Should I open an individual 401k account?

Question

I am looking for some advice on what to do with the Money from a previous employer 401k.

I currently have the checks that were issued to the trust of my new employer's 401k service. I have not sent them in to them because someone said I should think about opening an individual account because the funds are not good and expensive at my new companies plan. (think they were like 1.2 - 1.5%, sound high?)

The only reason I was even bothering with a rollover is because I want to take a loan against that money. If I open an individual 401k account, can I still take a loan against the money? Is that a safer option since I wont have to worry about my job status with respect to paying the loan back?

Secondly, should I be able to get the checks re-issued to a new account should I open one?

And lastly, if anyone has any investing companies that should be worth taking a look at, I'd like to hear about it. So far I was just leaning toward E*TRADE.

Answer 1

AFAIK, individual 401k accounts are supposed to be funded from self-employment earnings, not from rollovers from 401k plans of previous employers. So, check with your accountant before making opening an individual 401k account and getting your previous 401k plan to re-issue the checks to be payable to your individual 401k account. You might also want to ask about whether loans are permitted from individual 401k accounts (my guess is they are not because the possibility of abuse of the privilege is too high since the employer and employee are the same individual). In any case, loans against 401k plans are generally not a good idea, and many people on this forum have blogged about this matter.

Answer 2

You're confusing between "individual" 401k (they're called "Solo-401k" and are intended for self-employed), and Individual Retirement Account (IRA). You can't open a solo-401k without being self employed.

You can open an IRA and roll over money from your old 401k to it. You cannot get a loan from IRA. You can ask the 401k plan manager to reissue the checks to the new trust, shouldn't be a problem. Make sure the checks are issued to the trust, not to you, to avoid withholding and tax complications. This is what is called a "direct" rollover.

You might be able to roll the money over to the 401k of your new employer, it is not always allowed and you should check. You can probably then take a loan from that 401k. However, it diminishes the value of your retirement savings and you should only do it if you have no other choice (being evicted from your home, your children are starving, can't pay for your chemo, etc... this kind of disasters).

Otherwise, I'd suggest rolling over to IRA, investing in funds with significantly lower fees (Vanguard target retirements funds for example, or index funds/ETF's), and reassessing your spending and budgeting habits so that you won't need loans from your 401k.

Re companies - ETrade is nice, consider also Scottrade, TDAmeriTrade, Vanguard, Fidelity, Sharebuilder, and may be others. These are all discount brokers with relatively low fees, but each has its own set of "no-fee" funds.