She’s been a part of my life for 38 years, but the time has come to say goodbye.
With a dedicated line on my Net Worth statement since 1985, it’s sad to see her go.
She’s worked hard for a long time. She even made me a 401(k) millionaire.
Most importantly, she helped me to retire young.
But it’s time to say goodbye to my old 401(k) friend.
Today, the reasons I decided to close my 401(k) and roll the funds over to individual IRA and Roth accounts. It’s something I always knew I would do, and I finally did it.
Today, I’ll tell you why.
After 38 years, I finally said goodbye to my 401(k). Today, I tell you why. Click To Tweet
Saying Goodbye To The 401(k)
Our relationship started in July 1985. I was fresh out of college, and my boss told me the 401(k) was something I should sign up for during my orientation process. “Get the match,” was the message, and I listened. I didn’t really know what I was doing at the ripe old age of 22, but I became a serious student in the subsequent decades.
I won’t bore you with the details of our 38-year relationship. If you want the full story, I encourage you to read the popular guest post I wrote on Budgets Are Sexy titled “How To Become A 401(k) Millionaire”. That article shares the steps I took to make the following growth happen (chart from the same article):
The Past vs. The Future
I now consider that article a eulogy to my old friend. She’s a relic of my past, and I’m looking to the future. The 401(k) referenced above no longer exists. Like so many of our heroes who have contributed to their cause and ultimately passed away, she’s done her job and faded into history.
I’ll miss her.
She served me well during the Accumulation Phase when I was diligently dollar cost averaging with every paycheck. But the past is the past, and she’s no longer meeting my needs in the Withdrawal Phase.
I’ve got a new girl.
Two girls, actually. One is my lovely pre-tax IRA, and the other is my beautiful Roth. Our relationships are much better suited for my retirement years, and I suspect I’ll spend the rest of my life with them.
Why the change? Read on…
6 Problems With The 401(k)
Every employer custom-designs their 401(k) program, so I don’t know how common the pitfalls I faced with my 401(k) are in the industry. I suspect the shortfalls are not unique to my plan, but only you can provide that answer. For the record, both my 401(k) and personal IRA and Roth accounts are with Vanguard.
Below are the biggest issues I had with my 401(k):
1. Roth Conversion Difficulty
The biggest reason I closed my 401(k) was the frustratingly difficult process of doing my annual Roth conversions in retirement. Online conversions were not available with my 401(k) plan, so I had to work my way through the Vanguard voice network and contact a representative to initiate each conversion. This entailed having to…
- talk to several associates before they understood what I was trying to do,
- walk them through the details of my conversion request ($ amount, from this to that account, etc)
- wait several days for them to snail mail me the paperwork (really? REALLY??),
- fill out the paperwork manually and, finally,
- mail the completed forms back to Vanguard.
Contrast that to the simplicity of doing a Roth conversion via a personal account at Vanguard. Since I already had a personal Roth and IRA, I used them for a trial Roth conversion earlier this year to test the process. I was blown away by how simple it was. Two online clicks (from…to) and I was done. As with my retirement conversions, there was no tax withholding on the conversion, which is the way I prefer it (I calculate it into my quarterly estimated tax payment). It took me less than 5 minutes, and I made up my mind on the spot…
It was time to close the 401(k).
2. Roth Required Minimum Distributions
A few years ago I discovered a fact that influenced my decision to close my 401(k). For those who don’t know, Roths held in a 401(k) are subject to RMD’s, whereas Roth’s held in a personal account are not. While the RMD’s don’t kick in until age 72, I knew I’d have to close the 401(k) at some point to avoid the forced distribution. Now, I don’t have to worry about it.
On a related note, I expect the IRS will recognize this difference and likely implement RMD’s on personal Roth accounts in the next 10 years, but time will tell. For now, my Roth funds are not subject to RMD’s and I hope it stays that way.
3. Visibility Of Holdings
Our plan’s 401(k) was accessed through a separate “Retirement Plan” area on the Vanguard website, and I never cared for the design. It showed the entire 401(k) balance without an easy way to see your holdings broken down in the Roth and the IRA portion. You could see what funds you held, obviously, but you couldn’t tell how much you held in each of the tax classifications. When I update my Net Worth (get your free Net Worth Template here), as part of my Year-End Financial Review, I break down my holdings by tax status (After-Tax, Pre-Tax IRA, Roth, etc) and it was a hassle to click, click, click, click to find that level of detail. Then, I had to do a manual calculation to break down the holdings, which were only shown in aggregate.
Contrast that to the simplicity of viewing your holdings in personal IRA and Roth accounts. They’re clearly broken down on the main Vanguard page, and there’s minimal work involved to input them into my Net Worth statement.
4. Tax Location Optimization / Blended Assets
My 401(k) had funds that were in two different tax classifications, Pre-tax and Roth, as I had contributed to both during my career. The problem was that all of the holdings were equally divided between the two types of accounts, and I had no way to move my holdings between the two. As I mentioned in our Retirement Drawdown Strategy, some types of assets are better suited for pre-tax, and some for Roth (others are best suited for after-tax). I explained the issue in that post, and summarized it in the following table:
I’ve always viewed the “tax location optimization” as a fine-tuning element that wasn’t critical to our portfolio’s success, but still. Having the ability to locate your highest growing (stock) funds in your Roth (and not your Before-Tax IRA, where they’ll eventually be taxed as income) should be a basic functionality of any retirement 401(k), but it wasn’t.
Contrast that to having the funds in personal IRA and Roth accounts, where the funds are easy to see and manipulate. Since converting my 401(k) into a personal IRA and Roth account, I’ve begun migrating the assets into the tax classifications for which they’re best suited. For example, I transferred the entire S&P500 holding out of my Before-Tax IRA, moving the funds and into REITS and Bonds. At the same time, I did the opposite transaction in my personal Roth (selling REITS and Bonds, and buying the S&P500). My asset allocation remained the same, but now my entire S&P500 holding is in my personal Roth, and my bonds are in my Before-Tax IRA. Over time, the S&P500 should outperform the bond holdings, and all of the additional growth will be tax-free since it now resides 100% inside the Roth account.
Note: if you’d like to read a good summary of this tax location issue and its impact on your taxes over time, check out this article from Kiplinger.
