Rollover old 401k or not?

This is a good question, Art, and I'd like to know the answer too since I still have a 403B plan that I have not rolled over into my IRA (I retired 2 yrs ago). Let's hope someone answers. I think you can keep the 401K indefinitely as long as the company doesn't make you move it. SandyBeth

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POTENTIAL advantages:

1. Hassle of dealing with former employer and it's administrators.
2. IRS's ability to "freeze" 401k due to company malfeasance.
3. Better ability to personally manage fees and expenses in IRA.
4. Multiple IRAs allow for personally crafted stretch provisions upon death.
5. IRAs have wider selection of investment choices.
6. Consolidation of statements and paperwork if combining multiple

1. 401k plans often need to be amended (at the employers discretion) to accomodate new tax laws. IRAs don't.

POTENTIAL disadvantages:

1. 401k may allow distributions at 55 without penalty.
2. Institutional investments that may not be available to IRA investors.

That's a good start, I think.

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Only for those who separate from service during or after the year in which they attain age 55. This probably does not apply to the original poster because he left the company 13 years ago and still has a few years until he retires.

Dave

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This is what got me thinking about a rollover. I'm not sure what the payout period of the 401k would be if I were to die. It might even be a lump sum payment requiring large tax payments.

I saw Ed Slott on TV talking about stretch IRAs, etc. It was the first time I'd heard that term, and I guess I need to investigate it further.

Would the purpose of "multiple IRAs" be to have a different beneficiary (e.g., children and spouse) for each?

Thanks, Art

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Good point Dave. I overlooked the "few years until retirement part".

Still a good mental note for others it may apply to though.

Thanks again.

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Antiquated 401k plans that have not been amended can require that, upon death, all proceeds in your 401k plan be distributed in the year after your passing. In this instance, the funds can no longer grow tax deferred. Furthermore, you cannot manipulate the marginal tax ceilings to minimize your tax burden. The result is almost assuredly a higher marginal tax.

Even in updated 401k plans, your non-spouse heirs are required to distribute the funds based on the their life expectancy (this changes somewhat if you were already in RMD territory). If you have multiple primary beneficiaries (such as two children), the life expectancy used to calculate distributions is the one that results in the shortest distribution period. Again, some of your funds will lose their precious tax-deferred status earlier than necessary.

Given the later scenario, one alternative would be to establish TWO stretch IRAs (one for each of your hypothetical children). Upon your demise, each child would stretch their inherited IRAs over their unique life expectancies. The end result is that the younger beneficiary has the option to keep the funds tax-deffered in the account for a longer time period. In addition, they increase the odds that they will be able to withdraw only so much as prevents them from entering the next tax bracket.

Congress seems to be slowly eliminating the above mentioned benefit by expanding the capabilities of 401k plans. However, as they add these capabilities they have historically only made them OPTIONS, not REQUIREMENTS. As a result, many behind-the-times employers still have outdated restrictions on their plans many years after the law allows those restrictions be lessened.

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In 2010, it the new president does close this loophole, you can convert it to a Roth. A Roth doesnt have mandatory withdrawasl which might increase the size of your medicare premiums.

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Don't underestimate this. The OP indicated that the 401k *plan* is with a major financial institution. That doesn't make much difference if the former employer is not - you still have to track down the employer to do many things. I had a big hassle tracking down someone able to deal with a 401k from a former employer which had gone out of business. The 401k provider, of course, was just fine.

Also, don't forget 8. *clarity* - many 401ks have fees which are not clear or visible. The funds may be great and have low expenses at the fund management level, but the plan itself may still be whacking at you with fees which aren't obvious.

That said, some plans are fabulous. My current one has is as straightforward and low-cost as could be.

If one is on disability or has fully separated from service to that former employer (which, IIRC, the OP has).

However, there are very few for which an equally good equivalent is not available in an IRA.

also, 3. If you have employer stock in that 401k with a big gain embedded in it, there may be good reason to make the company stock a taxable distribution, since it may be treated differently tax-wise. Talk to an accountant. Google for "Net Unrealized Appreciation"

Bread, thanks for the additional insights. Very informative, as usual.

NUA is definitely something to take into consideration. To be honest, I forgot about it when throwing my list together. While it's definitely pertinent info, I'm not sure it classifies as an advantage or disadvantage of rolling-over (which you may not have meant it to be). To employ the NUA rules, one must leave the 401k but not enter and IRA. It's more like a third option, don't you think.

Note to OP: If NUA applies, you can still roll the non-NUA assets to an IRA (or not).

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