Limited 401K options ... IRA?

Anyone with earned income can open an IRA. If your income is above a certain level *and* you have a 401k, you won't be able to deduct IRA contributions from your income for tax purposes (and you track the IRA's cost basis annually via an IRA form - the quite trivial Form 8606).

If your income is below a different (larger) threshold, you may contribute after-tax dollars to a Roth IRA instead of a traditional one.

When you leave your job, you can roll your 401k into a regular traditional IRA. And in most cases, that's what I'd recommend doing. Not all, but most.

You can open it, but your deduction is phased out for an AGI of $83k- $103k (married filing jointly) and $52k-$62k for single.

Are you married? That would open up the possibility of a spousal IRA contribution if your spouse is not covered by an employer plan. Of course I'm not advocating you get married for this reason alone :-)

It may not be relevant to the OP, but "[c]ontributions cannot be made to your traditional IRA for the year in which you reach 70 1/2 or for any later year."

So some wage earners may not be able to contribute to any IRA.

Mark Freeland snipped-for-privacy@sbcglobal.net

[but not necessarily deduct it]

Quite right, thanks. And, in fact, the >70-1/2 age group is increasingly still working, too. The following breaks it down into 65-74 and 75+, but between those two groups, the numbers are rising quite a bit:

But, yeah, it very likely doesn't apply to the OP...

Thanks for the info guys. I'm only 28 right now so I'm not worried about the 70.5 limit. I also do not want to contribute to an IRA in ADDITION to a 401K. Rather, I'm wondering about transferring existing funds from my 401K into an IRA. I need to keep contributing through my 401K right now because my employer is matching a certain level of contribution (also, the limit is higher), but I am not at all happy with the options for my 401K, so I was wondering if it was possible to make the contributions through the 401K but then rolling/transferring those contributions to the IRA which has more options. Can I still do this while I am employed and the 401K is still active or do I have to wait until I leave the company?

Also, what happens when I start a new job which has a 401K. Will I have to transfer all of the funds from my IRA back into whatever 401K plan my employer has? I was actually planning to take a few years off and go back to school, so I was planning to roll into an IRA and then into a ROTH IRA, pay the taxes while I was unemployed and in a very low bracket, so what would happen then will I have to transfer the Roth IRA into a 401K and lose the post-tax nature of the Roth funds?

Incidentally, this is the first 401K plan that I've had and there are about 6 or 8 mutual fund options and one S&P 500 index fund to choose from--no international funds, bond funds, precious metal commodities, or REITs. I was damned disappointed in the selection. How am I supposed to hedge properly if I can only invest in the US stock market? Do 401Ks tend have so few options or did my employer just pick a bad one?

It varies. You should look carefully at the expense ratios for each one. Likely the S&P fund will have a very low expense. You may very well be under-diversified right now, and might consider reducing the contributions a bit, at least to get whatever the company match is, and open an IRA to help balance the portfolio. When you go to school, you'd roll the 401(k) into this IRA account, and rebalance the whole thing. When you convert to Roth, no funds need to be sold, the conversion just sends the amount you choose from one account number to the other, IRA to Roth IRA.

You sound like you're off to a great start. JOE

Generally you cannot do that until you leave the company.

If you don't have enough excess cash to maximize both the 401k

*and* an IRA - and you have the patience to deal with multiple accounts - and the discipline to make sure both get funded - there's no reason then to fund the 401k beyond the employer's match. Fund it up to the match and put the rest into the IRA (or, perhaps better, a Roth IRA if you make below the cutoff for that).

Generally only when you leave the company. There are some small exceptions (ie. company gets acquired and terminates the old 401k plan, etc) and there may be some alternatives (some 401k plans have "windows" which allow funds to be routed through the 401k to a self-directed outside account, but the ones of those I've seen really weren't worth it - the outside choices weren't any better).

Nope. It goes into your IRA and may stay there. You *may* roll it back into your new employer's 401k, but there's not usually any reason to do so. (again, there are some exceptions, but in general, no reason to).

If you've converted from the IRA to a Roth IRA, it cannot be rolled back into a new employer's 401k, nor would you ever want to - the taxes are already paid, there's no longer any required distributions, etc. etc.

Can you list the specific funds? (And I wouldn't worry much about the precious metals or reits - they are nice, but not essential and if you want them, you can easily enough to them outside the 401k - they should be a pretty small slice anyway, if used at all)

For all the talk lately about how every one ought to be loading up their portfolios with "international" I'm not sure I buy some of the current analysis. (a) US Large Caps have *huge* international exposure; (b) much of the reason for the push is to increase diversification to uncorrelated assets - the correlation between international and US stocks *and* economies appears much stronger now than it used to be. I certainly think one ought to have international funds - but don't let the lack of such funds keep you from maximizing the 401k - the tax-deferred, auto-pilot nature of that investment vehicle overcomes a lot of sins.