5. Simplicity / Consolidation of Accounts
Transferring my 401(k) into my personal IRA and Roth accounts eliminated an entire account in my portfolio. I’ve been working to simplify my portfolio, and this fits well into that strategy. I’ve done a similar thing with my peer-to-peer Real Estate exposure, closing my Prosper account and consolidating the exposure into my Peer Street account. I’ll continue to work to simplify my accounts every year, it just makes sense in my opinion.
I should note that my 401(k) had a good selection of funds and low expenses, so neither of these influenced my decision. That said, having the funds in my personal IRA and Roth accounts does offer more fund selection. Also, I changed my IRA and Roth accounts from standard accounts to brokerage accounts this year. If you own funds with Vanguard, they’ve likely notified you with a request to convert to a brokerage-style account. Be warned, they’re going to start charging a fee (can’t recall how much, sorry, think it might be $20?) per fund if you’ve not yet made the change (the charge will only be applied on the standard accounts, not the brokerage ones).
6. The Ability To Build A CD/Bond Ladder
Finally, now that all of my funds are in brokerage accounts I can also buy other types of assets outside the Vanguard family. Yesterday, I started building a CD/Bond ladder in my IRA to gain experience. Following the example my friend Jim @ RouteToReire did and explains in Opening The Books To Our Investment Portfolio, I made my first Invesco Bulletshare purchase (2025), layering in some CD’s in the shorter timeframe. Here’s a tweet I sent yesterday outlining the rungs:
Gaining the access to additional fund types was only made possible by converting my 401(k) to individual Roth and IRA accounts. It’s nice to have the capability to finally start building the ladder, I’ve thought about it for several years and can finally say I’m taking concrete steps in that direction.
The Process of Closing My 401(k)
Finally, a note about the process of closing my 401(k). It wasn’t as easy as I had hoped, but I survived. Similar to when I would do my Roth conversions from my 401(k), I had to work through numerous Vanguard representatives until I found someone who knew what they were doing. Fortunately, it didn’t require the “snail mail” hassle, but it was still laborious. The rep had me verbally confirm the conversion (on a recorded line) of every individual holding, and I was required to click on an e-mail confirming that the changes were what I had intended.
A second frustration: Although I had existing personal IRA and Roth accounts, for some reason they were not able to transfer my 401(k) directly into those accounts. Rather, they had to establish two new accounts (Before-Tax IRA and Roth), which resulted in my having two of each type of account (two IRAs, two Roths). Once the accounts were funded with the closed 401k proceeds, I transferred each fund into my brokerage IRA and Roth accounts, eliminating the extraneous accounts. It was a bit of a hassle, but it was a “one-and-done” effort.
Lastly, since I moved the Before-Tax portions of my 401(k) into my personal Before-Tax IRA (and, Roth to Roth), there were no tax consequences since all funds remained in the same tax classification.
Conclusion
It’s been a good run with my old and faithful 401(k). However, as my needs changed in the Withdrawal Phase of retirement, it was time to better align my holdings to a fund style that better met those needs.
The takeaway: Realize you’re not married to your 401(k) sweetheart after you retire. If you’re finding yourself dealing with some frustrating issues with the way your employer has designed your 401(k), it’s worth investigating whether it’s worth converting yours into personal accounts. It’s up to you to decide if it’s worth saying goodbye to your 401(k).
For me, it was.
And now you know why.
Your Turn: Have you closed your 401(k) since you retired? If so, why? If not, why not? Let’s chat…
Hi Fritz, Thanks for the great info and for what you do! This is my first time actually posting a comment to your articles. I always enjoy reading your posts and have gotten many nuggets for me to consider as I approach my early retirement as well. Great info on the RMD for 401K Roth!
I know you are above 59 1/2 now, but did you keep your 401K between the years of 55 and 59 1/2 to retain that “Rule of 55” access to your 401K after you left your job? I am 54 and possibly leaving my company next year or year after. I had planned to leave my 401K in tact until I turned 59 1/2 in case I need to touch those assets penalty free.
I have a steady rental income stream and a chunk of after tax investments to use in my pre and post retirement. I plan on funding 3 buckets with my after tax dollars and love what you did with the ladder of CDs. My plan would be to allow my retirement assets to grow without being touched, but if for some unknown reason I had to touch the 401K after leaving my company in the year I turn 55 or later, it seems I should leave it there for the next 4 years. My 401K is with Fidelity with very low fees and doesn’t appear to be as a much hassle as what you had with Vanguard.
Thanks again for what you do Fritz.
D – thanks for coming “out of the shadows,” nice to meet you! Good point about the “Rule of 55.” That was a consideration when I first retired, but with my first 3 years of retirement in a bull market I never had to pull that trigger. I knew at age 57 that I wouldn’t need that “rule,” but I was just a bit lazy in getting the 401(k) transfered. You’re smart to consider that, and it’s certainly a viable reason to keep your assets in the 401(k) until age 59 1/2. It sounds like you’ve also done well in building that after-tax “bridge” (and rental income) to allow those retirement assets to continue to grow. Enjoy your journey across The Starting Line!
D –
I retired at 55. Prior to retiring, I researched the “rule of 55”. I was told by my company’s plan administrator, the “rule of 55” wasn’t offered in my 401k. Evidently, “rule of 55” feature is an option for employer plans, but not compulsory on employers to offer it. Surprised me but didn’t sway my decision to leave. You might want to make sure your 401k plan offers that feature if it’s important to your decision.
Best of luck!
B- WI
Hi love your articles! glad someone does the research because i don’t have the patience or the knowledge to go to the correct places! we also looked at rolling my wife’s 401k into a ROTH but the bottom line that changed our mind (my understanding) is that a ROTH is subject to judgements where a 401k is not. in today’s world with high medical care costs and high deductibles we were concerned about a catastrophic illness forcing us to use it and or possibly losing it. a lousy way to look at it but a defensive maneuver for old age.
David, thanks for adding the point about the additional legal protection provided by the 401(k). I was aware of that, but forgot to include it in the post. Glad someone else has done some research – wink. To me, I considered that an extreme “tail risk” and hope it never comes into play…
I closed my wife’s 401K and mine last year after 39 years. For different reasons than you. But, like you it had served us well. My company moved my 401k to another company to manage. I didn’t have the options or flexibility that I wanted in retirement.
