Conflicting advice about what to do with my 401k / Roth IRA

Question

I left a company that I was at for over 18 years about a year ago. The company I was at was using Fidelity and I had then opened a Roth IRA under Fidelity as well. My Roth only has around 15k and my 401k has close to 500k.

I joined a new company that same year where they go through John Hancock and have opened a 401k here with so far around 7k. I know I have options to either move my 401k, or I could roll into a Roth IRA (and believe I read you need to pay taxes on it at that point in time), or simply leave my money in my original account with no further contributions to it.

Every website gives a different opinion and I don't know if it makes sense to roll over the Fidelity account to my John Hancock account, or pay the taxes now and move it into my Roth IRA or simply leave it alone. I don't really see one outweighing the other?

I do know that when I take the contributions out they will be taxed. I also know that if I do move them into my Roth IRA they will be taxed since Roth IRA's are after tax contributions. I also know that right now I have no plans whatsoever to actually cash my old account in and pay all these fees plus taxes - I do not need the money.

Is there a preferred option you would take or what am I missing here?

Answer 1

Have you considered the alternative of rolling over your 401(k) to a brand-new Traditional IRA instead of into your already-established Roth IRA? Such a rollover (to a Traditional IRA) would not incur any taxes now and you would save the annual fees that you are being charged for the 401(k) plan of your previous employer. Most IRA custodians waive the annual maintenance fee charged to IRA accounts when the IRA assets rise above a certain level ($10K? $25K?) and if your chosen IRA custodian is unwilling to waive the fee when you are proposing to roll over $500K, it is time to find another IRA custodian. In contrast, 401(k) plan providers don't often waive their fees; they have a captive audience who can't go elsewhere.

As user3757614 mentions below, the recipient Traditional IRA is called a Rollover IRA. Once upon a time, this name was reserved for IRAs that held money coming from a 401(k) plan, 403(b) plan etc, and the money (plus any accumulated earnings) was eligible to be further rolled over into a 401(k) plan of a new employer etc. Contributing to a Rollover IRA destroyed the ability to do this second rollover for all of the money in the offending IRA. I believe that this is no longer the law, and that nowadays, any IRA money can be rolled over into a new 401(k) plan if the plan is willing to accept it. The difficulty might be finding a 401(k) plan willing to accept a rollover from a general-purpose Traditional IRA instead of still insisting that the money has to come from a Rollover IRA in its virginal state unsullied by any contributions from the IRA owner. What the 401(k) laws allow and what parts of what is permitted (but not explicitly required) a particular 401(k) plan chooses to implement are two different matters.

See this question and its answers for more discussion of this matter.

Answer 2

Looking first at your current 401(k). All the money in the account is either:

• Roth 401(k) contributions and earnings
• Pre-tax 401(k) contributions and earnings
• Company match and earnings which are viewed as pre-tax
• Post-tax 401(k) contributions and earnings.

When you decide to move the money from the old account you can do the following transactions without owing any immediate taxes.

• Roth 401(k) money into Roth 401(k) with your new employer or into a Roth IRA
• Pre-tax 401(k) money into a pre-tax 401(k) account with your new employer or a traditional IRA.
• Company match into a pre-tax 401(k) account with your new employer or a traditional IRA.
• Post-tax money that isn't Roth is more complex. The contributions can go into a Roth and the earnings go into a pre-tax account. Again you can go with a 401(k) with the new company or an IRA.

One caveat, some companies don't allow rollovers into their 401(k), others do allow it.

The new IRA/401(k) custodian should be able to help with the rollover. Most will be able to make sure the money is transferred directly so you don't have to have checks sent to you. Others will insist that they must send the checks to you. the new custodian can help specifying the method of transfer, and how the checks are to be designated.

Now if you want to change pre-tax money, and company match money into Roth then that will trigger tax issues. But you are not required to change the flavor of any of the money when doing a rollover.