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In Service Rollover

I'm 69, still employed full time and collecting my Social Security.   Due to health issues, I am just now getting into setting up my retirement.  I know, it should have been started LONG ago but that's for another thread later.   I have an IRA with TD Ameritrade, a 401K at work with Vanguard and a pension.   The 401K has provided dismal returns in the past few years, so I did an In-Service Rollover of 90% of the fund into my IRA this past January.    My 401K has employer matched contributions, allows In-Service Rollovers and provides a generous cap on contribution size.

 

SO I'm wondering why I'm limited to $7000 per year funding my IRA but I can increase my contribution level to my 401K and then roll it over to the IRA and circumvent the $7000 limit.   Seems that I am missing something that could get me into trouble.

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Social Butterfly

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Remember in 2012 when Mitt Romney revealed he had a $102 million dollar IRA. Do you think he exceeded the contribution limits every year he owed those IRA’s? You bet he did. How?

 

Easy he hired peopled with exceptional investing skills and the knowledge about how to manipulate the loopholes in the IRA rules to his favor. He didn’t do anything illegal though.

 

Romney is not alone there is more than $15 billion held by just 156 Americans in tax-free IRAs.
https://www.propublica.org/article/the-number-of-people-with-iras-worth-5-million-or-more-has-triple...

 

My opinion there should be a limit on how much money someone can sock away in a tax-free IRA.
IRAs were intended to help middle class workers save for retirement not to allow wealthy individuals to save a $102 million dollars in a Tax-free account.

 

For the ultra-wealthy it’s not about saving for retirement it’s about tax avoidance.

 

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@ReTiReD51 I am providing a link to an article from Reuters that may help answer your question regarding the value of Romney's IRA https://www.reuters.com/article/us-usa-campaign-romney-ira/how-did-romneys-ira-grow-so-big-idUSTRE80... Some folks may have the option to invest in non-traded opportunities that may result in substantial gains. It appears that Romney invested in investment partnerships, venture capital, and other non-traded investments. There are substantial risks especially with start up companies and distressed companies. In other words, you can lose 100%. However, if successful, the returns can be outstanding year after year. Before the election, I reviewed Romney's 2010 Federal Return which was on the Internet. It was over 270 pages including all schedules and notes. It took days to review and weeks for me, a non-CPA, to grasp the tax concepts. Ronmey's 2011 Federal Return was also available at over 300 pages and just as complex. At any rate, none of the IRA info was available because, at that time, he did not take any distributions nor contribute to his IRA in those years. He left Bain Capital in 1999 and continued to  receive taxable income (millions) from his past partnership investments. He did not need to take any distributions from his IRA. He left the IRA with its investment partnerships to compound. In another article, it was estimated that Bain Capital produced returns at approximately 88% per year during Romney's working years (1984 to 1999). Because Bain is privately held, we don't know the real returns. It could be greater. If interested, take a look at the investment returns for the Yale Endowment when it was managed by David Swenson. He used  non-traded private equity investment along with market traded investment to obtain above average returns.  

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@Tonster521  The reason I even bother to mention Romney is the question jamesdjohnston asks in the first post is there “something he is missing that could get me into trouble.”

 

You and I both know there is no reason for him to agonize over his 401k to IRA transfers he is not doing anything illegal. As a matter of fact, it’s a very wise decision he is making. Good for jamesdjohnston more people should follow his advice if they can afford to.

 

As for Romney I use him only as an example of someone that has been able to take advantage of the carried interest loopholes to grow his IRA to $102 million (2012). Putting up shares of startup companies into retirement accounts is not something your average American can do.

 

Romney is not worried about getting into trouble and neither should jamesdjohnston.

 

Conversationalist

@ReTiReD51 I understood the Romney example. I am sure he is known by more folks because of running for President than the other wealthy Senator Mark Warner (estimated wealth $200 million) who also founded and managed a venture capital firm (Columbia Capital). Anyway, if the 401 K Plan has an In-Service Rollover provision and the Plan is in  compliance, participants need not worry about the provision. However, it may not be the best strategy for all folks. As you know, 401 K Plans will vary from employer to employer. Some Plans have a brokerage account as an investment option which eliminates the need to transfer to an IRA. More and more 401 K Plans are participant directed and they offer multiple investment options. So, employers reduce their fiduciary responsibility somewhat. Also, some 401 K Plans still offer Guaranteed Insurance Contracts (GICS) which provide greater interest rates than money market funds that are available in IRAs. For folks, especially near retirement age, that may be looking for a safe place to park some money away from market risk, the GICs offer a reasonable solution. But more importantly, if the participant has a Company Stock investment option that has appreciated significantly over the years, the participant needs to review the tax savings that is available if such stock has Net Unrealized Appreciation (NUA).The stock cannot be rolled over and must be distributed (to a taxable brokerage account). Depending on the years of participation and the growth of the stock price, this could be worth tens of thousands of dollars, if not more, in tax savings. Remember, all distributions from an IRA are ordinary income. There are a number of items to review to ensure the participant is affecting a viable strategy.

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@Tonster521 

Sound like you have an advanced understanding of 401k’s, IRA’s and investment vehicles. My knowledge is rudimentary at best.

 

Guaranteed Insurance Contracts (GICs) I always thought required an upfront sales charge which could be rather expensive and I think the government has bailed a few of the Insurance companies out because some how they failed as a company.  But I know people that invest in them and are very happy they did.

 

Your information about Company Stock and Net Unrealized Appreciation (NUA) is something I’ll have to do some more reading about. Not for me but I have family members that could be in this situation and I want to make them aware of this. For them I would recommend they see a professional.

