401k Rollovers

[Edsel]

Employees (at least those who can think straight) enter and fatten up their 401K retirement accounts.  A great deal.

Well...not entirely.  Custodial Fees (on top of mutual fund fees) are heavy and aggressive, and the only thing that prevents the 401k from being less attractive is the employer match - enough to overwhelm the high fees.

After the employee retires or quits, and the employer match stops, the real character of the vehicle is revealed.  I know people who have retired/quit and five years later they haven't touched the money, yet their balance is no better than it was five years thence.  Disclosure of fees hasn't helped a bit since the regulation was adopted a few years ago.

It is thus an economic recommendation I give to my customers - get OUT of the 401k, and rollover into a conventional IRA, where hopefully their wealth can grow.  However, I'm finding that there is a snag!!  The 401k plan is written in such a way that if a participant rolls over the funds into any other vehicle, it is TAXABLE.  My contacts in the investment community tells me it all depends upon how the 401k plan is written as to whether the rollover is taxable or not.

I am not aware of anything in the Code or Regs that stops free movement in rollovers - and as long as the taxpayer leaves his hands off of it, a rollover should be tax free.  If the creators of a 401k plan can make an outbound rollover taxable at their own choosing, how can they get away with it??  Taxability should be defined by the IRS - not by custodians of funds.

[Randall]

I don't know the specific rules of what a plan is allowed to do but I would think an individual can roll it over.  Even if receiving a check, roll it over within 60 days.  But if they withhold tax, then the individual would have to come up with the extra money to roll the 100% amount over.

[Randall]

Even though the fees may be high, I wonder where they had their money within the plan to not have any growth.  That is of course, before the recent situation and big downturn.

 

[BulldogTom]

4 hours ago, Edsel said:

After the employee retires or quits, and the employer match stops, the real character of the vehicle is revealed.  I know people who have retired/quit and five years later they haven't touched the money, yet their balance is no better than it was five years thence. 

The 401k plan is written in such a way that if a participant rolls over the funds into any other vehicle, it is TAXABLE.  

I am not aware of anything in the Code or Regs that stops free movement in rollovers - and as long as the taxpayer leaves his hands off of it, a rollover should be tax free.  If the creators of a 401k plan can make an outbound rollover taxable at their own choosing, how can they get away with it??  Taxability should be defined by the IRS - not by custodians of funds.

The employer cannot hold the participant's vested portion of the 401K.   It belongs to the participant and they are allowed a tax free rollover to their IRA of those funds.  The 401K plan rules cannot stop this from happening.  

Tom

Modesto, CA

[Lion EA]

You might be thinking of your client receiving a check that could have w/h, and as Randall said, it's on client to make up the difference or pay tax on the w/h. But, he gets the w/h on his tax return. Just tell your client to do a trustee-to-trustee transfer to avoid any w/h.

[Edsel]

22 hours ago, Randall said:

Even though the fees may be high, I wonder where they had their money within the plan to not have any growth.  That is of course, before the recent situation and big downturn.

 

Yes, Randall it seems incredible.  In the days when you still had these fees reportable as a 2% deduction, these custodians would have to report their fees on the back of their tax statements (1099-DIV or 1099-B).  I would see these things (not associated with a retirement account) every year.  A typical statement would have $500 as ordinary dividends and $500 as LTCG distributions, and then have $1700 in custodial fees.  The taxpayer would think they were doing a great job because the portfolio would be up $5000.  However, the LTCG distributions is a true reflection of what really comes out that isn't fluff - and in a bad year the fluff goes away.

It is not uncommon over a 30-year period for a custodian to make more $$ than the participant - if the employer's match is subtracted.

 

[Edsel]

20 hours ago, BulldogTom said:

The employer cannot hold the participant's vested portion of the 401K.   It belongs to the participant and they are allowed a tax free rollover to their IRA of those funds.  The 401K plan rules cannot stop this from happening.  

Tom

Modesto, CA

Thanks Fresno State guy!  I think you have hit the nail on the head.

The incidents I remember had no employee vesting.  Either entirely funded by employer, or later rolled or transferred into a subsequent 401kl with another employer.

[Randall]

1 hour ago, Edsel said:

Thanks Fresno State guy!  I think you have hit the nail on the head.

The incidents I remember had no employee vesting.  Either entirely funded by employer, or later rolled or transferred into a subsequent 401kl with another employer.

That's a common trick of small employers.  No vesting.  Employer contributes.  Employees don't stay that long.  That employee's balance is distributed over the other accounts of which the employer has a huge percentage and receives most of it in his account.