Per my Fidelity guy. “ IRA’s offer the same creditor protection as 401k’s in Texas.”
I too was thinking of keeping the 401k due to the legal protection it affords but per fidelity tx protects IRA as well.
we lived in Texas and our Credit union told us no protection for a roth. sounds like legal advice would be warranted. curious what the truth is.
I recommend checking on this. My understanding is that as long as the IRA is identified as a rollover IRA it has the same legal protections as the 401(k). Not sure what happens upon conversion – do you have the same protections as long as you can trace the Roth conversions back to the 401(k)?
We are still working, and both of our employers use Fidelity for retirement accounts (403B & 457 for me, 401K for him). We also both have rollover IRAs at Schwab from our previous jobs. My plan has always been to roll everything into one IRA when I retire (and same for my husband). Roth conversions make no sense for us while we’re still working, but we’ll do that, too, once we retire. My Schwab IRA is all in Vanguard funds, so we’ll see if we consolidate everything in Vanguard, Fidelity, or Schwab. I have a couple more years to figure that out.
You’re certainly thinking about the right things, Dana, and it’s best to do your thinking while you still “have a couple more years to figure it out”. Rolling over and consolidating makes a lot of sense, as do Roth conversions if you’re situation supports it (I agree it’s best to wait until you’re no longer working – it’s all a game of playing that marginal tax rate). Thanks for stopping by.
I too just closed my self-employed 401k and transferred over to an existing IRA. Both were with Fidelity and it was a small hassle as well…especially the need to get a Medallian Signature Guarantee even though both ends of the transaction were with Fidelity. In any event the 401k mechanism has served me well over the years. I had two with prior employers that I previously rolled over years ago plus the self-employed one. I’ve been saving in 401k’s since 1981-ish when they first came out and have done well.
Glad to see I’m not alone – both in the strategy of closing the 401(k) and in dealing with a bit of a hassle to get it done. A “Medallian Signature Guarantee” – wow, first time I’ve heard that term. Sounds ominous…
I can’t believe you had all that hassle within Vanguard to make that transition. I am dreading the thought of each year trying to funnel out of my federal TSP retirement plan into Vanguard an amount that I want to become a Roth IRA after conversion. The thought of having to explain each time sounds like a full day hassle. not sure if anyone here is familiar with the TSP, but I’m wondering whether we can take out the Roth portion and move it to a Vanguard Roth IRA. And also separately take out 40,000 a year and convert that into a Roth IRA. I wonder if paying an annual Vanguard financial advisor would make this easier. I have DIYd it until now, and two years from retirement at 60.
its not. find a notary public at your bank or at most public libraries. Its a witnessed signature that requires the notaries stamp in addition to their signature and yours
A Medallion Signature Guarantee is not offered by all banks or credit unions. Our local credit union did notaries but not Medallion. A notary can’t do it unless they are signed up and approved for it separately. (For ex, a bank may have 3 notaries on staff at the branch but likely only 1 is Medallion.) It’s much more restricted. My other local bank required copies of docs showing where the $ was coming from (individual mutual funds) and amounts before they would do it. I did not feel comfortable giving them that info “to keep in their file”. In the end, ironically, the Fidelity office about an hour away would do it…so I was transferring from a Fidelity Self-Employed 401k to an existing Fidelity IRA and they still required the Medallion Signature which on turn they did themselves anyway! Seemed pointless in the end.
The Medallion signature guarantee has become a bit of an issue for me as well. My bank now only offers it to those with funds in their “Wealth Management Division”. It was explained to me that the institution is on the hook for the amount of funds transferred if there is an issue. That would explain why Tony needed to go to a Fidelity branch for a Fidelity Medallion Guarantee: they knew the amount of his funds on hand.
Another fine article to get others to ponder….transferring funds into one holding company.
We transferred Carol’s TSP into a Fidelity GO IRA account, they charge .35% of AUM. That is the only non-DIY account we hold. Once that was completed (about 2 years ago), we transferred $40K each year into her personal Roth IRA account. We will continue to do this for several more years. No, we are not concerned with IRMA worries. We are able to hold down our AGI to an amount that handles all of our spending. We had too much cash sitting in our brokerage account and also initiated our CD laddering strategy this year. Sidenote: last check, our Fidelity SPAXX had a yield of about 3.4%! So great to see, as we were getting about 1% last year. One item to ponder is the maturity date of your CD; we like to see them all mature in different years…again, an income tax/interest problem that is good to have!
We agreed to simplify our entire portfolio; all of our retirement accounts are held by Fidelity. Each Roth/IRA transfer I have done by phone was painless through them. I heartily endorse their customer service, their low fees and easy to use website. We have annuities with 2 different insurance companies, pensions from the US taxpayers and will draw 2 SS checks sometime in the next 3-6 years. My biggest financial goal for the future: To simplify all of our holdings, enabling Carol to conduct business easily once the time comes for me to meet our Creator. You know??
I believe most of your readers will agree with the following statement: It is a great 1st world problem to have, when you are tax strategizing and moving funds from one account to another….and reading to discover what others are doing. Life is good. We strive to remain kind and grateful.
God’s blessings to you and Jackie. Peace and love to your readers, Steve
“It is a great 1st world problem to have…”
It is, indeed. Thanks for helping us all keep things in perspective. As for your thinking about making things easier for Carol when you meet The Creator, I’m thinking about that, too. I’ve looked into Vanguard’s Personal Advisory Service, sounds very similar to your Fidelity GO account. I’ll likely make that change sometime in my 70’s, when I no longer enjoy managing the portfolio and begin to see any signs of mental slippage. In the meantime, I update a “Love Letter” every year for my wife, and that’s one of the steps I’ve suggested she consider if I pass before I’ve got it set up.
boy, I sure would like to talk to Steve about how he manages this. Fellow Fed. also about how much bucket to build up for retirement when one has a pension coming. And whether to keep that bucket in the high-yield savings or in a CD ladder
I am in the same boat. Going to do some CD laddering, and move some additional cash into JP Morgan’s JEPI, an ETF currently yielding 11%. Having the pension sure makes things less stressful.
