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Financial Planning / Tax Strategies
|Subject: Re: 401 k direct rollover vs. transfer to IRA||Date: 10/14/2002 4:05 PM|
|Author: Crosenfield||Number: 61712 of 120797|
"I pretty much want to leave the funds (which are in a family of mutual funds) alone, but be able to move them around within the fund family later."
The only thing you can put into an IRA is cash.
When you do the transfer, the trustee of your 401k will sell the assets in the account, converting to cash. If you like the family of mutual funds you have been with, you might consider that fund family as the custodian for your new IRA. To avoid unnecessary inconvenience, you do a "direct" transfer which means the 401k custodian will make the check out to your new custodian, not to you. You begin by selecting the new custodian, which could be a broker or a mutual fund family. You tell them you have changed jobs and wish to move your 401k to them. They may assign a number for your as yet unfunded account. You tell the trustee of the 401k that you have decided to move your assets into an IRA, with XXXX as the new custodian.
Probably they send the check, payable to the mutual fund family, to you. That's fine--handled thusly you know the check was issued, the amount, and when it was issued. It is likely to be several months after you select the custodian. I left a job in November, made decisions immediately and it was April 1 when I got the check, payable to my new custodian. I thought the date appropriate.
Then you send the check to the new custodian.
This must initially go to a traditional IRA.
If you wish to preserve the right to subsequently transfer the funds to a new employer's 401k, you leave it there, and you don't add any funds other than rollover funds to it.
Once the money is in your new IRA, assuming the custodian handles the mutual funds of your choice, you can invest within the fund family as you wish, and move them around as you wish. With a supermarket like Schwab, you could select funds from many families and buy and sell individual stocks or bonds if you wish.
If you convert to a Roth, you pay taxes only on the amount converted, not on any subsequent capital gain. After 3 years of bad markets now may be a good time to do that.
I wanted to clarify the mechanics of the procedure, and to make it clear that you almost certainly will NOT be able to transfer your mutual funds intact--they will be sold (no tax consequences within the 401k) and you will reinvest the cash.
Best wishes, Chris Rosenfield
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