Rollovers/Retirement

[Frugal45]

In the last year, we have eliminated all debt with the exception of our home, and fully funded our Emergency Fund. We are saving around 25% of our income. 10% of it is going into a "High-Yield" savings account for what we call "Short Term" savings (car, home downpayment, misc wants). And the other 15% is going into retirement. We are each contributing 15% to our company 401ks which both match the first 6%.

My wife just left her job for a new job, and I am wondering what to do with her 401k balance. Should I take this opportunity to start a new Traditional IRA, roll the money from her previous employer into that and start contributing everything above the 6% 401k contributions into it?

Should I start an IRA and a Roth IRA and roll the money from her previous employer into the traditional IRA and start contributing everything above the 6% into the ROTH? We are right at the top of the limit income wise for joint filers for the roth, but with the contributions it would bring our income below the limits.

Thanks in advance.

[Little House]

Since you are already pushing the ROTH limit, I'd select the traditional IRA. It's also tax free until you withdraw. I'd definitely have her contribute to her new company's 401K since they are matching 6%. With an IRA, you max out at $5,000 annually, so if anything after the 6% to the 401K is under the $5K annual amount, then your plan will be successful. However, you might find that you need to contribute more to the 401K if the remaining 9% of her contribution is over $5K a year.

Good luck you are already on a great path towards retirement.

[gf1723]

I recently switched jobs and only had about 4K in my 401k from my first job. When starting the new 401k, I had my parents finance adviser roll my 4K into my Roth IRA for the year. I don't think this counts towards the maximum for each year either. So I believe I can put in another 5K on top of it.

For some reason, he told me it could not directly go into my Roth, it had to be put in a Traditional IRA account, then put into a Roth.

[bjl584]

If it is a good 401K program and you like your fund options, then you could just leave it there (if you are allowed.) Or, you can roll it over into an IRA where your investment options will be basically unlimited.

I'm assuming that she will starting a new 401K at her new job? I'm assuming that 6% contribution will just start going into that.

[Mr Nice Guy]

Originally Posted by gf1723

I recently switched jobs and only had about 4K in my 401k from my first job. When starting the new 401k, I had my parents finance adviser roll my 4K into my Roth IRA for the year. I don't think this counts towards the maximum for each year either. So I believe I can put in another 5K on top of it.

For some reason, he told me it could not directly go into my Roth, it had to be put in a Traditional IRA account, then put into a Roth.

You are correct, the 401(k) rollover to an IRA does NOT count as a contribution.

I literally just got home from rolling over my old 401k into my Roth IRA at my local Scottrade branch. For some reason they let me do it, but since 401k balances are pre-tax, and roth balances are post-tax, it didnt make sense. But I was down.

[disneysteve]

Originally Posted by gf1723

For some reason, he told me it could not directly go into my Roth, it had to be put in a Traditional IRA account, then put into a Roth.

That is correct. A 401k is a pre-tax account. A Roth is an post-tax account. So you can't convert directly from one to the other. You must first rollover the 401k into a traditional IRA and then convert that into a Roth, paying taxes in the process.

If it were possible to rollover a 401k directly into a Roth, you would avoid paying the taxes forever and obviously Uncle Sam wouldn't let you get away with that.

[Hector]

Originally Posted by Frugal45

In the last year, we have eliminated all debt with the exception of our home, and fully funded our Emergency Fund. We are saving around 25% of our income. 10% of it is going into a "High-Yield" savings account for what we call "Short Term" savings (car, home downpayment, misc wants). And the other 15% is going into retirement. We are each contributing 15% to our company 401ks which both match the first 6%.

I wont say that I am saving 25% of my income if 10% it is going to short term savings.

[Hector]

Originally Posted by Frugal45

My wife just left her job for a new job, and I am wondering what to do with her 401k balance. Should I take this opportunity to start a new Traditional IRA, roll the money from her previous employer into that and start contributing everything above the 6% 401k contributions into it?

Should I start an IRA and a Roth IRA and roll the money from her previous employer into the traditional IRA and start contributing everything above the 6% into the ROTH? We are right at the top of the limit income wise for joint filers for the roth, but with the contributions it would bring our income below the limits.

How are the options in her previous 401k? If you are able to choose funds that you really want, I dont see a point in converting. However one would hardly have all the options in his/her 401k and rolling money over to IRA makes much more sense.

[disneysteve]

Originally Posted by Hector

I wont say that I am saving 25% of my income if 10% it is going to short term savings.

We've had this debate here before, and there is a difference of opinion. Some of us, myself included, feel that money that is earned and not spent for immediate and current needs counts as savings. Others essentially only count retirement money as savings.

If I earn $1,000 this month and my total monthly expenses are $750, I believe I have saved $250 regardless of where I've put that money or what my future plans are for that money. To say that it isn't savings if I plan to use it for a new car in 3 years just doesn't make sense to me.

Remember, a very common recommendation is to save 20% of your income - 15% for retirement and 5% for other needs.

[Frugal45]

"Short term" for us could be years. We have been saving for our next home down payment for the last year and will continue to do so for another 3-5 years. Therefore, I would definately call that savings. That is my opinion at least.

