You are not my financial adviser and I am not your client. All statements will be considered opinions.
Two years ago I switched jobs. My previous job I had a profit sharing account and a 401k. Both were invested with a major financial institution. The one with the neat tower in San Francisco. They were competent so I left the accounts there when I moved. My former employer was bought out soon after I left. I recently was notified I cannot stay in the plans I am in. I have about 3 weeks to move to a different group. I can leave the money with that firm but be in a different arrangement. I have to check but I think I can roll it into my current employer retirement structure with a different investor. Or I can go with any other investment company. Those two accounts combine to around $1/3 million. About 1/3 of this money are in what are considered secure such as T-bills and bonds. The rest is in riskier growth funds. My current employers 401k fund is in one of the “pick a retirement year and we’ll take care of you” retirement funds.
I am mid 50’s looking at about 10-12 years of work yet to maintain insurance for my much younger “stay-at-home mom” wife and a child’s college plans. I have a few years before I can access the money without penalty. I understand I can transfer it between firms without penalty now if I do it properly.
This is a golden opportunity to evaluate my options. Nothing like a back against the wall time frame.
One thought I had was to abandon everything, take the money and blow it all, expecting Armageddon or a jealous husband/boyfriend to take care of my future. That has been discounted but not entirely eliminated. Other ideas?
Assuming that these are all pre-tax investments and not Roth arrangements, remember that if you take the money and blow it, you will owe both your regular income tax and a 10% penalty on the amount.
One option you might want to evaluate would be to roll both accounts to an IRA at discount broker such as Vanguard, Fidelity or Charles Schwab. The best way to do this would be to contact the discount broker and let them walk you through the process of opening the rollover accounts and transferring the funds. It is better not to have the money come to you before going to the broker, since once it comes to you, you have a limited time to deposit it in a retirement account or you will face early withdrawal penalties. Once the money is in the rollover IRA, you will have multiple options for how to invest it, including T-Bills, growth funds, and target date funds.
Whether a discount broker would be a better option than rolling into your current employer’s retirement would depend on the options offered by your current employer, including the expense ratios on investments and any fees charged.
Congratulations on having a substantial amount of retirement savings.
Another vote for a Rollover IRA. I have had multiple employers over the years and as I leave each one I move each 401k balance into my Rollover IRA. The rules governing IRAs and 401k are slightly different, in terms of loans to self and taking money out, but for the layman they are essentially identical. The advantage of a Rollover IRA at one of the commercial houses (Schwab, Fidelity, etc.) is that your investment choices are essentially anything under the sun. Whereas if you roll into your current employer 401k you may be limited to the 20 or so funds that they let you choose from. In addition, employer 401k’s charge little fees that you don’t really see.
You’re mid-50s so you need to be more conservative with investments. If you’re in the market, do indexing. I agree with others that you should look into a regular IRA, as it’s pre-tax like a 401K (Roth is post-tax IRA, which is the ideal).
Also, don’t pay for your kid’s college - help with living expenses.
My current employer has my 401k account set up with Vanguard. Do I stay with the same financial group or would I be better off spreading the risk with a different firm? Every time I log in to find out my rollover options it automatically assumes I want to change my current account with them. I haven’t called to check anything further with a real person yet.
Vanguard funds are great, but I hear bad things about their technical platform. I would recommend Merrill Edge, plus open a Bank of America checking account (you don’t have to use it, just have it to be a preferred rewards client). At over $100,000 in Merrill Edge that makes you a Platinum Honors client, which means 100 free trades per month. Basically, you can buy whatever you want for free once your status gets updated. I recommend buying Vanguard ETFs. Plus, they will give you up to $600 to transfer your 401K into a rollover IRA as well.
Edit to add, if you go that way, get a Bank of America Premium Rewards Credit card too - as a Platinum Honors client they give 2.6% back on all purchases with that card, highest % available from any card outside of special categories.
I don’t think Vanguard or any other major firm is very risky.
I also vote for rolling it over into an IRA - also because you have more investment options that way.
Over the past 30 years, I have invested with Wells Fargo, BofA, A.G. Edwards, Fidelity and Vanguard. All were stable, even with some mergers. The difference wa in the fees they charged me - and Vanguard wins hands down.
