Advanced Personal Finance

There has been lots written about what to do with a 401(k) when you leave a job and why.  I’m not going to rewrite those posts.  Instead, what I do want to talk about is my experience rolling a 401(k) over into an IRA.  I’ll show you how to do it and pitfalls to avoid.

When you leave an employer in whose 401(k) plan you participated, you have some decisions to make regarding your retirement savings.  Really, your options are three:

• Leave the money in your old employer’s plan
• Roll your account into the new employer’s plan (if allowed)
• Rollover into an IRA

I recently left my job and chose the third option - a 401(k) to IRA rollover.  It had been many years since I did this last and I’d forgotten how it goes, so I thought I’d review it here.

Step 1: Decide where to open the IRA

There are several advantages to rolling a 401(k) into an IRA.  Two of the biggest are investment options expand dramatically (for good or bad) in an IRA and the opportunity to save money on fees.

401(k)s are inherently limiting.  You’re limited in what you can invest in (that is, only what your employer offers).  You also can’t take your business elsewhere if a 401(k) plan gouges you on fees.  A rollover to an IRA gives you an opportunity to fix these problems.

When evaluating where to open your rollover IRA, you want to look at those two elements - investments offered and fees charged.  In this case, bigger is better.  You want to go with a large fund family or brokerage.  Vanguard, Fidelity, and T. Rowe Price come immediately to mind.  Generally, they charge very low fees on their products.  They also give you lots of different investment options from which to choose.

But I didn’t use any of these three.  I used USAA because they are my all-purpose financial provider.  I’ve written before about their awesome service and I like having all my accounts consolidated in one place.

Step 2: Contact your choice and set up accounts, if necessary

After I decided to go with USAA for my rollover, I gave them a call.  I already had retirement accounts of various types open with them.  I wanted to prepare the ground for the rollover, though.  I called USAA and had them open two new accounts - a Roth rollover account (since some of my 401(k) is the Roth type) and a money market account for the traditional IRA.  Why money market?  I want to rebalance everything once it’s consolidated, so this gives me the opportunity to do that.

Step 3: Call the administrator for your old plan

I then called the administrator of my old employer’s plan - Fidelity.  They were excellent.  They actually have a group of people assigned to assist people after they’ve left my old company.  Naturally, they’re there to also try to get you to leave the money with Fidelity, but I did not get a hard sell.

I have a bit of a complicated situation in that I have traditional 401(k) contributions, Roth 401(k) contributions and after tax contributions.

There’s a big difference between an IRA rollover and a 401(k) rollover.  In an IRA to IRA rollover, you never see the money.  It goes electronically from one investment firm to another.  Not so with a 401(k) rollover.  In that case, the checks have to be sent to you (”For the benefit of [the investment firm]” is written on the checks) and you send them to the investment firm.

I think this is a stupid set-up for a couple of reasons.  First, seeing a (hopefully) large dollar figure on a check makes people question rolling it over.  I think it might encourage 401(k) withdrawals.  Secondly, there’s a (admittedly small) chance the checks might be lost in transit or be deposited incorrectly.  Finally, if you’re not careful and forget about it, you might take a withdrawal inadvertently.

Anyway, I recently got the checks in the mail and now have to close the loop and send the checks to USAA.  At that point, the 401(k) to IRA rollover will be complete.  Then it’s time for a complete review of my asset allocation.

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Some big things are happening in our family.  I started a new job that has an incredibly cool feature (which I’ll write about sometime soon).  We’re selling our house, buying another, and moving to another state.  My wife will also be staying home with our second child for the next couple of years, so the budget’s been completely up-ended.  Busy, busy.

Since our family’s money situation will change radically, we’ve had to make a number of changes to our financial priorities.  One of those priorities has been saving for our two kids’ college funds.  After wrestling a little with whether paying for college for them is a good idea, we’ve been saving pretty aggressively toward that goal.  One of the priority shifts I just mentioned is that we’re scaling this back a bit until my wife returns to work.  We’ll still be saving, just at a slower pace.

We have a couple of decisions we have to make.

