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I recently left my job to go back to school.

I have a 401k plan with my previous employer with an account balance of $12000, and a vested balance of $8000. The $4000 difference is the employer match after working at the company for 2 years. My understanding is that if I move my money from the employer account, I will lose 100% of the match. Employees must work at the company up to 7 years to get 100% of the employer match (2 years doesn't get you anything).

My 2 questions:

  • Since I do not see myself returning to that company after graduate school, does it make more sense to rollover my 401k to a Roth-IRA, though I will lose the $4000?

  • I currently have a Fidelity Roth-IRA set up. Since I can only contribute $5500 per year, will I need to set up a separate IRA to receive the remaining $2500 balance of the roll? My plan is to put this money away until retirement, so I would prefer to avoid any tax or fees with the roll.

Since this was my first job with benefits out of undergrad, I am relatively new to the world of 401k plans. Any advice is much appreciated!

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    You have lost the unvested amount either way. – D Stanley Feb 14 '18 at 21:12
  • Is your 401(k) a Roth 401(k) or a regular pre-tax 401(k)? – RonJohn Feb 14 '18 at 21:41
  • You can roll over into IRAs without it counting against annual contribution limits. A rollover isn't a contribution. – Beanluc Feb 14 '18 at 21:45
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    While it is true that after two years the employer can claw back the unvested match, the other details of the plan as you have described them are longer than allowed by law. thebalance.com/… – Andrew Lazarus Feb 15 '18 at 1:36
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    As mentioned above, double check on the vesting. This link says at a minimum, by law, 20% of the employer match should vest after 2 years. – Craig W Feb 15 '18 at 1:42
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The critical point here is whether the possibility exists for you to ever return to this employer and whether they will roll the previous vesting over once re-employed. If the answer is maybe and yes, then you might consider leaving it for the time being.

The next most important consideration is the quality of the plan. If it has high fees and/or limited options, then rolling over to an IRA with lots of low-fee options is a smart choice.

To answer your second question, you won't need to setup a separate IRA for this and can thus use your Fidelity IRA.

Finally, it is likely you will have many jobs in your career and thus many potential opportunities to roll a 401k over to an IRA. It's worth finding a good broker with low fees for an IRA as this will likely grow to hold a significant portion of your nest egg.

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    Rolling over to a traditional IRA and investing in a low-fee Index fund will result in very low fees. It's hard for a 401(k) to match that, and many/most don't offer low-fee funds like FUSVX. Finally, if OP chooses a Fidelity Target Fund, look at their low-fee Index Target funds vs the higher-fee managed target funds. – Rocky Feb 14 '18 at 22:49
  • I should have mentioned Traditional vs. Roth - OP should open a traditional IRA if they don't want to take a tax hit on the Roth conversion, unless of course they have no taxable income, in which case there would be no tax burden up to the first bracket. – Andy Feb 15 '18 at 17:44
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A 401k account is roughly equivalent to a traditional IRA account, where contributions are pre-tax, not a Roth IRA account where contributions are after tax.

If you rollover the 401k to a traditional IRA, the primary consideration is fees. Compare the fees (including load, which is continuous, not one-time) to keep your money in the 401k against those at the IRA. I have personally found the mutual fund selection at Fidelity and Vanguard to be as good as corporate 401k plans with significantly lower fees (0.2% v. 1.5%-2%). Some companies also have rules about minimum balances required in 401k accounts for non-employees that may affect the fees.

If you rollover to a Roth IRA, this is like being paid the $8000 this year and paying tax on it. If you expect your income to be lower this year due to being a student, the $8000 may be taxed at a lower marginal rate now than in the future, depending on your income and future tax changes. You need to have savings on hand to pay this tax. The same fee considerations apply as with traditional IRAs.

Rollovers do not count towards IRA contribution limits. Money in these account is basically already "contributed".

Vesting is usually a function of when you leave the company, not when you move money out of the 401k account. This will not affect rollover decisions.

  • So if I rollover the traditional 401k to a Roth IRA (through the Roth IRA conversion), I can still contribute another $5,500 on top of that to the Roth for my yearly contribution? Since rollovers do not count towards the IRA contribution limit. – sanjayr Feb 15 '18 at 16:28
  • @sanjayr Yes, you can still contribute because rollovers do not count towards contribution limits. This question has also been answered directly. – mattm Feb 15 '18 at 16:40

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