The others all had shareholders to keep happy (by getting fees to pay out as dividends), with Vanguard the company is owned by the people who invest in their funds - the “shareholders” in this explanation from Investopedia.
If you are going to be buying And selling every day, the the plafform may matter but for long term retirement accounts the wise move is to pick a good mix of index or target date funds and check back yearly.
(FWIW, your allocation of 1/3 bonds 2/3 stocks is pretty good at your age. I stayed at 90% stocks until I retired and ten years later am still at 60/40. My account has more than doubled since retiring at 60.)
Vanguard wins because of the fees, and fees can take away a lot of your money over time, especially if you are reinvesting your dividends and trying to take advantage of the compounding factor.
I don’t recommend stock trading unless that person really knows his shit. And by that I mean, investors really ought to read – and know how to read – a company’s financial statements. They really ought to have a basic understanding of not only the company but the field/industry in which it competes, its profits and losses, its long-term performance, the P/E ratio, and a variety of other factors.
If investors don’t do this, then they’re gambling. They might win sometimes - and sometimes win big - but they’ll lose just as often, if not more so. In fact, Charles Schwab said that indexing is probably the way to go for 98% of investors.
There’s also Warren Buffett’s $1 million bet - that he won. His bet? That an index fund would outperform hedge funds over a 10 year period. Keep in mind, this was before the Great Recession when he made this bet.
A ‘backdoor Roth’ is a way to contribute to a Roth IRA even if you make too much money to do so. It requires that you have a zero dollar IRA at the end of the year.
Whether or not to use Intl Index funds is often debated. I suggest you read about the simplest index fund portfolio - the Three-Fund Portfolio. (I follow this investing approach and sleep well.)
Not needed with target date funds which almost always include international stocks.
I rolled over a 401k into an IRA with TD Ameritrade and they walked me through the process.
Vanguard is great but most funds will have similar ones with other companies so you may find one suits your investment mind better than the others. As an example I have 5 funds in my retirement: 2 Vanguard, 1 Schwab, 1 Fidelity and 1 iShares
Any of the brokerage houses will have the option of a rollover IRA, and they’ll have similar options to the ones you currently have. They can even invest your money in other funds (e.g. if you place it with Fidelity, they can buy a Vanguard fund).
They all have “retirement year” funds as well, similar to what the OP describes.
One thing to think of: you can roll over 401(k) money from a prior employer into a current employer’s 401(k) plan, if their plan allows it. You can only do this if you have NOT commingled it with money from other sources - in other words, don’t add it to an existing IRA.
You definitely don’t want your hands on the money. Not only do you have to worry about redepositing it in another vehicle, they might withhold taxes and/or penalties from it. Which you would then have to make up before redepositing it, or the difference would be taxable. As an example: a friend got a distribution for, say, 10,000. They took out 2,500 in taxes so she only had a check for 7,500. She deposited the 7,500 - and had to pay the 2,500 out of her own pocket to make the account whole. Had she not done so, that 2,500 would have been counted as income, and she might have been socked by a 10% penalty as well.
One argument for rolling it into a current 401(k): they are sheltered from lawsuits and bankruptcy, while IRAs are not necessarily sheltered. I don’t know if a rollover IRA would be treated differently in court.
I have zero dollars in a trad IRA. I can put in $5500 after tax and convert it to a Roth without additional taxes. Next year, I roll $2M from a 401k into a trad IRA. Now, any year I want to pull a $5500 backdoor, I have to pay additional taxes on $5485 of the rollover. Perhaps you don’t think that’s a problem, but I do.
You’re restricting the term “backdoor Roth” only to a yearly $5500 (or $6500 for those eligible) contribution to a traditional IRA that’s being converted to a Roth IRA. You’re ignoring converting an already existing traditional IRA (or 401k) to a Roth IRA, which is ALSO called a backdoor conversion. In any event, you’ve disregarded the OP’s problem - that he HAS to move his 401(k) somewhere right now. The only real option for that is an IRA (unless he’d like to pay taxes on the entire amount right now, which is really unlikely). Perhaps you don’t think that suddenly increasing your annual income by several hundred thousand dollars (and facing taxes on that amount) is a problem, but I do.