Should I have both a 401K and IRA?...Need Advice

**Petunia 100** · 09-25-2016, 09:55 PM

Originally posted by SilverJK View Post

I need some guidance. I left a job almost 3 years ago that had a company sponsored 401k plan. Upon leaving, I rolled it (only had about $9k) into a traditional IRA through my bank and it's been sitting there ever since only gaining minimal interest. It's not invested in anything. I then took a new job at another company and started contributing to their 401K sponsored plan. My new employer also offers a pension plan upon retirement after qualifying years + age. I hopefully plan to stay there until retirement if possible. My question is what is the best thing to do with the $9k sitting in the Trad IRA at my bank? I feel my options are ...

1. I could just withdraw it and take the penalty and tax hit.
2. Somehow roll it into my current 401k (if that's possible)
3. Roll it into another IRA with an investment firm
4. Leave it alone and try to contribute to it each month on my own. (this is hard because I forget I even have it to be honest).

Some background info, I am 33, single, no kids and looking to buy my first home within the next year. No other debt whatsoever. Thanks for any advice!

Your 401k plan may accept rollovers; ask them and find out.

Otherwise, open an IRA at a quality, low-cost custodian such as Vanguard, Fidelity, or Schwab and get your money invested. The custodian you select will be happy to help you roll your existing IRA, no penalties or taxes required.

**kork13** · 09-25-2016, 09:55 PM

Please, please, PLEASE... Don't do #1. I know, it's a relatively small amount, and the tax hit+penalty won't be killer.... But you've already got it in an IRA, why not just leave it there & let it grow for your future retirement?

What are your 401k's investment offerings? If they are good & low-cost, do #2 if they will let you. Otherwise, I recommend #3 -- take it from your bank (where it's likely earning peanuts) and move it to Vanguard. Your future self will thank you.

Additionally, instead of #4.... You don't mention your income level, but if you're eligible, you should also open up & max out every year a Roth IRA (again, I'd recommend Vanguard). Outside of any contribution match you get with your 401k, the Roth IRA will be your best-spent $453.33 every month. It's super easy to set up automatic contributions so that you don't even have to think about it.

**clatoden99** · 09-26-2016, 02:56 AM

You should convert to Roth.

1) A Roth IRA gives you the option of accessing the contributed capital with no penalty (after 5 years) while a traditional IRA imposes a penalty for early withdrawal.

2) A Roth IRA does not require minimum required distributions during the owner's lifetime while traditional IRA's require minimum distributions at [70]. This means, you can compound more capital tax free for a longer period with a Roth.

3) Many are speculating that taxes will go up given the fiscal situation of the US. A Roth is a way to hedge the risk of a higher future tax rate.

4) Even if taxes don't go up, you may accumulate enough capital and savings for retirement such that you don't actually drop to a lower tax bracket upon retirement and thus are subject to the same tax rate.

5) A Roth IRA is good for intra-generational wealth transfer as it allows your beneficiaries to continue to compound capital tax free.

6) Assuming your tax rates are equivalent during retirement, a Roth IRA allows you to invest more on a tax-neutral basis ($5000/yr after tax) than a traditional IRA ($5000/yr before tax, which is then taxed later = less than $5000 after tax).

Risk factor: There is legislative risk in Roth IRAs in that it is possible for Congress to revoke tax exemption on the capital gains in a Roth IRA. Unlikely in the short term, but possible if debt / budget deficits become a much larger problem than currently. (A traditional IRA doesn't run this risk as you are paying taxes on withdrawals anyways)

**SilverJK** · 09-26-2016, 06:19 AM

Thanks. Yea my employer's 401k is through Vanguard, so maybe I will just try to roll the IRA into that. But would it really make a difference if I were to simply roll it into my 401k at vanguard vs. opening a roth IRA at vanguard and rolling it into that? Either way, it would be invested, which it isn't currently. So any big advantage over the other?

