I will be leaving my company two weeks from now, but I will (probably) still work for them as a contractor. I guess that I will have to roll over my 401K into an IRA - perhaps with the same financial organization (Fidelity), but perhaps it might be best to choose another institution. Vanguard turns up after searching other threads on the subject of 401Ks and seems to be highly regarded.
I will call Fidelity in the next day or two, but until I do, I can’t seem to get a clear idea of what I can contribute - tax deferred - after I leave and roll the 401K over. Fidelity’s website doesn’t seem to address this scenario.
Can anybody tell me how much I can contribute, and is anybody in a similar situation and can give me any pointers or caveats?
Also, any advice on being an independent contractor would be welcome - especially in regard to taxes, insurance, etc.
IANA tax lawyer, financial adviser, etc. Tax laws on retirement accounts are complex, so do your own research. That said…
When leaving a company, there are generally three options regarding the 401(k) plan.
Leave the 401(k) account where it is. Contact the plan administrator to determine if this is possible; often there is a minimum amount (typically $5000) that you have to have in the account, for them to let you keep it with them.
Roll the 401(k) into the next one. Contact the new company’s administrator for details. (This doesn’t help you any, it seems.)
Roll the 401(k) into a rollover IRA at a financial institution of your choice. Contact the receiving company for details.
On options 2 and 3, it is VERY important to have the money paid into the name of the new account’s custodian; if the money is paid to the person, a large amount (20%, IIRC) is withheld and taxable. Example: When leaving CecilCorp, roll the 401(k) into an IRA at ZottiTrade Securities, and have the check payable to ZottiTrade for the benefit of Fritz at such-and-such account number.
I think the latest tax laws add option 4: Roll the 401(k) directly into a Roth IRA, and take the income tax hit.
You may be right about that (presumably even if you couldn’t do it directly, you could roll it into an IRA then convert that to a Roth). Be careful if you do that though - IIRC, if you don’t have the ready cash to cover that tax liability, you’d have to actually withdraw some of the money to cover the tax liability. Might there be penalties if you do so?
If you opt for converting your 401(k) to an IRA, I’ve heard you should not commingle newer IRA contributions (ones you make on your own once you go independent) in that same account. The reasoning being: You can sometimes move that 401(k) money into a new employer’s 401(k) but if you’ve added IRA contributions on your own, you can no longer do so. No cite, I read that years ago, sorry!
I opted to leave my 401(k) money where it was, when my division was sold to another company 4 years ago. So now I have 2 accounts, one through the old employer and one through the new one. There hasn’t been any overwhelming reason to consolidate them.
I think you’re right under past tax law, Mama Zappa – the old rule was that the 401(k) had to be rolled over into a traditional/dedicated IRA, which then would be converted into a Roth IRA; the new rule is that the 401(k) can be converted directly into a Roth IRA. I suspect next year’s rule will allow converting the 401(k) into a Roth 401(k).
Conversions into a Roth IRA / Roth 401(k) will generate taxable income. If there’s a lot of money in the account, this requires extensive planning to make sure there’s enough money outside the account to pay the tax bill. At that point, consult a professional tax advisor, not an Internet message board. (;))
(This is casual advice. I’m not a financial advisor. There’s also a good chance I’m wrong about details (although I’ve done this a few times).)
In general, don’t try to make additional contributions to a 401K after rollover. If you move to another company someday with a 401K plan (or your contracting business starts one), you can often re-rollover that money into the new plan, and start contributing again that way.
Otherwise roll it over, invest as desired, leave it alone, and start a separate IRA (Roth or not, as you like) under the usual rules for individual contributions. This will limit how much you can contribute (a few thousand dollars) per year–so if you have the option to create or join another employer plan, you’ll probably want to look into it. Otherwise, you can supplement with after-tax investments.