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401k Rollover Help/Questions


rb
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I was hoping that some of you can help me with a situation I have.

 

So an employment has ended and there is an option to roll over the 401k to a traditional IRA. The 401k is fully vested. Now under normal circumstances I open up an IB IRA account and just tell the 401k where to send the funds right?

 

However, it gets a little more complicated. This a quite sizable 401k and is a highly compensated employee 401k. So I was wondering whether there are any limitations or exceptions in a case like this or a 401k rollover is good to go no matter what.

 

Any guidance on this is appreciated. Thanks.

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Yeah, all the contributions are 100% vested and the account only has 2 mutual funds in it, nothing esoteric. The plan is to do a direct rollover to a newly opened IRA at IB so they can just send the cash into it and not have to worry about cheques and other nonsense like that.

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Yeah, all the contributions are 100% vested and the account only has 2 mutual funds in it, nothing esoteric. The plan is to do a direct rollover to a newly opened IRA at IB so they can just send the cash into it and not have to worry about cheques and other nonsense like that.

 

This shouldn’t be a problem. I personally would roll it over into Fidelity and Schwab and maybe from there into IB later, because I don’t trust those guys at IB to get these things right. If there is any issue, you may have a hard to to get them  resolved. With Fidelity or Schwab, I don’t think you will have issues.

 

Disclosure : I have IRA’s with both Fidelity and IB.

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If it's currently with one of the big firms, you might want to have the money rolled directly into the IRA at that firm from the 401k. Then do a transfer of assets from that IRA to the IRA at IB. It'll save you some (potential headaches) regarding coding, money transfers and keeping the assets invested.

 

There is an excellent chance that they'll send out a check to IB if you decided to do a rollover to another trustee.

 

Most likely things will go through without an issue but this way significantly reduces the chance of a screw up. The only real downsides is that you'll have to do a little more paperwork (or online account set up) and possible account closing fee depending on firm.

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If you don't already have a pre-tax IRA, establishing one via a rollover will limit your ability to execute a back-door Roth conversion strategy due to the pro-rata rule. If you don't care about making Roth contributions via a non-deductible IRA, this won't be an issue for you. 

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If you don't already have a pre-tax IRA, establishing one via a rollover will limit your ability to execute a back-door Roth conversion strategy due to the pro-rata rule. If you don't care about making Roth contributions via a non-deductible IRA, this won't be an issue for you.

Not allowed to have a Roth IRA so it doesn't matter.

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If you're over the income limits, the "back door" strategy is the work-around to make Roth contributions regardless of your earnings. However, by establishing a pre-tax IRA, you'll eliminate your ability to execute this strategy due to the IRA aggregation/pro rata rules. I've seen people get tripped up by this. It can be a surprise at tax time and complicates the record keeping of pre/after tax dollars within an IRA. If you're not using the back door strategy, and never plan to, having a pre-tax IRA is no issue at all.

 

The other thing I would add is if you retire at age 55, you can take distributions from a 401k without penalty. If the money is rolled over to IRA, penalty free withdrawals are age 59.5.

 

If neither of these are an issue, rollover is a good deal. Few people know that they are paying fees inside 401k plans. The fees are usually built in to higher fund expenses so you never see them. The fees are generally lower in large-company plans. The flexiblity of IRAs is nice and the costs are hard to beat at the discount brokers.

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If you don't already have a pre-tax IRA, establishing one via a rollover will limit your ability to execute a back-door Roth conversion strategy due to the pro-rata rule. If you don't care about making Roth contributions via a non-deductible IRA, this won't be an issue for you.

Not allowed to have a Roth IRA so it doesn't matter.

 

Also, i think it would not make sense to contribute to a after-tax regular IRA, cuz at withdraw time your tax is based on the ratio of your entire before tax/after tax IRA. So you will have to pay a bit tax again on your after tax IRA contributions.

 

 

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rb, pardon too personal question: IIRC you're outside US. How the heck you have 401(k)? Were/are you working in US position while being outside US? Or are you asking for a client/friend?

 

I'm asking not just out of curiosity but also since this may affect your conversions into Roth/etc. IIRC US accounts and non-US accounts and taxes can get way complicated really fast.

 

Feel free not to answer though.  8)

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rb, pardon too personal question: IIRC you're outside US. How the heck you have 401(k)? Were/are you working in US position while being outside US? Or are you asking for a client/friend?

 

I'm asking not just out of curiosity but also since this may affect your conversions into Roth/etc. IIRC US accounts and non-US accounts and taxes can get way complicated really fast.

 

Feel free not to answer though.  8)

Yes. Among other things I had a position with a company in the US while also not being in the US. And yes, I am well aware of how complicated the international tax stuff gets. Right now I file taxes in 3 damn jurisdictions.

 

I was just slightly concerned about this 401k rollover as I've never been in this position before and I'm not as familiar as the locals for which I assume this is a fairly basic subject. We just don't have the 401k vs IRA distinction in Canada. So I thought it prudent to reach out to my CoBF brethren.