1. Do we continue to contribute to the 529 we already have set up (in our soon-to-be former state)?
2. If not, do we open an account in the new state’s plan?
3. Should we roll over the old account into the new?

I’m going to leave it as a given that we’ll continue to use a 529 savings account plan.  There are, of course, lots of other ways to save for college, but this one works best for us.

The old state’s 529 was one of the best rated by savingforcollege.com, the premier site for information on saving for college (with which I have no affiliation).  It offered a state tax deduction for contributions, it was low fee and run by T. Rowe Price, and it had lots of good investment options.  So it’s going to be tough to beat in a 529 plan.

The new state’s 529 is also really good, though.  It also offers a state income tax deduction for contributions (up to a certain dollar limit); is low fee and run by Vanguard; it also has plenty of appropriate investment options.

This is a no-brainer.  We’ll suspend contibutions to the old plan and open an account in the new state’s plan and begin contributions there.  It’s obvious because the plans are similar in every respect - it’s not like we’re moving to a state with a bad 529 plan.  What makes the decision easy is the tax sweetener.  Getting a tax deduction for something we’d do anyway is very nice.

Someone else’s situation may be different.  If you’re considering these questions, you have to compare the two (or more since there’s no reason you have to invest in your state of residence’s 529 plan) plans side by side.  If the old state’s plan was solid and the new one isn’t (e.g. high maintenance fees or bad investment options), your decision will be different.

Now we come to the question of the rollover.  In short, you can roll over your 529 account from one plan to another just like an IRA rollover.  Whether we should, however, is the question.

On the one hand, I am a big believer in consolidation for simplicity.  Keeping all the money in one place has a great deal of appeal.  On the other hand, moving it is a little bit of a hassle and like I said, the old plan is very good.  Incidentally, there are no tax consequences either way.

We still haven’t decided for sure, but I’m inclined to move the accounts to the new state’s plan.  I think maybe we’ll establish the accounts, make sure there are no issues with administration we don’t like, then make the rollover happen.  We shall see, though.

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I’m learning all kinds of marginally-useful stuff since we’re selling one house, buying another in a different state, and moving all of our stuff there.  It’s that last one I’m going to write about in this post.  Specifically, I’m going to tell you what you need to know about making sure your possessions are properly insured during a move.

Insurance during our move was one among the 1,237 things to think about during a move that I didn’t think about.  Besides the fact that insurance in general is about as exciting as watching geriatric water ballet, it’s often byzantine in its details.  So here’s what I’ve learned.

Your possessions are most likely not covered during transit by your homeowners insurance.  This makes sense if you think about it.  You aren’t insuring your old place any more.  The stuff isn’t actually located in either house.  For a short period of time, it’s quite possible you don’t actually own a house at all if you haven’t closed on the new house prior to closing on the old.

The mover is only responsible for certain situations and only up to a point.  The standard amount a mover is on the hook for is $0.60 per pound (it’s called ‘valuation’).  Except for your angelfood cake collection, nothing you own can be replaced at sixty cents on the pound.  Besides that, the liability of the mover is limited to certain situations.  For example, if the truck is broken into, you may not be covered at all.

In many cases, you need to buy third-party moving insurance.  Often the mover will offer this through a third party, but pay attention to cost and exclusions.  Your homeowners insurance company may very well offer to sell you an inexpensive policy to cover the gap between house coverages.  Make sure you get replacement cost coverage if at all possible.

So before a move, do some homework and find out if your insurance covers your stuff during a move and, if so, how well.  It might make the difference between a minor inconvenience and an unmitigated disaster.

Additional resources:

Bankrate article on moving insurance

Explanation of types of moving insurance

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I have one of those great money-saving stories I love to read about on other blogs (like this one from CFO) and hear about from friends.  And for anyone who will ever take out a mortgage, it may very well save you a good deal of money.

We’re selling our current house and buying another one in a different state.  For us, for right now, that still means a mortgage.  This will be a smaller mortgage, to be sure, and that’s part of the reason we’re moving - lower cost of living.  At any rate, we’re in the process of doing all the mortgage-related paperwork.

