Help on 401K loan rolling over to a new account?

[99toLife]

My wife borrowed some money from her 401K set up to pay back out of her payroll check. Problem is now she is changing jobs and we are not sure what to do.

Is there a way to roll into another account and continue paying it back or will we need to take the penalties and file with our taxes?

Someone has to have some advice on this!

[99toLife]

I guess no finance guys on here know what I should do.  Can't be rocket science for sure..  Just thought I would ask!

[HognotinMemphis]

I guess no finance guys on here know what I should do.  Can't be rocket science for sure..  Just thought I would ask!

Yes. Just talk to 401k plan administrator at new employer. You don't have to pay back loan in order to roll it over to another employer's 401k plan. Of course, this is assuming the new employer's 401k has loan provision in its plan as did your wife's previous employer. If not, I would think she can still continue paying off the loan as is currently set up...just would not be able to borrow in the future from the new plan. Comprende?

[HognotinMemphis]

If you viewed my response above before i edited it 1 minute after i posted it, read it again.

[99toLife]

Yes. Just talk to 401k plan administrator at new employer. You don't have to pay back loan in order to roll it over to another employer's 401k plan. Of course, this is assuming the new employer's 401k has loan provision in its plan as did your wife's previous employer. If not, I would think she can still continue paying off the loan as is currently set up...just would not be able to borrow in the future from the new plan. Comprende?

Thanks for the response, My understanding is my wifes former employer has stated that she needs to pay it off in 90 days or roll into an account that will allow her to pay it off.  Her new employer is saying she can't roll it into their 401K as a new employee for 1 year.  It sounds crazy to me that we can't send the monthly payment to the existing 401K account for the first year.  Am I lost and confused, it just shouldn't be a big problem in my little mind!

[snoblind]

The other option would be to roll the current 401K into a rollover IRA.  Personally, that's what I would do rather into the new employer program anyway.  But, I'm not a tax or finance guy so that's why I didn't respond initially - I don't have a clue about the repaying the loan part.  I assume the IRA trustee you choose has someone who could answer that question.

[HognotinMemphis]

The other option would be to roll the current 401K into a rollover IRA.  Personally, that's what I would do rather into the new employer program anyway.  But, I'm not a tax or finance guy so that's why I didn't respond initially - I don't have a clue about the repaying the loan part.  I assume the IRA trustee you chose has someone who could answer that question.

Definitely an option and one I would suggest as well. I assumed you and your wife want to roll it into new employer's 401k for some reason. If it is me, I would roll it into an IRA or leave it where in current 401k plan at ex-employer. But if you roll it into an IRA, you have to pay back your loan within 60 days or have to pay tax and penalty.

[PEtrader]

I am a CFP.  It is one of the messed up things in the ERISA code, but she either pays it off, or it will be taxable to her and she will pay the penalty once she rolls the 401k ffor 99.999999 percent of cases.  Not much room for anything else besides paying back within those 90 days.  My advice, and something I have seen done before, is to take loan and use it to pay back the 401k loan.  PM me with any questions.

Also,  ask for the summary plan description and it will tell you exactly what you can do in regards to the loan.  Honestly most advisors, administrators, etc really aren't very well versed in this subject and the SPD will let you know exactly what you can do in regards to this plan.

[PEtrader]

Definitely an option and one I would suggest as well. I assumed you and your wife want to roll it into new employer's 401k for some reason. If it is me, I would roll it into an IRA or leave it where in current 401k plan at ex-employer. But if you roll it into an IRA, you have to pay back your loan within 60 days or have to pay tax and penalty.

Not 100% on this, but I seem to remember a case where IRS disallowed this.  An IRA is governed by different rules than 401k and you can't roll the loan.  My understanding is that if you move the 401k without repaying the loan than it is immediately considered a taxable event with penalty if below 59 1/2.  An IRA is not an ERISA plan therefore the ERISA allowment for loans does not carry over to the IRA provision that allows you to withdrawal and replace. 

[HognotinMemphis]

Not 100% on this, but I seem to remember a case where IRS disallowed this.  An IRA is governed by different rules than 401k and you can't roll the loan.  My understanding is that if you move the 401k without repaying the loan than it is immediately considered a taxable event with penalty if below 59 1/2.  An IRA is not an ERISA plan therefore the ERISA allowment for loans does not carry over to the IRA provision that allows you to withdrawal and replace.

