Comments on: Three More Reasons To Not Rollover Your 401(k)

By: Steve

Steve — Thu, 14 May 2009 12:26:14 +0000

First, you cannot take a loan on a 401 (k) as a separated employee!

Second, as stated by Doug earlier, most employer plans have a repay loan feature on termination of employment.

Third, very few plans send you a check if you are doing a rollover. You can have the funds transfered directly to your new IRA using either the new IRA company form, your old employer form, or automatically from their website. You will usually get a check if you don’t rollover your money if it is below a certain threshhold, such as $5,000. This is
because the company doesn’t want to pay the admin on that small amount.

For my clients I like to explain that it is like the airline business. The airlines use a hub and spoke system where a lot of there flights go through the hub then on to the destination. Your IRA should be your hub and your jobs should be the spokes. Every time you leave your job you should rollover your pension into your IRA. That way you have a centralized location for your retirement that you or your advisor can administer and manage in any way you like.

I hope this clarifies some of the grey areas.

By: Wim Taylor

Wim Taylor — Tue, 31 Mar 2009 21:27:47 +0000

Personally, I am not that keen on all the constraints that come with having my money tied up in a 401K. I would prefer to roll the funds over into a self-directed IRA where I have more control over the investments. My investment of choice are mortgage positions. My investment is backed by an asset and a personal promissory note with a 70% or below loan to value ratio. The interest rate are typically fairly high as real estate investors are finding tight times when it comes to credit. Once the funds are self-directed (which granted does take time =( I can address the issue of volatilty by getting the funds out of global markets and into local markets based on cash flow and not speculation. In terms of borrowing against a 401K, I have really earmarked the funds for retirement and I try to keep a nice safety net available so I dont have to dip into these funds.

Just the thoughts of one man though…

Wim

By: Travis

Travis — Tue, 31 Mar 2009 17:01:33 +0000

The policy is based on the deal that your former employer set up with Fidelity. Some plans allow a auto draft from checking or send a monthly bill.

By: Doug M

Doug M — Tue, 31 Mar 2009 16:32:47 +0000

One tidbit about borrowing from a 401(k) that I just had occasion to find out about the hard way… if you leave your current employer, the 401(k) loan becomes due in full immediately.

I had no idea.

I borrowed from my 401(k) to put money down on my condo a few years ago (bought at ~precisely~ the wrong time, but that’s another story). Was paying it back with payroll deductions, which was painless.

I recently upgraded my job situation, and lo! Got a letter from Fidelity demanding the remaining balance or they would rat me out to the IRS. Yes, they said it more nicely than that, but that was the essence of the message.

I called them, thinking that if I left the money with them, rolled it over to a Fidelity IRA, I could keep paying the loan back per the previous agreement… nope. No wiggle room whatsoever.

Thank the Flying Spaghetti Monster that I had the money available in short term savings, or I would have really been shafted, tax-wise.

Whether this sort of thing is required/law, or just bad Fidelity policy, I do not know. Either way, I’m rolling out of that place.

The more you know.

Doug

By: Travis

Travis — Tue, 31 Mar 2009 15:43:27 +0000

Those points are good but if your goal is to make money compound interest is the way to do it. Taking loans against retirement is better than a withdrawal but is quite hurtful in the long run. So if your goal is a healthy retirement roll all of your money to an investment with a large number of choices that can be an IRA or a 401k.

By: Neal Frankle

Neal Frankle — Tue, 31 Mar 2009 15:40:50 +0000

That makes sense Jim. Its always good to look at each financial decision from all angles.

By: Jim

Jim — Tue, 31 Mar 2009 15:37:40 +0000

I agree with you, I think a rollover is a good idea in many cases, I was just mentioning a few of the reasons why you shouldn’t so people understood them.

By: Neal Frankle

Neal Frankle — Tue, 31 Mar 2009 13:29:54 +0000

Jim,

I see your points here but I respectfully disagree.

1. The process can be long but its usually not. In fact, lately I’ve been surprised at how quickly the process is completed.

2. For most people, not being able to borrow against an IRA is a huge benefit. My experience tells me that the reason folks have most of their savings in an IRA is precisely because they can’t borrow from it.

3. Volatility. Yes, this is true. Your money is “on the dark side of the moon” for a few days. The longest I’ve ever seen this take is 10 days and that could hurt an investor – but it could also help someone. Its 50-50.

When I look at all the pros and cons, I see the rollover as a no-brainer. But I do see your points. Thanks for a very important topic.