As for the options, the options in her current account are pretty limited, as are her new account options. We will both definately be doing the 6% to get the match. But I was thinking of taking this opportunity to start an IRA, roll the money from her old 401k to it, and start contributing all retirement savings (after our first 6%) into the IRA.

What do you guys think I should do?

[Hector]

Originally Posted by Frugal45

"Short term" for us could be years. We have been saving for our next home down payment for the last year and will continue to do so for another 3-5 years. Therefore, I would definately call that savings. That is my opinion at least.

As for the options, the options in her current account are pretty limited, as are her new account options. We will both definately be doing the 6% to get the match. But I was thinking of taking this opportunity to start an IRA, roll the money from her old 401k to it, and start contributing all retirement savings (after our first 6%) into the IRA.

What do you guys think I should do?

If that's the case, I would definitely roll her 401k into IRA. I believe that it’s a good idea to start contributing to IRA after match in 401k.

As you mentioned that you guys are almost there for limit of contributing to IRA. If that’s the case, it is likely that you guys are maxing out your 401k to a full limit of 16.5k assuming you guys are not older for higher limit. And as you can’t invest more than 5k in IRA, investing rest in 401k would be a next logical step in my opinion.

For me these are priorities for investing in retirement accounts
1. Contribute to 401k up to match
2. Max out IRA
3. Fund 401k

[Frugal45]

Originally Posted by Hector

If that's the case, I would definitely roll her 401k into IRA. I believe that it’s a good idea to start contributing to IRA after match in 401k.

As you mentioned that you guys are almost there for limit of contributing to IRA. If that’s the case, it is likely that you guys are maxing out your 401k to a full limit of 16.5k assuming you guys are not older for higher limit. And as you can’t invest more than 5k in IRA, investing rest in 401k would be a next logical step in my opinion.

For me these are priorities for investing in retirement accounts
1. Contribute to 401k up to match
2. Max out IRA
3. Fund 401k

If we can get enough deductions to bring our income below the Roth limit would it be a better choice?

[happygirl]

Originally Posted by Frugal45

If we can get enough deductions to bring our income below the Roth limit would it be a better choice?

I'm no expert so I could be leading you astray, but last year we were able to roll our 401k's into a regular IRA, then because there was an exception for the past 2 years, we were able to convert our regular IRA's to Roths. Granted, we had to pay taxes on the gain (again, I think that's what it was but someone can clarify I'm sure), but we thought it would be worth it over the years until retirement to have the money in a Roth. We were able to max on traditional IRA's again this year and convert them to Roth's so that might be an idea for you if your income is over the normal Roth limit.

[Hector]

Originally Posted by Frugal45

If we can get enough deductions to bring our income below the Roth limit would it be a better choice?

If you are able to max out 401k as well as ROTH, I think it would be a better choice.

But if you are not able to max 401k and Roth then it depends on your state income tax bracket. It is likely that you guys are in 28% federal tax bracket. If I was living in CA I would go for Regular IRA and if I was living in Texas, I would go for ROTH.

[Frugal45]

TN. 28% bracket.

[Hector]

Originally Posted by happygirl

I'm no expert so I could be leading you astray, but last year we were able to roll our 401k's into a regular IRA, then because there was an exception for the past 2 years, we were able to convert our regular IRA's to Roths. Granted, we had to pay taxes on the gain (again, I think that's what it was but someone can clarify I'm sure), but we thought it would be worth it over the years until retirement to have the money in a Roth. We were able to max on traditional IRA's again this year and convert them to Roth's so that might be an idea for you if your income is over the normal Roth limit.

I dont know much about Regular IRA to ROTH IRA conversation, but dont we need to pay taxes on gain as well as pre tax contribution?

[Hector]

Originally Posted by Frugal45

Tennessee. 28% bracket.

So state tax is gonna be 6%. Total tax would be 34%. I personally wont go for Roth in this situation if I am not able to max out 401k and Roth.

[Frugal45]

So why does it matter if you can max them out? If you can max them out should you just stick to traditional IRA?

[happygirl]

Originally Posted by Hector

I dont know much about Regular IRA to ROTH IRA conversation, but dont we need to pay taxes on gain as well as pre tax contribution?

That makes sense. This is one of those areas I don't understand as well as I should. Fortunately we have a tax guy whom I really like and trust and DH has a good understanding of the process.

[Hector]

Originally Posted by Frugal45

So why does it matter if you can max them out? If you can max them out should you just stick to traditional IRA?

IMO its better to put more money in retirement accounts. When you are able to max out 401k and IRA, it is likely that remaining money would go in taxable account where one pay tax every year. I think 5k in Roth is better choice than 5k in Regular IRA and 1750 in taxable. Also you are on top when it comes to limit of adjusted income for qualifying for Roth. It is likely that you wont able to contribute to Roth in future because your income (if not wedge then at least from your investments) will go up. In retirement when you start withdrawing its good to have diversification between pre tax and post tax money coz it is likely that your income in retirement will be higher and you have a couple of options in Roth. But there isn't anything you can do with regular IRA as it is less flexible.