Rolling over a 401k to...?

[MITGrad]

My wife hasn't worked since having our son nearly 4 years ago and today got a call saying she needed to either cash out her old 401k or transfer it somewhere else.

It isn't a large sum of money ( approx $1k ) but we'd like to go with either a traditional IRA or a ROTH IRA, as opposed to just cashing it out. Anyone have tips or experience?

This forum is proving very helpful, thanks in advance for any help!

[kork13]

I'm a big fan of Roth IRA's, particularly if you're younger than 30 or 35 and still have plenty of years' worth of (assumed higher-salaried) earning ahead of you. I'd say roll it over into a Roth IRA. You'll owe taxes on the amount you're rolling over, but after that, both the initial amount and and all interest/earnings will grow tax-free.

If you were to put it into a Traditional IRA, you wouldn't pay taxes on the initial amount right now, but when you withdraw the money as a happily-retired old man, you'll still owe interest on both the initial amount and the interest/earnings.

Another factor is comparing tax brackets. Will you be in a higher or lower tax bracket between now and "old-man-time"? If you expect to be in a higher tax bracket 40-50 years from now, it's distinctly possible. In such a case, a Roth IRA is also the better idea. But if you expect it to be the opposite, a Traditional IRA could be better (but still keep in mind that with a Roth, the interest/earnings are never taxed).

[disneysteve]

I don't believe you can do a rollover directly to a Roth, though I might be mistaken. I think you have to rollover to a traditional IRA and then do a conversion. You should only convert to a Roth if you have the money to pay the taxes due without touching the funds being rolled over. If you have to dip into the account to pay the taxes, just leave it in a traditional IRA.

[creditcardfree]

I don't believe you can do a rollover directly to a Roth, though I might be mistaken. I think you have to rollover to a traditional IRA and then do a conversion. You should only convert to a Roth if you have the money to pay the taxes due without touching the funds being rolled over. If you have to dip into the account to pay the taxes, just leave it in a traditional IRA.

Steve is correct. Roll, then covert to Roth. Only the conversion to the Roth will be a taxable event.

Personally, I would convert if you can handle the taxes, which on $1K is relatively minimal regardless of tax bracket. Then...if your income allows, your wife can contribute up to $5K per year to this same account, even though she does not work. The $1000 is a great start to open the account in my opinion.

[LivingAlmostLarge]

Rollover IRA then Roth if you wish.

[Broken Arrow]

Yeah, technically you roll then convert, but the company that's managing it for you can make it fairly seamless, so that it can seem like it's all one big rollover.

The Roth is definitely what I would recommend, especially if your wife is not working right now. Even if it's a small balance, paying only the 10% tax bracket is a no-brainer to me.

[KTP]

I was in the same situation a few years back and rolled over my $1700 401k to a traditional IRA in an etrade account. With no additional contributions it is now over $30,000, so don't discount the power of even a small balance if you make the right choices (read that as "get lucky").

[Broken Arrow]

I was in the same situation a few years back and rolled over my $1700 401k to a traditional IRA in an etrade account. With no additional contributions it is now over $30,000, so don't discount the power of even a small balance if you make the right choices (read that as "get lucky").

Um, so when you say "a few years", did you mean that literally? And what was it that you picked that made your money grow 17 times?

[KTP]

I'd have to log in to my etrade account to get the exact trades, but the rollover happened around 2001 although I don't think I did anything but leave it in the moneymarket account until 2002.

I mostly moved it around between msft, xom, goog, yhoo, vlo, hal, mcd, wmt, jnj and aapl


My best move was having it in xom (Exxon) during most of the bad part of latter 2008 and early 2009. Exxon didn't drop nearly as much as the rest of the stock market. In April I moved it all into microsoft and recently sold it at 29 right after earnings. (After that I was going to move it all into a Vanguard international account and forget about it but instead I rebought microsoft when it dipped to $28 and recently resold it at $30.30). I really should hold it through the next earnings release since I think $32 will happen, but I also really want to have some international fund exposure.

So really, a lot of luck daytrading...although it was more like month trading, playing with the dips of pretty big stable companies. I wouldn't have done this with money I cared about..this was just for play.

[cptacek]

I rolled my 401k from my old job I got laid off from to an IRA, and now am converting that to a Roth IRA before the end of the year. My thinking is that I was laid off for 4 months and got a job that pays less, the amount in that 401k was about the same as the missed paychecks, we always have more farm stuff we can depreciate, and taxes will most likely be going up. We MAY have one more year without a tax increase, but for sure taxes will go up Jan 1, 2011 because the Bush tax cuts will be expiring (or as Speaker Pelosi says, "[it isn't] a tax increase. It is- it is- eliminating a tax- decrease that was there." tomato, to-mah-to, I say).

[Broken Arrow]

KTP, that's basically what I've done too, but not as successfully. Congrats!

[zetta]

Just thought I'd add that any brokerage and many mutual fund companies can set up the IRA for you to roll the money into -- Etrade, ScottTrade, Fidelity, etc.