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Going self-employed, what to do with 401(k)?

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CreditJim
Established Contributor

Going self-employed, what to do with 401(k)?

I haven't been part of my employers 401(k) for long, only joined last year sometime. I was just laid off, so I'm wondering what to do about the money in the 401(k). It says that my current balance is $4,999.03 and vested balance is $4,228.79.

 

My wife has a small amount of 401(k) from her previous employer, around $5k I think, that she's rolled over into a Fidelity account. Ideally I'd like to consolidate these two amounts together and get serious about saving. I'm 30. I've decided to start my own business doing what I was doing independently, so I need to get serious and proactive about saving for retirement myself.

 

Is it possible to combine our savings? And what's the best way forward to get started? I read on another thread here that Schwab are a good start - but it seems you need at least $25k with them before they'll give you advice?

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Thomas_Thumb
Senior Contributor

Re: Going self-employed, what to do with 401(k)?

I would recommend you roll your balance into a Fidelity rollover IRA. THat way both your accounts are with the same full service brokerage/investment firm. You can link the accounts so summary statements show both your accounts and hers. However, you cannot combine your pretax accounts with hers. [note - if you had multiple 401ks, you could combine them in one rollover IRA]

 

I have 5 accounts with Fidelity and my wife has 2.

 

I am pleased with the service Fidelity provides and the variety of low fee investment options. Web site is easy to navigate. Great online features for researching/screening investment options by various criteria.

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ktl72455
Valued Contributor

Re: Going self-employed, what to do with 401(k)?

Set up a SOLO 401K and put it into that. Thats is single Propritor type business's.  Thats what I have. I put money from sales directly into it.

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Anonymous
Not applicable

Re: Going self-employed, what to do with 401(k)?


@ktl72455 wrote:

Set up a SOLO 401K and put it into that. Thats is single Propritor type business's.  Thats what I have. I put money from sales directly into it.


This^^^^ exactly... Talk to an accountant if you are unsure..

Message 4 of 5
Anonymous
Not applicable

Re: Going self-employed, what to do with 401(k)?


@CreditJim wrote:

I haven't been part of my employers 401(k) for long, only joined last year sometime. I was just laid off, so I'm wondering what to do about the money in the 401(k). It says that my current balance is $4,999.03 and vested balance is $4,228.79.

 

My wife has a small amount of 401(k) from her previous employer, around $5k I think, that she's rolled over into a Fidelity account. Ideally I'd like to consolidate these two amounts together and get serious about saving. I'm 30. I've decided to start my own business doing what I was doing independently, so I need to get serious and proactive about saving for retirement myself.

 

Is it possible to combine our savings? And what's the best way forward to get started? I read on another thread here that Schwab are a good start - but it seems you need at least $25k with them before they'll give you advice?


I'm going to agree and disagree with the above posters. I agree that you can't combine your 401Ks. You also don't want to. In the event of divorce, you get to keep your retirement accounts. If you don't get divorced, you've lost nothing by keeping them separate.

 

Your vested balance is all that matters here. The rest of the money is going to be pulled back, since it isn't really yours.

 

I've been happy with Fidelity. I've also been happy with Scottrade. You'll have to decide what to do. The most important thing is that you don't cash it out. If you get forced into taking a check, you have to deposit the ENTIRE amount into a new 401k or IRA, or you're going to be taxed on the entire amount and pay a 10% withdrawal penalty.

 

What I would do is to roll your 401k into an IRA. Fidelity makes this very easy, and you shouldn't need to make a withdrawal or take a check to do it. 

 

Now, since you are going solo, I'm guessing that either this year or next year, your income is going to be lower than it has been for some time, as you get your business off the ground. I would take that time to roll the IRA into a Roth IRA. When you do that, you'll pay ordinary income taxes on the entire balance, but any withdrawals down the road will be tax free (assuming you make them after 59.5 and therefore aren't subject to the 10% withdrawal penalty). The idea is to lower taxes now in anticipation of paying higher taxes later. If you think that taxes will be lower later, either through reduced income or a reduction in tax rates, then you should stick with your 401k/IRA. Some of that math is a question of how old you are and what you anticipate your retirement payouts being. Being younger implies that your future earnings will be higher and weighs towards converting to a Roth; being older means that you've probably been close to peak earnings and your retirement income will probably be lower, meaning that you shouldn't convert.

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