What are you going to do with your 401K?

When you leave your current employer, if the balance in your 401(k), or what's left of it given what's going on in the market , exceeds $2,500 you may roll it over into an IRA at virtually any brokerage. The advantage of doing this is that you can manage your 401(k) investments in one place along with any other taxable investments you might have at another financial institution. This way you get to choose investment options that may not currently be offered within your 401(k), too!

The second advantage is that most 401(k) plans offer ridiculously expensive fund choices, and rolling your money over into a Rollover IRA with a low-cost investment manager or brokerage such as Vanguard or Fidelity (as long as you meet fund minimums) for instance would make your investment expenses considerably lower than what they might be now. You have the choice of liquidating your 401(k) and using the proceeds to buy similar (often cheaper) funds and transferring the shares in funds currently in your 401(k) "in kind" into a Rollover IRA. I would recommend liquidating and buying into a similar fund over an "in kind" transfer.

If need be, you can also withdraw money from your rollover IRA to meet eligible educational expenses. You'll pay income tax for sure, but you won't be hit with the 10% penalty the IRS levies on other early (i.e. before you're 59+ years old) distributions from IRA accounts. So it's also a somewhat decent "worst case scenario" backup for MBA funding.

disclaimer: I have all my money at Vanguard and will shill for them at every available opportunity

What's the benefit of opening a higher cost rollover account vs lower cost one? Performance of the fund?

Let's say you have a large cap stock fund in your 401(k) that charges an expense ratio of 1.00%. Now both Vanguard and Fidelity offer index funds tracking a broad large cap stock index for expense rations ranging from 0.10% to 0.25%.

You can't predict the performance of the stock market, but over the long run your index fund investment will save you at least 0.75% in expenses year after year guaranteed. As it is, most funds try to beat the performance of a broad market index, and typically don't succeed over the long term anyway.

IHateTheGMAT is going to knock me for this, but I don't believe in stock picking. Yet, I do believe in manager risk. So in my opinion, an index fund is an ideal investment. However, please note that I am not a licensed investment advisor, so take my advice with a grain of salt and perhaps check our vanguard.com and fidelity.com?

So timeline wise, if you would do this right after you leave the current employer? And are there any penalties for moving the funds into a rollover IRA?

Thanks

Yes, you do it after you leave.

You call your 401(k) plan administrator and tell them you will be rolling over your funds into an IRA elsewhere. Then you open a Rollover IRA wherever you want, and get instructions so your 401(k) plan administrator can make out a check to the trustee of your new IRA (trustee here just means the investment manager or brokerage you choose).

This is the only really important thing, make sure the 401(k) plan administrator makes out the check for your 401(k) balance to your IRA trustee and NOT to you. Otherwise you will get hit with income taxes. So confirm that your 401(k) plan administrator is doing a direct rollover, or what is called a "trustee to trustee transfer" of funds.

Some 401(k) administrators will charge a fee, perhaps $30-$50 to close out your 401(k). If they do so then they suck, but you can only blame your company HR department.

May be we need to do a Financial Aid chat or something?

Thank you!!



Ha. Yes. I like this idea.

Isn't it a bad time to roll over your 401k? (atleast for the most of us).

I'm down SIGNIFICANTLY in my 401k, and switching out of these investments would make me realize these losses.

(FYI, most of my investments are in the index funds, hence the steep losses).

When you quit your job for bschool, your employer will give you 2 options. Provide them a rollover IRA account or cash out w tax penalty.

So, it's inevitable.

No, not at all. All you're doing is selling your index fund in your 401k and buying a fund that tracks the same index in your Rollover IRA with another trustee. You're not "realizing" any losses.

For instance, let's say you had 100 shares in a S&P500 index fund which was down 42% last year. If you sell all those shares and buy into another S&P500 index fund (most likely cheaper than the one you had in your 401k) then that S&P500 fund will also be 42% cheaper than it was last year.

Does that make sense?

Oh that makes sense. I had initially thought the case where I bought another fund...

Wow, I had no idea I had this option available for my 401k! I was resigned to cashing it out and paying the penalty. Now, if only my 401k hadn't gotten destroyed the last year (seriously...go look up some bank stocks and check performance.) Stupid company match forcing me to buy bank stock!