Can I roll over my 401(k) account through Capital One ShareBuilder to my Vanguard Roth IRA, or into my Charles Schwab Workplace 401(k), even though they are different brokerages?
At my previous employer, all contributions to employees' 401(k) accounts went into Capital One's ShareBuilder 401(k) account. At new company, our retirement savings go into a Charles Schwab workplace account. I have a Roth IRA account at Vanguard and at Schwab. I want to consolidate all of these accounts to keep them organized. Can I roll over my Capital One ShareBuilder 401(k) into my Vanguard Roth IRA or into my Charles Schwab Workplace 401(k)?
You have a few options in regards to your old capital one 401(k).
1) Roll into your new employers 401(k) plan. You would consider this if you liked the investment selection and the fees were lower relative to opening an IRA.
2) Roll into a traditional IRA. Given that your old 401(k) is pre-tax, you could roll it into a traditional IRA. This would maintain its tax-deferred status, and open up your investment selections. You also may pay less compared to your employers 401(k) investment expense ratios + administrative and recordkeeping costs (can be found in summary plan description). If you are in a lower tax bracket for the year, you may consider doing a Roth conversion. You'd pay taxes on the rollover amount from the traditional IRA to the Roth, however, you'd now be investing that money after-tax. Upon withdrawal (after 591/2), you wouldn't pay taxes as you would with a traditional IRA.
The Roth IRA's could be consolidated at either Vanguard or Schwab, whichever platform you prefer.
I'm glad you see the importance of consolidating and simplifying the structure of your financial accounts. The good news is that you have multiple options for your 401k! There are just a few things you need to consider before making the final decision.
1. If you are currently in a low tax bracket (say 12%) then it could be beneficial to convert the pre-tax 401k funds into after-tax Roth funds. Depending on your age, converting the funds now will provide you with years of growth that can be withdrawn tax-free and potentially help you avoid having your Social Security benefits taxed and lower any required minimum distributions at age 70 1/2. Remember, it is important to understand you will be taxed on the conversion amount in the current year.
2. Another option is to execute a direct rollover from your previous 401k into the new Charles Schwab 401k with your current employer. This will be a tax-free event since you aren't distributing any of the funds.
3. Similar to option #2, you can perform a direct rollover from your previous 401k into a traditional IRA at whichever custodian you choose. This will also be a tax-free event.
It is pertinent that you perform a direct rollover if you are looking to avoid taxation in the current year. If you perform a regular rollover then 20% of the 401k balance will be withheld for federal taxes.
Again, depending on your age, years of tax-free growth and additional other benefits could vastly outweigh the extra tax liability you would have to pay this year from converting traditional funds to Roth funds. I hope this helps, good luck with your rollover decision!
It’s a good idea to keep your financial life simple by consolidating now. The important question you must ask yourself is: Do I want to pay tax on transferring my old 401k from the Capital One to Vanguard or Schwab Roth IRA? If the answer is no, then roll the previous 401k to the current 401k. Before you do, ask the HR to see if the current 401k plan allows such a rollover.
On the other hand, if you’re looking ahead to better position yourself for the future, my answer may surprise you. Since your question does not reveal your age or how much is in the previous 401k, I can only generalize it. When you retire, any money comes out of the tax-deferred account (i.e. 401k and traditional IRA) will be taxed at the future rate. Depending on how much, it could potentially cost your social security benefits to be taxed (up to 85%) as well as higher premiums for Medicare Part B and D due to the surcharges on the income-related premiums. Thus, it may be better for you to bite the bullet now and pay the tax on the conversion at your current rate (hopefully it’s low) and avoid the dreadful scenarios I just mentioned.
The key is not to pay a higher tax for conversion. If by making a conversion, Capital One 401k to your Roth IRA, pushes you to the next higher tax bracket, I would gradually make the conversions in a matter of few years. Sounds good?
If you are a current employee then your current employer decides all the rules. So you can only move money from other accounts into your new Schwab Workplace 401(k) if your current employer gives you permission to do so.
As for the money you earned with previous employers or with your own personal IRA accounts, you can do whatever you want with those. If you have money in a 401(k) or a 403(b) with a former employer then you can have the after-tax amount transferred into a Roth IRA with your favorite custodian and you can also have the before-tax amount transferred into a traditional IRA with the same custodian or with another custodian. The before-tax and after-tax portions must be kept separate whenever they are withdrawn to make their tax status clear to the IRS.
Consolidate your Roth account into either Vanguard or Schwab. Rollover your previous employer 401(K) into this account into a traditional IRA. Either choose your own funds or other investment vehicles in your Roth and traditional IRA or find a trustworthy fiduciary financial advisor, who can also give you advice on which funds to invest your current 401(k) at Schwab.