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    401k From Previous Employer

    I have accepted a new position at another company and will be leaving my current company at the end of the month. I have approximately $105k in my 401k account. Should I be rolling that into a Roth or Traditional IRA? Any other options that I should be considering?

    #2
    Originally posted by btctony View Post
    I have accepted a new position at another company and will be leaving my current company at the end of the month. I have approximately $105k in my 401k account. Should I be rolling that into a Roth or Traditional IRA? Any other options that I should be considering?
    I'd suggest that you roll it into an IRA. If the money is currently pre-tax, use a traditional IRA. If it's post-tax (Roth), use a Roth IRA. It's just about cleaner to possess the money outright & cut ties with your former employer. Plus, an IRA offers significantly more investment options.

    One consideration going forward -- what I plan to do with my wife's pre-tax retirement money at some point is to convert it to Roth. Best to do that in a year that either your income is abnormally low, or the stock market is in a downturn (or both) to minimize your taxes due in the conversion.
    "Praestantia per minutus" ... "Acta non verba"

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      #3
      Originally posted by btctony View Post
      I have accepted a new position at another company and will be leaving my current company at the end of the month. I have approximately $105k in my 401k account. Should I be rolling that into a Roth or Traditional IRA? Any other options that I should be considering?
      It depends. Here are some things to consider:
      1. Does your current company charge any record keeping fees?
      2. Does your current company have low ERs for your current investments?
      3. Assuming #1 and #2 are yes, does your current company allow roll-ins to your 401k after you are no longer an employee?
      4. Will you be doing conversions to Roth at any time in the future?
      5. Will you qualify to make direct Roth contributions in the future?
      6. Does you new company have lower fees and do they accept roll ins?


      You don't have to make any split second decisions. But, over a career you could end up having quite a few 401ks and if each one charges a record keeping fee, it can really add up. On the other hand, if you plan to make future contributions to a non deductible traditional IRA, already having funds in a traditional IRA could complicate future conversions to a Roth IRA.

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        #4
        I may be slightly confused, but here goes. The money is pre-tax. Would it be more beneficial to roll it into a Roth IRA and pay tax on it now while I am in a lower tax bracket as opposed to a Traditional IRA where I would pay tax at retirement and most likely be in a higher tax bracket? My current tax rate is 22%. After a few years in the new position my tax rate will be at 24% based on the newly released 2022 tax rates and income brackets. I suppose anything is possible, but I would say it is unlikely that my income will fall into the range that would be taxed at 32% or higher anytime in the near future and quite possibly never.

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          #5
          You always want to pay the taxes when you'll foreseeably be in the lowest tax bracket. Compare your current income to the income you expect you'll have in retirement. Would you expect to have a lower taxable income now, or once retired? If now, then it's advantageous to do the conversion now.* If you don't expect to have much taxable income in retirement, then you can just leave it in the traditional IRA & withdraw it in retirement at the low bracket that you'll likely be in at that point. It gets more sticky if you expect it to be roughly the same, but in that case I err toward the side of converting it now* and paying the taxes upfront to get all of the growth to be tax free. We don't know what future taxes will look like, but most people are paying historically low taxes right now.

          * Note that I say "now" but you don't have to do the conversion all at once. There's some advanced tax stuff I'm not terribly familiar with involved, but in general terms, you can roll it into a traditional IRA, then convert it over the course of a few years to spread out the taxes & prevent accidentally bumping yourself up into a way-high tax bracket by trying to convert all at once (because the entire $105k would be treated as normal income, so it would likely bump you up).
          "Praestantia per minutus" ... "Acta non verba"

          Comment


            #6
            Conversion to Roth now or later is a very complex decision. In some ways, it is like a moving target. The tax laws change. There has been some discussion in congress about limiting conversions to Roth under certain circumstances. The tax rates that are currently in place are due to sunset in 2025--so congress doesn't have to do anything and we are back to pre-2017 tax rates.

            "Many tax cut provisions, especially income tax cuts, will expire in 2025, and starting in 2021 will increase over time; this, by 2027 would affect an estimated 65% of the population and in that same year the law's provisions are set to be fully enacted, however, corporate tax cuts are permanent."
            https://en.wikipedia.org/wiki/Tax_Cu...bs_Act_of_2017

            If you get a pension and/or social security--that income may fill your lower brackets when you are retired. If you don't get a pension and delay social security in retirement and pull money from your pre-tax account--your pretax dollars will be taxed at different rates than your current marginal rate (filling in the lower brackets).
            On the other hand--if you claim social security: Social security could become taxable at certain income levels -even if you go even $1.00 over the threshold. This could result in some very high marginal tax rates under certain conditions:
            https://www.bogleheads.org/wiki/Soci...act_calculator

            If you wait to convert after age 63, the conversion activity could impact how much you pay for medicare part B:
            https://www.medicare.gov/your-medica...s/part-b-costs

            There are also ways to prevent the RMDs to impact your income tax. You could pull your charitable donations from your your traditional IRA (after age 70).
            https://www.irs.gov/retirement-plans...ns-withdrawals

            If you do the rollover traditional IRA and you subsequently make non deductible traditional IRA contributions, conversions could become a lot more complicated.