**DaveInPgh** · 09-26-2016, 07:07 AM

I would also recommend converting it to a Roth IRA.

**kork13** · 09-26-2016, 07:23 AM

Originally posted by SilverJK View Post

Thanks. Yea my employer's 401k is through Vanguard, so maybe I will just try to roll the IRA into that. But would it really make a difference if I were to simply roll it into my 401k at vanguard vs. opening a roth IRA at vanguard and rolling it into that? Either way, it would be invested, which it isn't currently. So any big advantage over the other?

Vanguard 401k --

The difference between rolling the Trad.IRA into your 401k vs. a Roth IRA is strictly a question of taxes, and both are very good options. If you roll it into your 401k, you won't pay any taxes on the money right now, only when you withdraw it. Into the 401k is basically a net zero move that just simplifies your situation. If you convert it into a new Roth IRA account, you'll pay taxes on the amount at your current tax rate, but it'll grow tax-free from here on out. Determining which option is best requires info about your income/tax bracket. But the most common advice is if you're in the 15% bracket or lower, go Roth. If you're in the 28% bracket or higher, go 401k. In the 25% bracket...it just depends, and you're probably good either way.

Going forward, though, as recommended already, suggest that you open a Roth IRA regardless of what you do with the rollover, and and max that out every year. That'll give you some tax-free savings in addition to your 401k (for tax diversification), and it's an all around good deal.

**greenskeeper** · 09-26-2016, 12:33 PM

convert to a roth IRA and contribute on your own with automatic deduction each month. Also invest in your company's 401k at least to the matching maximum percentage (if offered)

**Atretes1** · 09-27-2016, 03:45 PM

Originally posted by SilverJK View Post

Thanks. Yea my employer's 401k is through Vanguard, so maybe I will just try to roll the IRA into that. But would it really make a difference if I were to simply roll it into my 401k at vanguard vs. opening a roth IRA at vanguard and rolling it into that? Either way, it would be invested, which it isn't currently. So any big advantage over the other?

My works sponsored 457 B plan uses Vanguard funds but there is an extra asset base fee associated with the plan to pay the company to run the plan. Even tho this is a small enough fee I would not transfer extra outside money into my plan for that reason. I would set up an outside IRA at Vanguard. Your fees may be different tho.

**cornfieldj** · 10-19-2016, 08:25 AM

I might be late to the game on answering, but 1) Agree with others who say not to withdraw and take the penalty hit. The money's already set aside - you might as well keep it earmarked for retirement! But do look for a good investment (low-cost index funds are a great choice) to put it in.

2) You cannot roll it into a 401(k). That 401(k) plan can only be funded through payroll deductions.

Ask your bank if there's a fund the money can be invested in so you can get a better return on the money.

Good luck!

**Petunia 100** · 10-19-2016, 08:42 AM

Originally posted by cornfieldj View Post

I might be late to the game on answering, but 1) Agree with others who say not to withdraw and take the penalty hit. The money's already set aside - you might as well keep it earmarked for retirement! But do look for a good investment (low-cost index funds are a great choice) to put it in.

2) You cannot roll it into a 401(k). That 401(k) plan can only be funded through payroll deductions.

Ask your bank if there's a fund the money can be invested in so you can get a better return on the money.

Good luck!

It depends on the particular plan. Some 401k plans do accept rollovers; others do not. This will be spelled out in the plan documents.

Can I roll over my IRA into my retirement plan at work?

You can roll over your IRA into a qualified retirement plan (for example, a 401(k) plan), assuming the retirement plan has language allowing it to accept this type of rollover. Roth IRAs can only be rolled over to another Roth IRA

404 | Internal Revenue Service

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions

404

**cornfieldj** · 10-21-2016, 07:20 AM

You're right.. I just had some weird blank-brain moment where I forgot you can do a plan-to-plan rollover if your plan permits it.

Should I have both a 401K and IRA?...Need Advice