Moral of the story is, don't borrow from your 401k. Just asking for trouble. Pretend like you do not have it and access it only in literal life or death emergency.

[PEtrader]

Moral of the story is, don't borrow from your 401k. Just asking for trouble. Pretend like you do not have it and access it only in literal life or death emergency.

Until you retire at least, but yes you are right.  It should be your last reserve in the line of defense, but sometimes emergencies arise.

Also, I concur with whoever said roll into an IRA as opposed to her new 401k.  Although you are not going to get around the loan, you generally have alot better investment vehicles outside of the plan.  Plans are set up to be as vanilla as possible by the majority of sponsors, and for good reasons, but with a bit of research or hiring a professional you can usually out pace any returns than you will generally get in a 401k.

[snoblind]

Until you retire at least, but yes you are right.  It should be your last reserve in the line of defense, but sometimes emergencies arise.

Also, I concur with whoever said roll into an IRA as opposed to her new 401k.  Although you are not going to get around the loan, you generally have alot better investment vehicles outside of the plan.  Plans are set up to be as vanilla as possible by the majority of sponsors, and for good reasons, but with a bit of research or hiring a professional you can usually out pace any returns than you will generally get in a 401k.

That was me.  Do you know anything about "self-directed IRA's"?   

[PEtrader]

That was me.  Do you know anything about "self-directed IRA's"?

You mean self directed 401ks, then yes?   I mean technically all IRAs are self directed, atleast in industry speak.

[snoblind]

You mean self directed 401ks, then yes?   I mean technically all IRAs are self directed, atleast in industry speak.

After posted I thought about the way I worded it, but no I mean IRA.  But where one can purchase real estate, certain types of precious metals, etc. as opposed to stocks, bonds, funds, ETF's, CD's. 

[HognotinMemphis]

After posted I thought about the way I worded it, but no I mean IRA.  But where one can purchase real estate, certain types of precious metals, etc. as opposed to stocks, bonds, funds, ETF's, CD's.

If you are talking about buying actual real estate rather than REIT or R/E mutual fund, my advice is do not even think about doing that inside an IRA. Myriad issues with doing so and easily can invalidate your tax-deferred status which means you immediately incur taxes and penalties.

[PEtrader]

After posted I thought about the way I worded it, but no I mean IRA.  But where one can purchase real estate, certain types of precious metals, etc. as opposed to stocks, bonds, funds, ETF's, CD's.

The IRS has thought about it to, and won't let YOU do it directly. Saying self-directed if you talk to anybody about it is going to get them confused, probably better off saying your want to buy stuff directly into your IRA.   Just like Memphis said it can be done, but you really don't want to.  To explain, you could buy a rental property in Fayetteville and have it placed inside your IRA by titling it under custodial ownership of the IRA using IRA assets, is assuming you can find a custodian to do it because most wont. The problem is that if even a rent check hits your hands to deposit into your IRA the entire thing is disallowed.  You set foot on the property, heck even drive by to monitor it and it could be disallowed.  They are very anal about the use stuff on this.  Metals might be easier.  You could buy actual gold and have it named as a custodian asset of your IRA.  For Instance if you we are with Fidelity it would read as owned by NFS,LLC actt***-******* FBO snoblind.  The problem is that Fidelity isn't going to take possession of your gold for you, and you are going to have to use an outside source to do it who then has to route this back.  It can be done, but unless you are doing it big time you often wipe out any gain you would of had for the fees associated with doing it direct.  You are better off buying a gold ETF or gold note. 

If you really want to do this you need to talk to a really good adviser, as most won't even have a clue how to do it or are not willing. The code is actually pretty easy, it is just having it titled right and working the back office headache.   That being said my opinion on it is that the direct real estate rules are too easily broken and the risk of having your stuff disallowed to great.  You can buy a non traded REIT and get better diversification and a decent divi with very low market correlation.  If you do decide to go that route PM me the names of the ones you are looking at because half of them are ponzi schemes. For the gold, like I said stick with an ETF or a gold note. 

