounts can be brought over in-kind. This means the mutual fund shares can be transferred directly. But it’s not all of them and might not matter to you directly.
I will only answer this because it is similar to my own personal situation. I had a 401k at Vanguard from a previous company. I moved it into a Rollover IRA at Vanguard. It was an incredibly simple process.
duplicate post
Others have already said this, but let me reiterate: This is terrible advice.
Insurance investments generally (perhaps universally) have very high fees to obtain their dubious investment features. Then they add in a layer of implicit insurance costs for insurance benefits that you may or may not need and which are hard to understand. These implicit insurance costs are also generally much higher than than they would be if you obtained the same coverage from an affordable insurer. The most highly-touted benefit of insurance products such as variable universal life or variable annuities that would form the core of a “7702 plan” is that the investment is (generally) tax-deferred. But an IRA or a 401(k) account is already a tax-deferred investment and there is no additional tax benefit to including an insurance product in a tax deferred account.
Don’t believe me? How about the Financial Industry Regulatory Authority. They say: "Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson.
Also, if the annuity is within a traditional (rather than a Roth) IRA, the government requires that you start withdrawing income no later than the April 1 that follows your 70½ birthday, regardless of any surrender charges the annuity might impose."
Unfortunately, FINRA only regulates insurance brokers if they also securities. If Snnipe’s son isn’t also registered with FINRA, he won’t be subject to FINRA’s oversight. He would be subject to the oversight of state insurance authorities, who don’t generally look that closely at insurance agents’ sales practices.
I agree with doing a direct rollover, but it’s not quite true that nothing is reported to the IRS. When you do your rollover, you will receive a Form 1099-R from your 401(k) administrator during tax season and the direct rollover is also reported to the IRS.
The 1099-R will note that it is from a direct rollover and there won’t be any tax consequences. You will have to include the 1099-R “income” on your tax return. It makes the return look funny but doesn’t cost you any money.
Just to clarify-you can liquidate your holdings before or after you transfer the money. The reason I suggested afterward was the following:
-You are going to choose where the IRA will be and therefore what types of money market funds and investments will be available to you to invest in (as noted, bank or credit union IRAs have more limited options).
-You may decide that you want to keep some or all of your money in your current investments.
-When you roll over, depending on where you transfer to, some or all of your investments may be changed to cash and some or all may simply be transferred over in kind (which means you keep whatever you are invested in).
-Once the money is in the IRA, you will be able to take your time and decide what to do with your money.
-Pretty much all IRAs have a default money market where they keep any of the money that is in cash, so you don’t have to worry about “opening” a money market account.
-Staying with Fidelity may be the easiest option but it’s a really really simply and quick thing to transfer anywhere.
As noted above, I have multiple IRAs and I can give you my rationale for each:
#1) Rollover IRA with a brokerage firm-they were handling my other investments so it made sense at the time.
-Benefits: I get free investment advice, can still invest in low-cost options
-Cons: Broker wants to sell me stuff and there is a $50 yearly maintenance fee that I have to talk them into waiving every year.
#2) Rollover IRA with Vanguard-money was already in Vanguard funds so it was simple to do
-Benefit: No maintainance fee and minimal to no transaction fees on Vanguard fund
-Cons: No significant professional investing advice and some limitation to what I can invest in
#3) IRA with Schwab-this is my regular IRA that I deal with
-Benefit: Much wider variety of investments available; low price for transactions and I have found the customer service staff extremely helpful
-Cons: No significant professional investing advice
Again, once you decide where you want your IRA, they will arrange everything for you and once everything is transferred over you will be able to decide if you want everything in cash or to keep some investments or even to buy something new.
Thanks Mr. Chance. I had understood that under IRS regulations, direct rollovers could only be done in cash (and never in-kind) but I don’t have a cite. People on the internet say it’s possible and that they’ve done it. I stand corrected unless I dig up the IRS cite.
I can imagine it would be good to rollover in-kind if you wanted your funds to be continuously invested in the market. This doesn’t apply to the OP who seems to be looking for the best way out of the stock market. It might also be good if you have an investment in your 401(k) that would not be available to you in the IRA, such as a fund that is closed to new investors or a fund that is only available to institutional investors like a 401(k) plan. I don’t know if this applies to the OP.
I’ve done this twice and it is far easier than opening a bank account. And after the transfer you indeed have no dealings with the old managers.
The people you transfer your account to are delighted to handle the details.
Another reason to bring it over in kind is if there are very high transactions fees for that particular investment. The 401k may have liquidation fees and so forth.