You moved relatively higher yield investments into Before Tax accounts. But why not put high-yielders, BDCs and REITS into a Roth and take that income as tax free distributions (assuming you have the amount you need beyond growth holdings that will appreciate over time of course). Seems like this is a way for us to get tax free income. Thanks!
Dan, I found that tax location optimization list somewhere, but can’t recall where. The logic of having high-yielders in the IRA is: First, you have to have SOMETHING in there, so there’s that. Second, since the IRA is taxed as income when withdrawn, it makes sense to have assets that generate dividends that would be taxed as income either way. It’s the least painful choice, but I agree it’d be best to have everythign in the Roth and avoid taxes entirely (once you pay the tax on the conversion). I’m working hard to convert as much as I possibly can for exactly that reason, but for now I have too much money in the IRA and have to invest it somewhere…
I always thought the RMD for Roth 401ks was pushed by employers to get the account off the company books. I’m sure XYZ corp has little interest in managing retirement accounts for kids of the former employee of the year. Though if Congress can meddle, they likely will.
Do you have a Schwab account, or were those CDs purchased within Vanguard?
My 401k is with the Thrift Savings Plan. I want to close it every time I do a withdrawal or IRA transfer as it requires notarized signatures for me and bride. If I converted it to an annuity I’d be done – I think that is what they want retirees to do. They recently improved the website – it looks very good for a government site. But it now won’t talk to Personal Capital AND it takes 5 clicks to drill down to a page that shows which investments are in my account. Five clicks! Like we’re in a 3rd world country. More annoying is that a withdrawal is taken proportionately from each investment – I can’t designate it all to come from the large cap or a bond fund. But the management fee is only 0.02 percent or so – super cheap even for an index. Probably the best reason to keep it is because it has limited choices so I don’t tinker around with it.
Kevin, I hadn’t thought about the possibility that the RMD was pushed by employers, certainly a possibility.
As for the Schwab CD’s, those were purchased through my VG brokerage account. Nice to have the flexibility to buy almost anything through that platform.
Finally, glad to see I wasn’t the only one who had a major headache each time I did a Roth conversion. I don’t know why companies (governments) can’t develop a plan that works more efficiently. I can SOOO relate to that “5 clicks to drill down” and “can’t designate it” comment, both of those were real frustrations for me with the 401(k). Fortunately, it’s now just a memory…
Hey Kevin, have you tried to remove only the Roth portion into an outside Roth IRA? I was thinking maybe to do that first upon retirement, and then do Roth conversions from the as yet untaxed TSP – in this way, I was hoping to avoid the RMD on the Roth portion, and this would also lower the overall RMD wouldn’t it?
Hi Moon,
I retired just over a year ago and am still in the process of transferring my TSP to a Roth and a 401k. I did exactly as you mentioned: TSP-Roth to Roth IRA, and for exactly that reason…to get away from the RMD on the TSP-Roth.
I am 57.5 years old now, and my plan is to leave enough money in the G Fund for any anticipated expenses (and a bit more) until 59.5, then move it all to my M1 IRA.
My next task is to start diving into Roth conversions.
I retired in May 2021 at 58 1/2 years old. I left the 401(k) funds in place in case I needed to access them using the Rule of 55. Once I hit 59 1/2 years old they were transferred to my Vanguard accounts for several reasons.
1. Simplicity: Everything in one place – easier to access/manage.
2. Greater Investment Options: Significantly more fund/ETF options through Vanguard than the 401(k).
3. Lower investment Costs: Vanguard has extremely low fees (I do not invest in single stocks).
I would note that in the earlier this year I moved all of our retirement assets to a local CFP firm with minimal costs. While I could still manage the accounts, this gives my wife the peace of mind in the case of my early demise. It is a small price to pay for her comfort.
Fritz, in the last sentence of your article “It’s up to you to decide if it’s worth saying to your 401(k)” did you mean “It’s up to you to decide if it’s worth saying goodbye to your 401(k)? It seems like a word is missing.
I know you did this intentionally but I almost felt like you were telling the story of breaking up a marriage and going to new girlfriends! It really got your point across. Good writing–and a great read!
Sarah, thanks for catching that missing word in the last sentence. I spend as much time editing as I do writing, and it amazes me how many mistakes still slip through. Do you want to be my editor? Wink. And, thanks for your compliment on using the relationship metaphor for my article, pleased to hear that it helped to get the point across. Mission Accomplished!
Fritz, any good writer spends a TON of time editing and still a mistake always gets though! Trust me, I know….
Thanks for post Fritz. I retired April 1st of this year and rolled my pre-tax and Roth 401ks to an IRA and Roth in May . Then I closed down my 401ks for good; or so I thought.
My company didn’t post thier 2021 401k matching until June, so my 401k was reopened and I had to go through the rollover again.
I’m still glad I did it. A wider selection of investments and having one less place to go for managing my portfolio is worth the rollover hassle.
Oops!
You touched on a sore spot for me: not being able to see separately the Roth and pretax in your 401k. It makes me slightly paranoid that they put my Roth into the pretax. Fidelity seems to have the same hidden method as Vanguard.
Yep, that was a biggie for me, too.
If you found the trick to seeing Roth and traditional IRA balances on the Vanguard website, please publish the steps. I too find it difficult to find the 2 balances. Thanks.
I would if I could remember, but it was always a case of having to refigure it out every year when I did my net worth. As I recall, it was buried somewhere in the contributions tab (then “Source”, if I recall correctly) on our retirement plan page.
Hi Fritz, I retired about a year ago. I had my current 401k for 27 years. I didn’t roll over right away as my 401k had some decent fund options and really low costs, 1 basis point for VFIAX as an example. I waited about 6 months as I wanted to think through the pros and cons of loosing that slight cost advantage as well as work on a plan to simplify the number of accounts to help with rebalance simplicity. I also wanted to switch from Vanguard to Fidelity. I just experienced much better service with Fidelity so decided to consolidate. I still have one brokerage left at Vanguard but will likely move that soon. The consolidation will take me from 10 accounts down to 6 which is likely the lowest I’m going to get (2 Roth,2 IRA, 1 HSA, and eventually a single after tax brokerage after I consolidate my vanguard brokerage to Fidelity). The moves I’ve made helped me sort of clean house on our retirement accounts with a simple 4 etf portfolio. Prior to that we were kind of all over the place. My next task is to do some Roth conversion planning so I’ll take a look at some of your recommendations there.