            Comment


              #7
              One thing that hasn't been mentioned yet (or I missed it). Many 401k plans have a Stable Value Fund option that typically pays well above market interest rates. Right now, they may be paying 3% or so compared to 0.5% for your online money market. Many retirees hold onto their 401k specifically for access to that fund and use it as their cash reserve.

              How old are you?
              Steve

              * Despite the high cost of living, it remains very popular.
              * Why should I pay for my daughter's education when she already knows everything?
              * There are no shortcuts to anywhere worth going.

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                #8
                Originally posted by disneysteve View Post
                One thing that hasn't been mentioned yet (or I missed it). Many 401k plans have a Stable Value Fund option that typically pays well above market interest rates. Right now, they may be paying 3% or so compared to 0.5% for your online money market. Many retirees hold onto their 401k specifically for access to that fund and use it as their cash reserve.

                How old are you?
                I'm 37, so I have a long ways to go before I would be drawing anything out of it.

                Comment


                  #9
                  Originally posted by kork13 View Post
                  You always want to pay the taxes when you'll foreseeably be in the lowest tax bracket. Compare your current income to the income you expect you'll have in retirement. Would you expect to have a lower taxable income now, or once retired? If now, then it's advantageous to do the conversion now.* If you don't expect to have much taxable income in retirement, then you can just leave it in the traditional IRA & withdraw it in retirement at the low bracket that you'll likely be in at that point. It gets more sticky if you expect it to be roughly the same, but in that case I err toward the side of converting it now* and paying the taxes upfront to get all of the growth to be tax free. We don't know what future taxes will look like, but most people are paying historically low taxes right now.

                  * Note that I say "now" but you don't have to do the conversion all at once. There's some advanced tax stuff I'm not terribly familiar with involved, but in general terms, you can roll it into a traditional IRA, then convert it over the course of a few years to spread out the taxes & prevent accidentally bumping yourself up into a way-high tax bracket by trying to convert all at once (because the entire $105k would be treated as normal income, so it would likely bump you up).
                  Kork nailed it with this response. It may also be feasible to build a portfolio that generates "income" in multiple ways - taxable withdrawals from IRA/401k, dividends and cap gains from brokerage accounts, long-term cap gains from brokerage account sales, Roth IRA/401k withdrawals, etc. This approach can be a tool to help with managing the effective tax rate in retirement.

                  Comment


                    #10
                    I've kept only Roth IRA and 401k rolling one 401k to 401k. That way we can do a backdoor roth ira.
                    LivingAlmostLarge Blog

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                      #11
                      Originally posted by LivingAlmostLarge View Post
                      I've kept only Roth IRA and 401k rolling one 401k to 401k. That way we can do a backdoor roth ira.
                      I don't understand rolling from one 401k to another. What is the benefit there? My new employers 401k plan is not much different than the previous one or any other. Very limited on the funds that I can invest in.

                      Comment


                        #12
                        Originally posted by btctony View Post

                        I don't understand rolling from one 401k to another. What is the benefit there? My new employers 401k plan is not much different than the previous one or any other. Very limited on the funds that I can invest in.
                        We had some discussion about it in another recent 401k thread, but one potential benefit to rolling from one 401k to another would be if you're approaching age 55 and have interest in retiring early. The exception allowing penalty-free withdrawals after leaving your job at/after age 55 could give you access to the 401k balance including both your then-current job plus any roll-in 401k money.

                        However, as you refer to, this is only advantageous if your 401k options are good (or at least decent/acceptable).
                        "Praestantia per minutus" ... "Acta non verba"

                        Comment


                          #13
                          Originally posted by btctony View Post

                          I don't understand rolling from one 401k to another. What is the benefit there? My new employers 401k plan is not much different than the previous one or any other. Very limited on the funds that I can invest in.
                          Because rollover ira count as aggregation towards calculating if you can contribute to a backdoor Roth IRA. So if you have a rollover say $600k then the $6k/year you try to contribute to a Roth IRA backdoor. after tax contribute to non-deductible IRA because taxable again after you've paid taxes because of your Rollover ira. It's a painful thing. Versus having nothing but a 401k and Roth IRA and $0 balance Non-deductible IRA. Only people like that who make too much to contribute to a Roth IRA can do it. Also I find it easier to watch and roll conversion into a Roth IRA when it's simple from a 401k. I've never loved DH's 401k but it's treated us well.

                          We have been lucky to have almost a 50%/50% split between his 401k and our Roth IRA. Very unheard of but proper management, lots of careful rolling, filling brackets and backdoor Roth IRA/401k after tax contributions have made it possible. It will make our RMDs at 70 more manageable. I think we should be fine converting a lot of money from say age 55 to 70 then having everything pretty much tax free depending on how our 401k goes.
                          LivingAlmostLarge Blog

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