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rb, pardon too personal question: IIRC you're outside US. How the heck you have 401(k)? Were/are you working in US position while being outside US? Or are you asking for a client/friend?

 

I'm asking not just out of curiosity but also since this may affect your conversions into Roth/etc. IIRC US accounts and non-US accounts and taxes can get way complicated really fast.

 

Feel free not to answer though.  8)

Yes. Among other things I had a position with a company in the US while also not being in the US. And yes, I am well aware of how complicated the international tax stuff gets. Right now I file taxes in 3 damn jurisdictions.

 

I was just slightly concerned about this 401k rollover as I've never been in this position before and I'm not as familiar as the locals for which I assume this is a fairly basic subject. We just don't have the 401k vs IRA distinction in Canada. So I thought it prudent to reach out to my CoBF brethren.

 

Got it. I believe you got correct information from this thread. You are possibly at higher risk of audit and therefore backdoor Roth conversion - though legal - might be another risk factor. Also, as currently-not-in-US-person, you most likely cannot rollover work 401(k) into individual (self-employed) 401(k) that has advantages in certain situations (including backdoor Roth). So forget last sentence. And good luck.

 

OT: I was looking at investing abroad (outside US) into startups and hedge funds. During that I ran into the long threads about taxation and in particular US and Canadian RRSP entanglements. Not for faint hearted apparently.

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If you're happy with the investment choices in this 401k and the company doesn't force you to rollover, you can choose to let the account stay in the plan. You just can't contribute additional funds to it.

 

I still have an old 401k from a place where I worked like 10 years ago. Their funds have super low expenses so I use it part of my "passive" allocation. The returns there are similar to my active side despite spending so much more hours on the active side.  ::)

 

*smh at myself*

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If you're happy with the investment choices in this 401k and the company doesn't force you to rollover, you can choose to let the account stay in the plan. You just can't contribute additional funds to it.

 

I still have an old 401k from a place where I worked like 10 years ago. Their funds have super low expenses so I use it part of my "passive" allocation. The returns there are similar to my active side despite spending so much more hours on the active side.  ::)

 

*smh at myself*

Yeah i know. But I'm not crazy about it. Pretty much an average plan at Wells Fargo. I only did it to collect the company contributions. Also since I'm an investment manager I should probably do it myself. You either eat you own damn dog food or find something else to do.

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rb, pardon too personal question: IIRC you're outside US. How the heck you have 401(k)? Were/are you working in US position while being outside US? Or are you asking for a client/friend?

 

I'm asking not just out of curiosity but also since this may affect your conversions into Roth/etc. IIRC US accounts and non-US accounts and taxes can get way complicated really fast.

 

Feel free not to answer though.  8)

Yes. Among other things I had a position with a company in the US while also not being in the US. And yes, I am well aware of how complicated the international tax stuff gets. Right now I file taxes in 3 damn jurisdictions.

 

I was just slightly concerned about this 401k rollover as I've never been in this position before and I'm not as familiar as the locals for which I assume this is a fairly basic subject. We just don't have the 401k vs IRA distinction in Canada. So I thought it prudent to reach out to my CoBF brethren.

 

Got it. I believe you got correct information from this thread. You are possibly at higher risk of audit and therefore backdoor Roth conversion - though legal - might be another risk factor. Also, as currently-not-in-US-person, you most likely cannot rollover work 401(k) into individual (self-employed) 401(k) that has advantages in certain situations (including backdoor Roth). So forget last sentence. And good luck.

 

OT: I was looking at investing abroad (outside US) into startups and hedge funds. During that I ran into the long threads about taxation and in particular US and Canadian RRSP entanglements. Not for faint hearted apparently.

LOL, no it's not for the faint hearted. Thankfully international taxation is a specialty of mine so I'm quite comfortable with the issues involved. In fact I prefer it to be messy and complicated. Otherwise I imagine that the associated fees wouldn't be as generous as they are  ;D. Still for the life of me I can't fathom what foreign investing in hedge funds and startups have to do with RRSPs.

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Still for the life of me I can't fathom what foreign investing in hedge funds and startups have to do with RRSPs.

 

./shrug. It's just that if you search for "US person investing in Canadian companies / hedge funds" (or some variation thereof), you get a bunch of posts/threads talking about issues of US-Canadian person having RRSP. I think it's because US tax lawyers writing about US persons investing abroad also write about a (common?) situation of US-Canadian person having to deal with RRSP and US taxation.

 

To be clear: I am not US-Canadian person. I don't have RRSP and I don't know anything about it. I have looked into investing into startups abroad (there's a bunch of landmines) and into hedge funds abroad (there are way more landmines, but the first one is that they are likely PFIC so don't). None of this is aimed at rb who probably can recite relevant tax issues while drunk racing me in his Ferrari. Just at random people reading CoBF.  ::)

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