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My company is being split off their parent company. Along the way, they had been saying that our 401k's would just be transferred to new accounts staying with Putnam. However, when we received the official paperwork today, when it listed our options, it said we could roll over our 401k's to an IRA.

Now my question is, is there any reason I wouldn't want to do this? I would think getting an IRA with Scottrade for instance (where my Roth's are) would be much better than keeping it with my 401k. My 401k has around 10 funds, while obviously Scottrade would have a lot more options.

So, what am I missing?
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I agree completely.
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Roll it to an IRA. You get better control and unlimited choices. Probably lower fees too.
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In your case, rolling over to an IRA sounds like a good deal.

In some cases the costs of the 401K are subsidized by your employer. So 401K can be cheaper. But we know that Putnam is one of the Marsh & McClannahan funds, which Eliot Spitzer has gone after several times. Frankly he makes them look like crooks. You would expect their expenses to be high. The sooner you can get your money out of their hands, the better.

Some IRA custodians charge maintenance fees; Scottrade does not.

I would suggest that you investigate their fee structure carefully to be sure you know what you are getting into. But not to worry, the nice thing about IRAs is it is easy to move your funds somewhere else if you are dissatisfied with the service. That in itself is a good reason to move from a 401K to an IRA when you get a chance.

Good luck.
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>> So, what am I missing? <<

Nothing, unless you want to retire between the ages of 55 and 59 1/2.

With a rollover traditional IRA, you can't generally tap the account without penalty until age 59 1/2. With a 401(k), you can get to it as early as age 55 if you have retired.

In general the investment options in a self-directed IRA will be preferable to the limited fund options of a typical 401(k). But if retirement before age 59 1/2 is in the cards, you may want to consider a partial rollover, leaving just enough in the 401(k) to draw on without penalty between the ages of 55 (or your retirement age, if later) and 59 1/2. Then again, with other options (taxable investments, Roth IRAs, et cetera) if you have enough other investments and other income to get you through age 59 1/2, you may not need to consider this.

#29
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Wouldn't I still be able to SEPP payments from my IRA if needed to get around the penalty?
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>> Wouldn't I still be able to SEPP payments from my IRA if needed to get around the penalty? <<

Yes, provided that the SEPP distribution, together with other income sources (such as taxable investments, pensions, Roth IRAs et cetera), will be enough to meet your needs.

#29
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So, what am I missing?

There can be advantages and disadvantages. A couple of others:

If your "new" company requires a waiting period before you can open a "new" 401(k), then you can't participate for that period of time. If the employer has a "match" component then you will lose that for that period of time.

Depending on how old your 401(k) is, you may have "after tax" contributions as well as "before tax". (I think they ended that about 10 years ago.) If you move the 401(k) to an IRA, you lose the ability to shield that "after tax" contribution from further tax deferral; it comes out and becomes just like any other pot of money which is taxable. No, you cannot withdraw just "the other part", the first monies which come out are the ones which will be "unprotected." I have about 100K of such (in a 401(k) worth about 6x that) so there is a good bit of dough on which any earnings become taxable until such time as I might retire. The other side of that is that I could use that money without penalty, should I need to (which I wouldn't.)

Last, I would check on the "fixed income" component available in your 401(k); those after often paid with long bonds which are still paying very high rates of interest. One of my 401(k)s is still paying almost 6% in the fixed income category, which is equivalent to 9% elsewhere. You would be lucky to find a bond portfolio which you could accumulate in your new IRA which would pay anything close to that.

You may not care, of course, and want to be all in stocks, but if you want to have a portion in something less volatile, then you should think about it. (Those 'fixed income' rates are coming down - slowly - as their long-ago bought bonds mature and need to be replaced with what's available today, but they're still better than most of what you can find with that amount of safety.) I'm just sayin...
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Thanks for the information.

My company already started up the new 401k accounts and our payments are going into there from now on, so our old 401k accounts are either going to be rolled into the new 401k accounts, sit around, or get rolled into IRA's. So that's not an issue.

I never used the after tax contributions, so that's not a problem either.

Our fixed income component pays around 3.5%, not enough to be worth it for me to stay with them.

Once again, thanks for all the useful information.
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Now my question is, is there any reason I wouldn't want to do this? I would think getting an IRA with Scottrade for instance (where my Roth's are) would be much better than keeping it with my 401k. My 401k has around 10 funds, while obviously Scottrade would have a lot more options.