   

[HognotinMemphis]

The IRS has thought about it to, and won't let YOU do it directly. Saying self-directed if you talk to anybody about it is going to get them confused, probably better off saying your want to buy stuff directly into your IRA.   Just like Memphis said it can be done, but you really don't want to.  To explain, you could buy a rental property in Fayetteville and have it placed inside your IRA by titling it under custodial ownership of the IRA using IRA assets, is assuming you can find a custodian to do it because most wont. The problem is that if even a rent check hits your hands to deposit into your IRA the entire thing is disallowed.  You set foot on the property, heck even drive by to monitor it and it could be disallowed.  They are very anal about the use stuff on this.  Metals might be easier.  You could buy actual gold and have it named as a custodian asset of your IRA.  For Instance if you we are with Fidelity it would read as owned by NFS,LLC actt***-******* FBO snoblind.  The problem is that Fidelity isn't going to take possession of your gold for you, and you are going to have to use an outside source to do it who then has to route this back.  It can be done, but unless you are doing it big time you often wipe out any gain you would of had for the fees associated with doing it direct.  You are better off buying a gold ETF or gold note. 

If you really want to do this you need to talk to a really good adviser, as most won't even have a clue how to do it or are not willing. The code is actually pretty easy, it is just having it titled right and working the back office headache.   That being said my opinion on it is that the direct real estate rules are too easily broken and the risk of having your stuff disallowed to great.  You can buy a non traded REIT and get better diversification and a decent divi with very low market correlation.  If you do decide to go that route PM me the names of the ones you are looking at because half of them are ponzi schemes. For the gold, like I said stick with an ETF or a gold note. 

I said in 2 sentences what you said in 2 paragraphs!

[PEtrader]

I said in 2 sentences what you said in 2 paragraphs!

I thought he might like guidance as to why not, as opposed to just saying he shouldn't.

[snoblind]

Thanks gentlemen.  After asking I did do some research.  99.9% sure what I was thinking about as far as real estate would not qualify.  Plus most of the folks hawking this angle want to be your "custodian".  Even if you do a "metals" IRA the trust factor would be an issue to me.  Certainly not like a Vanguard, T Rowe, etc.

Over the years I've owned REITs in my IRA account so I'm familar with them although it's been funds or ETF's such as Vanguard REIT Index.

[HawgWild]

+1 to our walk on poster PEtrader. Nice to have him as a resource for these discussions.

[PEtrader]

Thanks gentlemen.  After asking I did do some research.  99.9% sure what I was thinking about as far as real estate would not qualify.  Plus most of the folks hawking this angle want to be your "custodian".  Even if you do a "metals" IRA the trust factor would be an issue to me.  Certainly not like a Vanguard, T Rowe, etc.

Over the years I've owned REITs in my IRA account so I'm familar with them although it's been funds or ETF's such as Vanguard REIT Index.

The REIT I speak of is a non traded.  Traded REITs due to so many people going into them have become correlated to the market.  These don't trade until they either go public, liquidate, or are bought by an institution.  They also generally hold at $10 a share until they trade or are closed to capital.  On the flip side there is alot of bad press out there on them for large fees and non performance due to some bad players in the industry.  There are some good ones though and ways to buy at NAV.  You are looking at a 6-7% divi with some dollar appreciation for an overall IRR in the high teens for a 5-7yr hold if they preform.  They other benefit is that real estate on the CRE side keeps good pace with inflation.  This is actually a way for the REITs that are in the REIT index to get their start on raising capital. 

[snoblind]

The REIT I speak of is a non traded.  Traded REITs due to so many people going into them have become correlated to the market.  These don't trade until they either go public, liquidate, or are bought by an institution.  They also generally hold at $10 a share until they trade or are closed to capital.  On the flip side there is alot of bad press out there on them for large fees and non performance due to some bad players in the industry.  There are some good ones though and ways to buy at NAV.  You are looking at a 6-7% divi with some dollar appreciation for an overall IRR in the high teens for a 5-7yr hold if they preform.  They other benefit is that real estate on the CRE side keeps good pace with inflation.  This is actually a way for the REITs that are in the REIT index to get their start on raising capital. 

Ah, now that would be an investment for the "self-directed" IRA as opposed to the typical IRA.  I see what you mean.