That all said, yes, some 401ks have *miserable* choices - mediocre, way way overpriced actively-managed funds, index funds with expense ratios as much as 5 to 10 times what one can get outside, etc. Still - even the most miserable choices are more often than not more than compensated for by having a match. If they have a fund which charges you 2% more than it should - but they give you a 50% match up front - it'll be a long time before that 2% drag overcomes that 50% match.

Even if the choices are miserable, if you don't expect to be there for too long, it's probably still worth maximizing the

401k because it's still the biggest fully tax-deferred option available to most folks. Max it out and look forward to rolling it into an outside IRA when you get the chance.

You may be able to roll over a portion of the 401K depending on the plan, your age, and how long the money has been in the plan. Thumper

I knew a sharp eye would catch this. If you are 59-1/2 or older you may withdraw all or any portion of your balance attributable to your contributions (i.e. not the match or its earnings). At 70-1/2 even the match may be withdrawn. The OP's reference to changing jobs struck me as a hint he was not quite that age, Of course any one may make reference to a job change. My bad.

JOE

I thought that a plan could provide for in-service distributions at whatever it defined as the "normal retirement age", which could be as low as 55. (I've certainly seen 401(k) plans that allow one to designate the NRA as

55.) (discussing regs before they became final)

Mark Freeland snipped-for-privacy@sbcglobal.net

I was watching Suze Orman last night. A caller had taken early distribution from her 401(k) to buy a condo, which then fell through. Suze told her that if she could come with the money to cover the tax levy, she could put back the money OR roll it into an IRA.

I've been searching the web for data on this, but not too successfully. Most examples are of people who took an early distribution due to job change or termination, not an elective one.

Brian

Normally, when folks intend to do a 401k rollover, it's best if they do a trustee-to-trustee transfer. The check is made out to the new trustee and not to the individual.

If a check is made out to the individual, taxes will be withheld, but if the individual deposits that money into the new IRA within

60 days - and comes up with the 20% tax money which was withheld, too, it's still considered a rollover (and that tax which was withheld will be returned later on when he files his taxes).

Look on the 'net for "IRA 60 day rule"

Can we leave this as "Not all companies are in the same situation defining 'normal retirement age' and the IRS regs allow some flexibility. Your HR/Benefit Dept should be able to provide the exact rules they follow." JOE

Right, I think it's like 20% or so.

This site had some information:

I'm still filtering through trying to figure it out. There's parts in there about "eligible rollover distributions" and such. It's not clear to me that one can just take money out of your 401(k) and do an IRA rollover while still working there.

Brian

I am not 100% on this, but this is my take; One cannot take $10,000 from a 401(k) like an IRA for home purchase.

401(k) withdrawals while in service and not at retirement age, are possible under 'hardship' withdrawal, and can be used for home purchase, but this is different than the $10K IRA rule. This money is subject to tax, and 10% penalty. For my company (A Fortune 500 company) the rules on hardship withdrawal specifically state this money cannot be rolled into an IRA. If my company is following IRS regs (and if not, why would they make the non-rollover statement?) then either Suze is mistaken or she misunderstood the caller, or you misunderstood the dialog. I am open to the chance that my company is confused on the regs, IRA rules tend toward confusion in all but the most simple issues. JOE

I know that Bread knows this, but I will point out that a "trustee-to-trustee transfer" also includes having a physical check being cut and mailed to you, BUT MADE OUT TO THE IRA CUSTODIAN.

Depending on the competency of the old and new custodians, you may consider this less risky then trying to get the old custodian to properly remit the funds to the new custodian.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

In service 401K distributions/rollovers are a fairly new law change. That means every plan started from before this change will not offer this option. New or updated plans may offer it but it's up to the discretion of employer to decide whether they will offer the option or not.

Ah, that makes sense. It would fit with the example on the show, where the woman did take a distribution with the intent to buy a condo, so presumably "hardship". As that fell through, she could then return it if within the 60 days. I guess that she could indeed roll it over into an IRA, presuming she could cover the tax withholding.

Brian

wrote On the legality of rollovers from a 401(k) to a Traditional IRA while still working for the 401(k) provider:

Do you have a citation for this alleged new law? It seems to me such a law would fail a few common sense tests. Unless Congress was trying to throw a tiny bone to some faction, I am not seeing it. The most I found on it referred to rollovers after age 59.5 but while still employed with the company whose 401(k) is desired to be rolled over.

As for the Suze Orman anecdote, hardship withdrawals for purchase of a residence have a number of strings attached. The claim that, upon the home purchase falling through, the money from the 401(k) could be rolled over to a Traditional IRA seems suspect. I would think, since the taxes /and/ penalty are still required for such a hardship withdrawal, the recipient could simply put the money into the Traditional IRA, but I wonder whether that's actually a "rollover." Orman covers (and is very much opposed to)

401(k) early withdrawals. I suspect important details were left out here, or the situation was misheard. (Not to be a cheerleader for Orman; merely to try to keep the thread factual, at least as I know the "facts.")

The web seems to have a fair amount of chatter on "hardship withdrawals" lately, due to people having taken on ARMs that are destroying them. A good site that sheds more light seems to be