“The consolidation will take me from 10 accounts down to 6…”
You’re my hero. You know that, right?
I’m so proud of myself. As soon as I read the title of your post, I knew you were moving it to an IRA. I’ve been reading you long enough to anticipate what you’re going to do next. 🙂 Seriously, I retired a few months after you and I rolled my megacorp 401(k) over to Vanguard during the first week of retirement. I retired from the employee benefits industry, so I realized the shortfalls of that 401(k). I can’t imagine you’ll ever regret it. It’s nice to have it all in one spot, and the investment options are endless. Great post Fritz, thanks for making my day!
“I’m so proud of myself.”
I’m sitting here pondering the perfect response to that line, but it evades me….
On a serious note, great to hear from an employee benefits expert that I made the right move. Now, you’ll just have to tell me what my next post is going to be about….wink. Thanks for being a loyal reader.
I retired at 58 and am now crossing the 4 year mark of retirement. Have enjoyed keeping up with your blog advice. I had the pleasure of supporting 3 companies during my career and had 401(k) from each. While I have converted 2 of the accounts to IRA, the third remains with my last employer and is an opportunity. I had thought to keep them as separate accounts, each with a specific and dedicated purpose (Growth, Cash Flow generation etc) but see the value of having them in one account. My wife also has two 401(k) accounts that will also provide a consolidation opportunity.
I like that the rates on your CD ladder example are now providing an actual return. A good place for a portion of a portfolio to insure against loss an ensure a return… food for thought no doubt!
Lastly… would be interested in your thoughts on Cash Flow vs Net Worth as a metric for retirement success.
Cheers from Athens…
It sounds like we’re walking parallel paths, RFA, though I was fortunate to only have one 401(k) to eliminate.
As for Cash Flow vs. Net Worth, both matter. If I had to choose one, my choice would be Net Worth since it determines how much cash you can safely flow from your portfolio…
Nope. I’m a retired Fed and I’m sticking with TSP, which has become way more flexible than it used to be. The plan keeps track of pre-tax and Roth separately and I can take RMDs from pre-tax only until I’ve held my Roth balance for the requisite 5 years. TSP even offers mutual funds now. I just retired and am perfectly content to leave my money with TSP with its low cost fee structure and flexibility. Can you convince me I should change?
“Can you convince me I should change?”
Doesn’t sound like it. 🙂
Glad to hear the government plan is becoming more flexible, though I had to smile at your “even offers mutual funds now.” My 401(k) had mutual funds available ~30 years ago. If the TSP is working for you, there’s no reason to change. Something each of us have to decide based on how well the features of our various plans meet our needs. Sounds like yours works well for you, so there’s no need in my trying to convince you to change.
Stable Value Funds are only available in a 401K. If you have one in your company 401K there is nothing comparable in a traditional IRA. These type funds are about 99% guaranteed to not lose money and currently with interest rates being high, some Stable Value Funds are paying an annual return of over 7%.
Just something else to think!!
Thanks for bringing the SVF’s up, Bob. I should have mentioned that the Stable Value Fund was the primary reason I delayed so long in closing my 401(k). It always offered far superior fixed rates, and it’s only now that I could replace it with a higher yielding “ladder”. BTW, the reason I have that cash in my IRA is because I had a fair bit in the SVF, which I always classified as a “bond” in my asset allocation since it my mind it served the same purpose as bonds (with less risk). When they closed the 401(k), they moved it to a MMF and I’m now working on redistributed it into the ladder structure I outlined in the post. Great comment, thanks for stopping by.
Yes, that is why we are staying with the 401K too. That is our safe cash bucket.
Fritz, thank you for succinctly summarizing the benefits of rolling over a 401(k) account to an IRA and Roth. I recently retired from my employer and just initiated the process with Vanguard. The process was straightforward on the Vanguard website, and I was able to review and sign the forms electronically. Maybe it was easier for me as a recently terminated participant. Either way, thanks again for nicely summarizing the process and helping me quickly decide to say goodbye to my 401(k)!
You’re welcome. 🙂
Glad to hear your rollover went a lot more smoothly than mine, most likely a feature of your plan vs. mine (you lucky dog).
I’m not closing my 401(k) because (1) my past employer’s 401(k) has a feature named BrokerageLink which gives me access to all the mutual funds the provider offers, not just the dozen or so chosen by the company committee (2) I retired using the IRS Rule of 55 which only allows me to pull penalty free from my last employer’s 401(k) (though there was no restriction to roll all prior 401(k)s into this one), and (3) the company that manages my 401(k) can easily do Roth conversions, but it requires a phone call – it cannot be done online
Good reasons, all. Glad to hear you’re happy with the plan and it meets your need.
Thanks Fritz for the interesting article. The fundamental take-away for me to reading all of these maneuvers is “wow, what a bunch of hassles!” No fault of yours, it’s just the complicated rules we have to deal with. I’ve chosen so far not to roll over my 401k for the following reasons.
1.) Greater creditor protection in an ERISA-backed 401k vs. IRA rollover. I know the legal technicalities on this point are complicated, vary a lot from state to state and are somewhat controversial and opaque. I find different references citing contradictory information and conclusions on this point. Call me conservative.
(Example source: https://www.kiplinger.com/article/retirement/t032-c000-s002-pros-and-cons-of-rolling-your-401-k-into-an-ira.html)
2.) Access to “stable value funds” (for fixed income allocation) not available outside of the 401K. Particularly attractive in a rising rate environment.
https://www.morningstar.com/articles/710877/unpacking-stable-value-funds
In the end, the “to roll or not to roll” the 401k question is academic for most, as most of us are subject to 401k plan rules that do not allow partial withdrawals, only full or none. So when the time comes that I need to access those funds, I will not have a choice and will be forced to rollover the entire balance. I think many overlook this fact in the rollover debate.
“No fault of yours, it’s just the complicated rules we have to deal with.”
Thanks for not throwing me under the bus. Wink. Good points on creditor protection and SVF’s. See my response above to Bob on my view on the SVF, agree that’s a solid reason to keep the 401(k) – it was my primary reason for taking so long to close it, but not reason enough to keep it in place given the other issues that were nagging at me. As for the comment on having to do “full or none” on the withdrawals, that’s the first I’ve heard of that, definitely not a feature of my plan. If it was, all the more reason to close it down given I’m doing partial Roth conversions annually.