Snnipe, I’m sorry for the criticism your son has received in the thread. If your son only sells insurance and would like to talk to me about career options I’d be glad to do so. My firm - a large one - is hiring. Send me a private message if he’s interested.
This is a very good point.
I found one statement on the IRS about rollovers saying:
"How do I complete a rollover?
"Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount." (emphasis added).
It doesn’t say that a check is the only means of making a payment, but I can’t find anything that seems to contemplate an in-kind rollover or anything other than cash. Mr. Chance – does your firm do in-kind rollovers of 401(k) plans?
My related experience. I have a 403b account with Fidelity from a previous employer. I was only there a short time, so there’s only something like $3500 in the account.
I also have a 403b account associated with my current employer.
I spoke to a Fidelity rep and asked about rolling over. He said, yes, the account was eligible to be rolled over, and the process was, download and fill out a form, send to the benefits office at my previous employer, they send a check (!) in the amount to me (!), which I then send on (!) to my new employer’s benefits office, who will send it to the new fund manager.
The kicker? Both accounts are with Fidelity. I can literally see them both from a single netbenefits login.
IMHO, this seems to be deliberate obfuscation on the part of Fidelity, so they can continue to skim fees from both accounts. I am seriously displeased.
Transferring from one 403b to another directly may not be possible. In any case, I found a good basic video on IRA rollovers at the Fidelity site here.
It is possible. http://www.irs.gov/pub/irs-tege/rollover_chart.pdf
You have to distinguish between direct and indirect rollovers. Transfers are a form of direct rollover.
Transfer: the money goes directly from one plan to the next-you never see a check and no reporting to the IRS.
(This may not be possible with all plans especially when rolling from one 401K or 403b to another.
Direct Rollover: you receive a check made out to the company where you have your new plan or IRA. The total amount is included and you send the check to the new company. You receive a 1099 R and the rollover is reported to the IRS but you don’t pay taxes.
Indirect Rollover: you receive a check made out to you minus 20% taken out for taxes. If you put in your own money to make up the difference and put the entire amount in your new account within 60 days, you will get that 20% back at tax time.
Obviously, doing a direct rollover or transfer is preferred, but not all companies allow transfers.
In araminty’s case, it appears that transferring from one 403b to another may not be possible, although a rollover still is possible,which is what (s)he describes.
Psychobunny got there first. Two things, though
First, the word rollover is being phased out per IRS rules. A rollover will be when money is pulled out by the account holder directly. A firm to firm process will be a direct transfer. Note that my firm still refers to the process as FTFR - firm to firm rollover. It’s a transition in progress.
Tired? My firm does indeed accept in kind transfers where the sending firm allows it. But it takes two to do that dance.
OK, I have a dumb question…
Why not just leave the 401(k) where it is? What advantage is there to rolling it over to an IRA?
I ask because I have a 401(k) from a former employer I left over 7 years ago. It’s also managed by Fidelity. I get quarterly statements from Fidelity, and I get an annual letter from my old company reminding me of the old 401(k). I can’t add money to it, but I can move money around from one fund to another (I think…I haven’t actually done this).
I thought about rolling over the 401(k) to an IRA back when I left my old employer, but could not find any real compelling reason to actually do this. Am I missing something?
In my experience, the 401(k) plan had a choice of only about twenty or so funds, versus the thousands available through a brokerage account at Fidelity or Vanguard. And some 401(k) plans have large fees, partly because the employers aren’t as careful as they should be about minimizing those fees.
My experience:
At the time I left my previous employer, the administrator/manager of the employer’s 401k offerred Vanguard funds, which I was fine with. Only 6-7 Vanguard funds were available, but that was adequate for me. So I left the 401k as it was.
Then the 401k admin/managers changed to a different fund company, which of course generated a ton of paperwork and more decisions by me re what funds I should choose.
Then a few yrs later, that previous employer was purchased by a larger company, which changed the 401k admin/manager, who then moved the 401k’s to yet a different fund company–Fidelity. Which of course generated another ton of paperwork and more what-funds-should-I-choose decisions.
Had I chosen to rollover that 401k into an IRA, I would simply have chosen Vanguard for the IRA and left things alone.
The point is: When you roll 401k into IRA, you eliminate that layer of 401k management over which you have no control and that can cause gawdawful paperwork headaches and fund decisions you don’t want to deal with. You are now in control.
In addition, there are too many chances for extra/hidden or non-transparent fees involved in all this.
—To other posters: I greatly appreciate your info; things are clearer now; will reply later–