Leaving: Rollovers: 401(k)
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HPAlumnipedia > Leaving > Rollovers > 401(k)
The HP 401(k) program was previously known as TaxCAP. Unlike the Retirement Plan, which was/is a "defined benefits plan" automatically given to all employees, the 401(k) is an optional "defined contributions plan" where the company matches (to some extent) the first X% of your per-pay-period contributions.
All 401(k) money is held by Fidelity independently of HP, so there's less risk or issues with just leaving your funds there after termination. There's no rush or deadline to do anything with them.
Alan Silverstein, Fall 2002:
I transferred my 401(k) funds to a rollover IRA for flexibility and simplicity. I wondered if in doing so I would lose the freedom to take loans against my 401(k) funds, but in Nov 2002, Andrew Flessel informed me I would not, you must be employed by the company to take a 401(k) loan.
If you have a 401(k) loan outstanding at termination, as I did, you can call Fidelity at any time to ask how to pay it off. I thought some sort of statement would arrive by mail. But when it didn't for a few weeks, wanting to ensure I did not let it be treated as a taxable and penalized distribution (you have 60 days to resolve it), I called them. I got a number for the actual dollar amount due, sent them a check, and then visited the website a week later to ensure it had been received and credited appropriately.
Note, I didn't think you could prepay a 401(k) loan without first being terminated, but:
Ernie Drake, Nov 2002:
401(k) loans can be prepaid in full at any time, per HP 2002 annual benefit document. The process is handled by calling Fidelity and working directly with a rep.
Alan Silverstein, Sep 2003:
I heard it's now possible to continue making payments on a loan even after termination, if you so choose.
Later I received email saying:
- The Fidelity folks said that if you have an outstanding loan in your 401K, they will send out a payment coupon book. This is new for 2005, in previous years you had to pay the loan off all at once.
John Pezzano, Sep 2003:
...if I were leaving now, I would take out a loan the size of my mortgage, pay off the existing mortgage, and pay myself back in my 401(k). The interest rate I earn beats what most mutual funds are doing. And if I have trouble making payments, the worst is that I have to pay a tax penalty for early withdrawal rather than getting foreclosed by a lender and paying outrageous fees... Something to think about.
Alan Silverstein, Sep 2003:
John's observation is clever, but also consider the following. If you had one more dollar to invest today, would you rather put it towards your mortgage or into your retirement funds? Don't answer too quickly.
We love to pay off our mortgages, but this means we give up the tax-deductibility of the borrowed money -- which reduces its effective cost to you, possibly well below the "time value of money" you can obtain any other way. Plus, by doing this we give up the advantage of leverage (least amount invested versus any investment gains), and we lock up a lot of money in a rather insolvent form.
Meanwhile, retirement vehicles grow tax-deferred. I'm all for being debt-free, but what really matters is growth of your net assets, not so much whether you carry some "wise" debt.
Alan Silverstein, Nov 2004:
I received email saying John's advice is wrong, and you must pay off the 401(k) loan soon after termination... Caveat emptor.
Michael Coulter, Aug 2005:
A recent change is that you can get a payment booklet from Fidelity to continue loan payments on a 401K loan after termination. People might want to take out a 401K loan while still an employee to get temporary access to some of the money (it will be repaid over at most 5 years). If you default on your 401K loan, there are IRS penalties.
Alan Silverstein, Fall 2002:
Based on the FAQs I expected to receive a "TaxCAP Distribution Reference
Guide" 3-5 weeks after termination, and I did, in 2.5 weeks. However,
it didn't tell me much I didn't already know from earlier sources. It
did talk about repaying loans if you had any, but contained nothing
specific about my loan. I think the moral is, if you have a loan, don't
expect or wait for a specific bill to pay it off, there might not be one
forthcoming.
(end quote)
Continuing to manage your 401(k) money after termination may be done through the Fidelity website or by phone, just as before termination. Apparently getting a rollover out to a conduit IRA is as simple as a phone call to them, too.
