Convert a 401K into an IRA?

[Goldy1]

My dh got laid off recently. Thank heavens we lived frugally and saved so we are sleeping well by the way. (paid off cars, not much owed on house, and we are lower middle class too)He diligently invested in his 401K despite the fact the company had not matched in years(another topic I suppose)

The 401K was with ING. WE got a call from an ing rep asking if we wanted to convert the 401K to an "activiely managed" ira.

I asked about fees, and the rep acted like an advantage was to have his advice to activley manage the account . I assume this mean smore fees so I said no thanks for now. I had a past bad experience with Morgan STanly acively managed account taking more in fees than what my account earned so I dropped tham years ago for fidelity since I am a small time investor.

I like to choose retirement date funds and the reps at fideleity are super over the phone, so I don't need an actively managed account.

Why would someone convert to a roth? This is so new to me. WE are in our 30's.

[kork13]

I think you have two real issues here... First, about actively managed investments and second converting to a Roth. The two are not mutually exclusive... you can convert to a Roth IRA without using actively managed investments. You're very right, actively managed funds can frequently underperform other options.

Converting to a Roth, however, allows you to earn tax-free interest/dividends on your investments, so that when you withdraw them 30-40 years down the road, you won't pay any taxes on it. With a 401k, you pay taxes at withdrawal. There are pro's/con's both ways, you just need to understand what is right for you personally.

[jIM_Ohio]

Your 2009 tax will be less than 2008 based on timing of the layoff- do the Roth conversion in 2009 tax year if you do it.

If you are in fifteen percent tax bracket for 2008, convert only up to cap of the fifteen percent bracket.

Contact fidelity and tell them you want to do a 401k rollover and they will do most of the work for you. That is a good decision. Fidelity can provide you with better advice than the ING rep, IMO.

[Goldy1]

Actually I do not want him to convert to a roth b/c we would pay a lot in taxes. I was thinking the other option was a non roth ira. I know about 401K's and roth ira's but I am not schooled much on non roth ira's.

[m3racer]

This is a no-brainer. If you can convert to a Roth IRA than take advantage of it.

[noppenbd]

Actually I do not want him to convert to a roth b/c we would pay a lot in taxes. I was thinking the other option was a non roth ira. I know about 401K's and roth ira's but I am not schooled much on non roth ira's.

There are two sides to IRAs. The first side is the investment aspect. In that sense, it doesn't matter whether it is a traditional or Roth IRA. You can choose to have the money in an IRA in index funds, no load mutual funds, CDs, even real estate. The other side is the tax side. That is just how the IRS looks at the account. Generally all money gets taxed once by the IRS (you could argue SS is an exception, but I digress...). For a traditional IRA it is getting taxed when you withdraw it (during retirement). For a Roth IRA you pay the tax up front, then, since it has already been taxed, you can withdraw it tax free during retirement.

You can rollover the 401k to a traditional IRA very easily. I would contact Fidelity and tell them you need to do a 401k to traditional IRA rollover. This is not a "taxable event", so you do not need to worry about taxes at that point. Then in 2009 you can take the Fidelity traditional IRA and do a Roth conversion. It's a good idea to do this when you are in a low tax bracket. You can also convert a portion of it each year to keep you from getting pushed into a higher tax bracket.