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.

  • 1
    Comment: Yes, 1.2%-1.5% are very high fees. Your real (inflation-adjusted) returns will likely be around 4% on average. The fee comes straight out of that. – user296 Nov 13 '12 at 15:57

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.

  • +1 - Lots of good advice about how to proceed here. (Loans are permitted from Solo 401k, but I don't think Solo 401k is what the poster wants.) Some insight about taking that 401k loan - joetaxpayer.com/fixing-the-401k-loan – MrChrister Nov 13 '12 at 18:13

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.

  • Interesting - I didnt realize there was a technical term for it - Solo 401k. So basically the only way to take a loan against my existing 401k money is to roll it into my employers plan, right? I am actually planning on using the money for a land purchase that I intend to build my primary residence on. It is a really good price right now, and I think I could comfortably pay the loan back in a couple years. – Derek Nov 13 '12 at 19:31
  • @Derek 401k is a deferred compensation plan, so you can only deposit your money if it is done through an employer. Solo 401k is the vehicle for self-employed (basically, same as any other 401k, but simpler to use and manage because of the limitation on who can participate). So you can either stay with your old 401k (if allowed), roll over to the new one (if allowed), or roll over to IRA (always allowed). Whether or not the loan makes economical sense - this is another issue, and for you to evaluate. – littleadv Nov 13 '12 at 21:45

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.