So, what am I missing?


IIRC, one reason to keep the money in a 401k is that it has more liability protection against creditors if you have a bankruptcy or malpractice.

IF
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Hi Ceberon,

Depending on your circumstances, this may be a minor point, or it may be significant enough to make you change your mind. Only you can tell for sure. If your 401(k) contains stock in your employer, there is a rule known as NUA - Net Unrealized Appreciation - that may benefit you if you keep your money in your original company's 401(k).

In essence, when you're legally retirement elegible (age 55 if separating from the company, and I think - but don't quote me on this one - 59.5 if previously separated), if you withdraw highly appreciated employer stock from your company sponsored 401(k) as an in-kind lump-sum distribution, you can save considerably on taxes.

In a nutshell, if you paid $50,000 for the employer stock in the plan, and when you distribute it properly, if the stock is worth $200,000 , you'd pay income tax on your original cost basis ($50,000). The other money would not be taxed until you went to sell the stock. At that time, the difference between the basis ($50,000 in this example) and an amount up to the value at the time of distribution ($200,000 in this example) would be taxed as a long term capital gain. The difference between the distribution date value and the sales date value would be taxed as either a long term or a short term capital transaction, depending on when the shares are sold, with respect to the distribution.

Contrast that with the distribution taxation rules from a traditional IRA, where all the value would be taxed as income upon distribution.

The NUA rule only holds for employer stock held in certain qualified retirement plans sponsored by that particular employer. If you transfer the stock into an IRA or another employer's plan, you lose the NUA benefit. Whether or not that matters to you depends a lot on your specific situation.


-Chuck
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"Now my question is, is there any reason I wouldn't want to do this? "

If you believe the folks at Putnam are going to have astronomical returns in the next couple of years, you'd stay with them, and happily pay their fees.
If you think you will be sued, the 401k is protected better than an IRA.
You CAN, although it is almost never a good idea, take a loan against your 401k, which you can't do with IRA money without paying taxes, and then can't put it back. The exception to that is the 60 days that you have to complete a "rollover". You can't borrow against your IRA.
If you absolutely love the choices you are given in the 401k....

I'd take the money, roll it into the IRA. Have the check made directly to the IRA custodian (Scottrade) and not to you. If they send you the check, made out to Scottrade, that's fine, but if you have access to the money for so much as a millisecond, a 20% withholding will apply.

Best wishes, Chris
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One thing to keep in mind is that you can borrow from a 401k but you cannot from an IRA. I actually consider this a benefit for the IRA, keeping you from temptation, but others think differently.
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I certainly wouldn't plan on borrowing from my retirement vehicles, so that's not an issue. I have c-cards I can tap for emergency funds, regular stock accounts, a car I could sell, books I could sell in a garage sale, and if necessary we'll sell the house and move in with my parents. I'm not touching our retirement savings :)
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My company terminated a defined benefit retirement plan in September, 1999. I chose the option of rolling over the lump sum distribution into an IRA. With some help from the Fool, I invested this money in individual stocks. My average annual return on this account for the last 5 years is 27% (including a triple digit return in 2003). I could never have achieved this type of return in a regular account with mutual funds.

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Robert52: "My company terminated a defined benefit retirement plan in September, 1999. I chose the option of rolling over the lump sum distribution into an IRA. With some help from the Fool, I invested this money in individual stocks. My average annual return on this account for the last 5 years is 27% (including a triple digit return in 2003). I could never have achieved this type of return in a regular account with mutual funds."

Is the 27% a CAGR or an mathematical mean average annual return or something else? For a 27% CAGR, for every $1.00 you started with in September 1999 you should have had $3.30 in September 2004, or more than tripled you money in 5 years.

Curiously, JAFO



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>> Is the 27% a CAGR or an mathematical mean average annual return or something else? For a 27% CAGR, for every $1.00 you started with in September 1999 you should have had $3.30 in September 2004, or more than tripled you money in 5 years. <<

Good point. If I'm up 100% in one year and down 50% in the next, my "average" (or mean) annual return is +25%, but my CAGR is zero. Big difference.

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The 27% is CAGR. The account value is approximately 3.3 times what is was five years ago. This account has generally been fully invested in stocks, although I have 10% in cash right now. Current holdings are an assortment of Hidden Gems/Stock Advisor recommendations.
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