Hi Fritz,
Some food for thought. Fidelity offers 401k participants with Brokerage link an almost unlimited choice of investment options. This includes both CD and bond ladders, and annuities. 401k plans also are creditor protected under federal law. Fidelity customers may be better served by leaving their funds in the 401k if Brokerage link is available to them.
The tax optimization is another super interesting question. There are no doubt benefits to putting your higher performing assets, like stock funds, in the Roth. More tax free growth on your riskier investments. On the otherhand, if you’re trying to simplify your portfolio it certainly is a more complicated proposition to tax optimize across accounts. While it may not be optimal, a simple strategy of holding the same allocation in each account is easy to understand and to manage. This is a huge, and underrated. benefit to the less savvy non-involved partner in a relationship in the event of your early demise. IMHO there is no need to make things more complicated when simplicity is good enough.
Brian
Thanks for the input, Brian. By reading through the variety of comments today, it sounds like Fidelity is doing a better job in their retirement plans than Vanguard. As for tax optimization, I don’t really see it adding complexity, given it’s a “one and done” adjustment to position the “right” assets in the “right” location. Like you, I’m a huge fan of simplicity wherever possible. If you read the link to that Kiplinger article on the impact of tax optimization/location, it may surprise you how big the impact can be (it did me). The potential benefit is worth the slightly more complex portfolio, IMHO.
I also like the fact that (at Fidelity at least) one can do in-kind trad IRA to Roth IRA partial conversions with just a couple of online clicks. That is, you can move specific shares from the IRA to the Roth without a sell/repurchase step.
Very helpful article, Fritz.
Another win for Fidelity. They’re certainly scoring some points in the comments today…
I’ve been holding onto the 401k because of the Stable Value Fund, but now with CD rates rising and being higher than the SV Fund, perhaps I need to consider this. Thanks for the nudge!
As I cited in my comment to Bob somewhere up above, the SVF was the primary reason I waited so long to close down the 401(k). And yes, it was the availability of higher rates in the market that also influenced my decision to make the change, I should have mentioned that in the post.
Hi Fritz,
When “I was Retired” now seven years ago, I was just turning 59, so I was past the Rule of 55. Nonetheless, I kept my 401k because the plan had many top features, including low-cost institutional funds, easy ability to reallocate between funds, and very easy in-plan Roth conversion features.
Most importantly, the plan gave me the right to convert the pre-tax portions to a Pension Purchase Option, which I exercised last fall to nearly double the small pension I earned after seven years in the plan.
This year, I discovered the remaining after-tax portions of the 401k are now even easier to convert to the Roth 401k, since I am taxed only on the earnings of the conversions. So I will keep it for a few more years to complete those. Then I will rollover a pure Roth 401k to my Roth IRA before the age of 72.
It pays for people to fully understand their employer’s 401k plans before rolling over to an IRA. In many cases, it will the right choice, but you don’t want to give up strategies that you will not have once it is in your own hands.
Jim
“…the plan gave me the right to convert the pre-tax portions to a Pension Purchase Option”
Wow, that’s unique. I suspect more plans will offer an annuity purchase option in the future, but yours is the first I’ve heard of that’s offering it today.
I agree wholeheartedly with your final paragraph, well said.
Fritz, if you haven’t heard it yet, I believe that your articles–perhaps now that you’ve slowed your output pace?–are the best you’ve ever written. Each one is chock-full and densely packed. Thank you so much for putting the time in.
One request: I would love to see an article from you on exactly how you go about paying your estimated taxes in retirement. As I am on the eve of an early retirement at age 51, this is one issue that feels very unfamiliar and I’ve never read about it. Thanks for your consideration of that.
“…if you haven’t heard it yet, I believe that your articles…are the best you’ve ever written…”
I haven’t heard it yet, but I can assure you that your comment is music to my ears. As a writer, I could ask for no greater compliment. Thank you, thank you.
As for the Estimated Tax request, consider it noted. In short, I have a simple spreadsheet where I forecast my income for the following year, add in any planned Roth conversions, then subtract deductions (e.g., HSA contribution) and calculate the estimated tax due. It wasn’t hard to put it together, but agree it may be worthy of a post. Thanks for the suggestion.
Thanks Fritz – your first person experience and willingness to share is super helpful! Hope all is well and happy holidays!
Thanks, Steve. Much appreciated. Same to you and yours for the holidays (my favorite time of year).
Sounds like a logical choice given what you outlined. I have a TSP and not a 401k and I’d have to start digging to see if I’d have some of those same issues but for now my TSP is great and has fees even lower than Vanguard for the most part so I’ll deal with it when the time comes.
“…so I’ll deal with it when the time comes.”
Reasonable approach, and one I took for years. Finally, that time came…
Fritz, another option is to keep the 401K for low expenses and create an IRA for efficienct cash management. The expenses from my old company 401K funds are so low (because it is a very large pool) that I can’t achieve those low rates in an individual IRA at Schwab, Vanguard, etc. So Instead, I move funds (only 1 partial roller/year allowed) into a Schwab IRA and do cash management/trading within the IRA. Also any cash holdings in the IRA benefit from Employee loans, so while MM funds were paying 3 or 4 basis points, we were getting 300 BP’s plus within the 401K. So a hybrid plan may make sense for some folks.
Valid point, Allen. Thanks for bringing some new thinking into the discussion. Also, good point about only being allowed 1 roll per year, another issue that frustrated me with the 401(k),
Really helpful and sharing experience Fritz!
Thank you.
Hey Fritz, I am looking into the Vanguard standard versus brokerage account that you mentioned. My 401k was with ML and I moved it to Vanguard in May. I have brokerage, Roth, and IRA accounts that I established years ago. I don’t understand the standard vs brokerage so I am looking into it now. I am glad I moved out of the 401k. It was a hassle to make standard trades which is much easier in Vanguard. I m glad I did it and now have only three accounts under one roof to manage…I am all about KISS. Thanks for the article!