 

 

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@ReTiReD51 Be aware that there are differences between 401 K and IRAs as well as other Qualified Plans such as Employee Stock Ownership Plan (ESOP), Company Stock Plans, etc. So, my suggestion is to always obtain a copy of the most recent Summary Plan Description (SPD), and if that document does not answer your question(s), request a copy of the Plan Document. Don't accept an answer that the document(s) are not available. ERISA mandates that the Plan Administrators keep those documents up to date. You need this info before you affect an in-service rollover as well as a rollover at the time of separation from service. If you or family members or friends or any reader have Company Stock that has appreciated over time, seek info from the Plan Administrator as noted above (always in writing), then tax info from a qualified tax person before electing an IRA Rollover. Then, based on the info that you have acquired, you can decide if you should remain in the Qualified Plan, elect a partial or full IRA Rollover, or elect a partial or full distribution. With regard to GICS in a 401 K Plan, an Investment Committee or Plan Administrator will request bids from various insurance companies. Sometimes, the GIC investment option may be a blend of insurance companies bidding for the business. Participants are not charged an upfront sales charge. However, you may find provisions that allow transfers only one time per year. That is how the insurance company is compensated. They have use of the money for at least a year and earn gross interest, but pay out less. That difference is their compensation. This concept is similar to a bank CD, but generally pays better. You may find another version of this concept called a Stable Value Fund. However, insurance companies are generally covered by State Insurance Guaranty Associations whereas SVFs are not. With regard to bailouts circa 2008-2009, I recall those issues grew out of repackaged mortgage securities aka collateralized mortgage obligations (CMO) and similar type securities. Lastly, as I mentioned in other postings, be careful of folks that call themselves investment advisors. Some are very good and some are not so good especially with Qualified Plan provisions. Do not assume that all Qualified Plans are the same. Hope this is helpful to you as well as other readers.  

Honored Social Butterfly

Yes, he probably did a Rollover from a 401K plan to an IRA.  That's what people should do when they move to another employer unless the new employer allows them to roll it over to the new plan or leave employment.  

 

From the IRS:  A 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. The underlying plan can be a profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan. Generally, deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reported as taxable income on the employee’s individual income tax return.

 

IRA's are not TAX FREE - they are tax deferred.  Most people of whatever income use the same strategy - put it away and get a break on taxes when income is high then pay taxes upon retirement withdrawal when taxes are usually lower. 

OR roll it over to a ROTH IRA  and pay taxes on it when the rollover is done, usually incrementally.

It is call a tax strategy - many also use a Qualified Charitable Distributions (QCDs)

when we begin to take distributions to also help with the possible tax consequences at that time.

 

 

Any contributions to an IRA no matter the wealth of the person have the same limits for the contribution by year.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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@jamesdjohnston 

I agree with fffred - Vanguard (401K holder) should be able to make sure that you are doing it right.  They should know any specifics about your particular employer plans.

An In-Service 401K rollover to an IRA is just like any other 401K rollover except that you are still working and your plan allows for it.  

Just to recap some info:

SmartAssets - SmartReads: 04/21/2021 - How an In-Service 401(k) Rollover Works 

 

IRS.gov: Rollovers of Retirement Plan and IRA Distributions 

 

IRS.gov - Rollover Chart 

 

IRA's and 401K's are different types of retirement plans - one (401K)  is from the employer and as long as the employer plan meets the IRS rules then it is governed by those rules.  An IRA is an individual plan and the rules are set up by the government -   That's the simplest explanation.  The maximum CONTRIBITION to an IRA is set by the government because that is the MAXIMUM amount that can be deducted on your taxes for it - there are actually (2) - a smaller one and then a higher one for people over a certain age with earned income that allows for a catch-up amount.

 

There is also a difference in CONTRIBUTIONS and ROLLOVERS - make sure you know the rules and timing, a slip up can cost you in taxes.

 

I will assume that you left 10% in your 401K so that you can get your employer match this year (2021) - I think that is fine.  Put in at least up to the match - or you could put in  $ 7000  there, or whatever the amount per your plan, as your contribution for 2021 and then do another In-service rollover next year for TY 2022.  I am also assuming that the In service rollover was coded for TY 2021 and not TY2020 since it was done in January.

 

 

The timing is important because many times you can only do a rollover once within a 12-month period - you will have to check with your in house plan administrator or Vanguard to make sure that this is the case with the 401K In Service Rollover.

 

Could you do both - 2021 TY contribution to IRA and some to the employer 401K since it is still active - maybe.

 

IRA rules get more complicated for contributions - it is possible to contribute mover than the maximum allowed by the IRS however only the allowed maximum is tax deferred and a deduction on one's taxes - the rest would be a taxed contribution and requires more tax documents that you need to keep forever since when you start drawing it out it will make a difference in what part is taxed and which part has already had taxes paid.

 

Depending on your birth year, make sure you know when you have to begin those Required Minimum Distributions and heed the timing on the 1st one because it is a bit confusing.

 

I am no expert - just somebody that has gone thru something similar.  To make sure you do all of this right and don't get tripped up tax-wise - run it by your financial advisor or tax expert.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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@jamesdjohnston 

 

Sounds like you have a good handle on these issues. Any differences in the maximum amounts and income ceilings for 401K and IRA contributions are due to the laws and rules governing the particular programs. And of course at your age you can make use of the "top up" provisions that permit additional contributions to your 401K for age over 50.

 

So, really, the answer to your question comes down to "different programs, different rules". Now why the rules are different? well, a camel is supposedly a horse designed by a committee, so that may relate to this situation.

 

I did in-service distributions to roll-over my 401K to my IRA, for the sake of more control and more investment options. 

 

I think that both Vanguard and TDA are good companies so you won't go wrong there (probably not).

 

Good luck!

 

 

 

 

 

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