If you’ve never taken out a mortgage or if it’s been a long time since you have, you may not be familiar with what’s called a Good Faith Estimate (GFE).  The GFE basically itemizes all your expenses for the mortgage.  Don’t ignore or skim over the GFE.  It tells you what the mortgage company and others are charging you.  On major purchases like this, where you’re talking hundreds of thousands of dollars, people tend to overlook a fee here they don’t understand and a charge there that wasn’t explained. 

Don’t be that person.  If you save $100 here, it’s the same amount of money as if you’d saved $100 at the grocery store.  If you could save a $100 on a computer, you’d do it, right?

Anyway, I was reviewing our GFE like a good frugal blogger.  I highlighted three items right away:

• Origination fee: $1250 (1% of the loan amount)
• Application fee: $300
• Underwriting fee: $325

I called the mortgage company contact person to get an explanation of these fees.

Me: “Could you explain why I’m being charged an application fee?”
Mortgage officer (MO): “It’s a standard fee.”
Me: “Ok, but why am I being charged for applying for a mortgage?”
MO: “It includes the appraisal and credit report fees.”
[Back story: We’re buying a new house at a price that requires us to use the builder’s lender.  In other words, at a high level they’re really the same company.]
Me: “But why do you need an appraisal of a new house your company is selling me?”
MO: “It’s required to disburse the loan.”
Me: “Ok.  Now what’s an ‘underwriting fee?’”
MO: “It’s the cost we pay to the underwriter to process the loan.”
Me: “So you’re passing your cost of doing business on to me.”
MO: “I guess you could look at it that way.”
Me: “There’s a $1,250 origination fee listed.  I don’t want to pay that.  Can you have it removed?”
MO: [several seconds of silence] “No one’s ever asked that before.”
Me: “Well I’m asking now.”
MO: “I’d have to talk to my manager and see what we can do.”

Normally that’s the kiss of death.  ‘Talk to my manager’ is salesperson code for put you on hold or leave the room, pretend to consult someone, and return to say ‘No way.’  Even if the person you’re dealing with actually does talk to his or her manager, the answer is usually no for the simple fact that the manager doesn’t have to say it to your face.

In this case, things worked out quite differently.  The next day when I spoke to the mortgage person, she told me that she had, in fact, gotten permission to remove the origination fee.

I got three takeaways from this experience:

1. Always go over every document in a situation like this, especially a GFE.
2. Ask questions about fees you don’t understand.
3. Ask again to have them removed.

Simply asking the question saved us $1,250.  And, to me, that’s real money.

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This was a new one to me.  I learned another weird IRS rule today.  This one was about 401(k) rollovers and after-tax contributions.

A couple of months ago, I changed jobs.  Today I called the my old employer’s 401(k) plan administrator, Fidelity.  The man assigned to help me with the disposition of my 401(k) was very helpful, especially with my somewhat complicated situation.

My now-former employer allowed Roth 401(k) contributions beginning last year and I took advantage of the opportunity.  (Incidentally, I highly recommend taking advantage of the Roth 401(k) if you’re offered it.)  Several years ago, I screwed up at the end of the year and didn’t shut off my 401(k) contribution in time.  I hit the limit for that year but money kept coming out of my paycheck and was contributed after tax.

So I had three sources of funds for the rollover: 

• Traditional before-tax
• After-tax Roth
• After-tax non-Roth. 

So this wasn’t a straightforward rollover.  The guy helping me actually had to get help from another guy who knew the rules a little better.

Here’s where the weird IRS rule comes in.  If your (joint) AGI is below $100,000, you can have the after-tax non-Roth funds rolled over as a current year Roth IRA contribution.

Our income this year is slightly over that amount, so the rule is I can’t have a check made out to USAA (the place I’m having the money from Fidelity sent to) directly as a 2008 Roth IRA contribution.  What I have to do is have the check made out to me and then send it to USAA.

In fact, I could do whatever I want with the money since I’ve already paid taxes on it, but using it toward this year’s Roth IRA sounded like a good idea.  Trouble is I can’t do that in one easy step. 

Like I said, weird rule.

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