Definitely worth getting your facts straight about the brokerage issue, and one issue the folks at VG seem very well versed in discussing. I suspect they’ve had extensive training on the topic, given the strong push at VG this year to convert folks to brokerage…
Thanks for the shout-out, Fritz, and great information. Even though you mention my ladder in place, your post is making me want to consider locking in some CDs while rates are hovering where they are. I would think that this is probably around the peak for those rates at least for the foreseeable future (time will tell!).
Hope the ladder works out well for you!
From one “FIRE-man” to another, we should always be inspecting our ladders….wink.
Hi my friend I closed out my and wife (old) 401k) accounts over the past 2 weeks. As you mentioned, I needed to open separate accounts prior to transferring/ rolling them into an IRA. In addition, some of the investment rolled over “in kind” and some of the funds needed to be liquidated into cash before transfer. I also had the additional complexity and delay of transferring the accounts from one provider to another in my quest to consolidate. The transfer is still not complete as the remaining cash has not be forwarded to the new provider. It’s taking 10 plus days to complete as I transfer assets from 3 other providers to one. Great article. thanks as always – Mitch
Glad to see you’re getting the consolidation/simplification in place, Mitch. I’m sure it’ll serve you well going forward. 10+ days! Amazing…
Hi Fritz. In my state (Maryland), pension & 401k-type income (minus Social Security income) is state tax exempt up to a specified limit ($33K in 2021, indexed to inflation) starting at age 65. For this reason, I’m planning to keep my 401(k) for withdrawals from age 65-69, since my S.S. income from age 70 will nullify this, and then rollover any leftover to my IRA. Were you aware that some states have this tax break? I’m figuring on about $2,500 tax savings per year, totaling $10K just for keeping the account open with ~$140K in it. Not bad, eh?
Wow, that’s a new one to me, Steve. Great point, and one I entirely missed in my analysis. Thanks for adding real value, I hope I didn’t just miss a big tax break here in GA…
I love the analogy of your 401K being a long-term relationship that is difficult to break off. It does sort of feel that way. This article aligns well with your previous one, How (& Why) to Execute a Before-Tax Rollover into a Roth, which was one of my favorite articles on retirement investments. This coming from someone whose eyes glaze over when we talk investments. I find it a necessary evil to have a sound and fun retirement.
We are not ready to break up with our 401Ks yet, but you bring up some excellent points to consider in making that tough decision. Thanks for doing the research and sharing your experience.
“This coming from someone whose eyes glaze over when we talk investments.”
You sound like my wife. Wink. Thanks for the compliment on the relationship metaphor, glad it gave you some “excellent points to consider” without making your eyes glaze over…
You nailed it with these last two posts, Fritz. Retired from federal govt this year at 55 and have been lurking on your site for a while. Just this week I was researching an amicable divorce from my TSP; your piece was oh so timely. I am struggling with the breakup in terms of how much to withdraw re- ACA subsidy until my military retirement kicks in next year. I echo the sentiments of other contributors who loathe the TSP when it comes time to withdrawal. In addition, I recently discovered the TSP takes out 20% income tax regardless of your tax bracket. The only way around it is back door Roth or wait for RMDs when the tax is 10% (if u qualify and aren’t in a higher bracket then, pretty unlikely). So, the breakup…it’s a slow process because of ACA and bracketology. My plan is to move it all to my VG IRA and drip it into my Roth, topping off to the rim of the bracket. (Don’t know where I got that idea from, wink!)
Regardless, keep up the great work! You have literally saved my thousands of dollars and I look forward to everything you write. Merry Christmas!
Glad to hear my timing worked perfectly for you, RAF. Interesting to hear some of the details of the TSP, and you’re also wise to make sure you’re considering your ACA subsidy impact of any Roth conversions while you wait for that military retirement (gotta love that health care coverage, I’m envious but pleased to see our government still honors the health insurance for our veterans, they deserve that and so much more – thanks for your service).
As for the thousands I’ve saved you, just wait until you get my bill…wink.
Thank you for the valuable information which was also presented very clearly One advantage of the 401k that’s overlooked is the fact that, unlike IRA’s, distributions are not taxed by several states. Isn’t that enough incentive to keep my 401k in place?
Gabe, thanks for highlighting the state tax exemption (also noted by Steve above). I wasn’t aware of this until I saw Steve’s comment, and it’s definitely something folks should be aware of.
Fortunately, I checked for GA and there’s a limit on tax exemptions for retirement income which I’ll meet with my pension (so, most of my pension will be tax free, and my 401(k) would still have been taxed since it was over the exemption limit). Whew, glad I missed that bullet, I would have been kicking myself if I had unknowingly given up a tax credit. Thanks for bringing up a very important point.
I thought I’d add to the great information supply Fritz has created here with my TSP transfer to Vanguard. Both my wife and I have TSP accounts, and last year I started to partially transfer some of her TSP over to her Vanguard IRA account. Note that “transfer” is the term you should probably use, as rollover does have significant tax implications (at least with the TSP).
Generally, the benefits of moving out of TSP (transfer to another IRA, such as Vanguard):
1. Easier/better distribution options from Vanguard during retirement
2. Ability to make Roth conversions (2-3 clicks into a Vanguard Roth)
3. More investment options. Although the TSP Mutual Fund window opens many options, these seemed difficult to research easily through their system (in a meaningful way to me), and, ultimately, didn’t allow investments into individual companies.
In December 2021, I transferred over ½ of my wife’s TSP (she was retired and so was eligible) whereas I am still working and so cannot transfer out. I transferred the TSP funds to her Vanguard IRA (set up just for this), then invested into 10 different individual companies. This was essentially an experiment using meaningful funds to us (rather than just something theoretical) to generate continual income off these dividend paying companies; this method, in theory, would allow us to not worry about our retirement income needs due to the cyclic impacts of a general market downturn on the stock price and having to cash out when the market was down. I’m very familiar with the bucket system, but I wanted to see if something “different” might work better for us. I will say that it certainly was painful to perform this transfer (probably took a month working with the TSP archaic conservative system). Now that it’s done, I realize how much easier it is to use a non-employer based IRA system (i.e. TSP) such as Vanguard. SO MUCH EASIER.
I will say the experiment has been going very well; although I certainly didn’t want a market downturn, it was a very good test to show the income resilience of such a system. I was also able to take 2 of these individual company holdings and convert them into Roth holdings (taking advantage of the price reduction in those stocks during this market downturn, although our dividend income of these stocks has never decreased…… we’re just now making those dividends/income generation on the tax free Roth side!).
The following is a pretty short youtube video that may give you some expert information about when and why to stay or go with TSP.
https://youtu.be/tfUXNVetqm8
As soon as we “CASHED” out the 9 to 5 eight years ago…
We decided to roll the entire 401K to our traditional IRA…
The financial move was no brainer for us…
1. Cost less to maintain
2. More options of investments
3. The ease to conversion to Roth IRA (as Fritz experienced in the process)
Here is a “psychological” tip to help with your FI path…
Just because you have done something for so long…
It does not mean it is a “GREAT” thing (it is more of a “Conditioned Stimulus” or simply put a “habit”)…
As soon as you have crossed over the “FIRE” marker…
Do not keep your 401K plan unless you have a specific need that out-weights the above benefits.
Good luck with your FI endeavor!
Fritz,
Thanks for sharing your experience with the 401k rollover. I fully intend to get that done soon after my retirement next year. My 401k doesn’t have a great selection of funds and charges higher administrative fees. So I’m more motivated than you were to migrate it to my personal IRA. The situation with my wife’s 401k is a bit more complex in that she has a lot of shares in her company stock that have appreciated very significantly over the years. So it makes sense to execute an NUA for those shares in the process of the 401k rollover. Given that the NUA event would require an immediate (within the same tax year) tax payment on the cost basis, which is not something we are thrilled to do in the near future, she would have to delay her 401k rollover for a while longer.
Great post Fritz, I love the satirical nature of this post, very creative!! I closed my 401 when I left my previous employer in 2008, and never looked back. Doing so, afforded me many more options and like you, I have some of it placed in Vanguard Funds. I’m currently in VYMI and VOO, and other than this year they have served me well, hoping for a more prosperous 2023. Hope you and your family have a blessed Holiday!
Fritz, in the process of doing the same thing as of end of 2022. As a new retiree this year and having closed down my LLC which my wife and I were the only 2 employees, I found 2 additional benefits to rolling over our 401Ks into IRAs… 1) save $500 annual admin fee (worth a couple nice dinners out!) and 2) my bond guy at Schwab can actually provide “advice” in an IRA where they cannot in a 401K (some legal liability concerns?). Now that I am in withdrawal mode, part of my strategy was to set up a 10 year individual bond bucket with 5 years of that previously in my 401K accounts. Going forward, as previously stated, I have the first world issue of being efficient in tax planning… a whole new adventure!
Fritz, I’m in the process of doing the same thing as of end of 2022. As a new retiree this year and having closed down my LLC which my wife and I were the only 2 employees, I found 2 additional benefits to rolling over our 401Ks into IRAs… 1) save $500 annual admin fee (worth a couple nice dinners out!) and 2) my bond guy at Schwab can actually provide “advice” in an IRA where they cannot in a 401K (some legal liability concerns?). Now that I am in withdrawal mode, part of my strategy was to set up a 10 year individual bond bucket with 5 years of that previously in my 401K accounts. Going forward, as previously stated, I have the first world issue of being efficient in tax planning… a whole new adventure!
Well played, Dave. Congrats on recently crossing The Starting LIne, sounds like you’re managing it well.
Qualified Charitable Distributions (QCD’s) are only available in an IRA, not a 401k.
Thanks Fritz for offering your experiences and insight. I am retiring in about 3 weeks, at the end of 2022. I currently have the majority of our retirement in a Fidelity 401k that is a partially a Roth and partially pretax, a likely be rolling it over to Roth IRA and a pretax IRA because like your Vanguard 401k the Fidelity 401k does not make it easy to track/control what is in the Roth side verse that pretax.
If you go to Fidelity NetBenefits, there is a place on that home page to look at sources and open that up. It will tell you what percentage is in Roth and what is in traditional for each account. If you make an online withdrawal, they will by default pull out according to those percentages, but if you want to pull only Roth or only traditional, it’s a simple phone call for them to do something special in their systems to make that happen. It’s not a pain at all, other than you have to talk to a human. And their customer support is top notch from my experience.
I have an even more complicated setup. My Fidelity account has a feature called BrokerageLink where I can transfer anything out of the employer’s 401(k) into BrokerageLink, choose from thousands of investments, and avoid the dozen or so chosen in the 401(k). But to withdraw from that, it becomes a two stepper. They need to sell shares in BrokerageLink, move the cash to the 401(k) then withdraw from the 401(k). It just takes a few more days for everything to process, but making your trades well in advance of any deadlines (end of year, tax day) avoids those complications.
Hi Fritz,
Curious as to why you think the Roth will be subject to RMDs in the future. You’ve already paid the taxes at conversion so it’s similar to a brokerage account in that respect (except for taxes on earnings). Of course, it IS the IRS we are talking about …
Keep up the good work.
Dennis, just preparing myself for the possibility. I’ve always taken a conservative view on policy decisions and it’s tended to work well. I assumed my employer would discontinue health care insurance coverage for retirees, even though it was in place when I was initially planning my retirement. They did discontinue it, but I was able to absorb it given my conservative assumption when I planned my retirement expenses. I suspect the government will need to find “creative” ways to increase income/reduce expenses, and at some point they’ll realize the approach of implementing RMD’s on Roth’s could be the least painful method. For the record, I also give my SS benefits a 25% “haircut” in my future cash flow projections, just to be conservatie. Nothing’s guaranteed, especially when the IRS is involved…
Fritz… that doesn’t make sense to me. Roth’s are after tax dollars, so implementing RMDs wouldn’t help the government since there is no tax due. Now, if they use Roth required RMDs as part of some new tax law to be considered income for Medicare Part B or SS means testing, then yah, maybe. The only other thing is perhaps they would figure you would invest the Roth RMDs into new taxable investments. So, maybe. But I suspect we are a long way from that.
The tax revenue would be generated by the portion that is “RMD’d” from the Roth and into an after-tax account. It also reduces the amount of the Roth that would be passed on as a legacy, where it would otherwise also remain tax-free for the recipient of the estate. I hope I’m wrong, only time will tell. If I were a betting man, I’d bet $1 it’ll happen sometime during my retirement.