Roth VS Traditional? Rolling over my 401k

[cashstasherat23]

Hi All!

I have recently switched jobs and now find myself with the need to roll over my first 401k. From the research I have done and the reading on MMM, I know that I would like to roll over to Vanguard, and that I would like to invest in VTSMX, at least until I hit $10K and can switch to admiral shares.

However, I am a bit stuck on whether a Roth or Traditional IRA is the best choice for me right now. I am currently in the 25% bracket, but don't know how old I will be or what I will be making when I retire. My plan at this point is loosely as follows:

-Pay off student loans this year ($16,000 remaining)
-Work for the next ~10 years (approx) building up my savings to FI
-Leave the traditional workforce by my mid-30s (24 now) presumably to do freelance work or consulting, while semi-retired

I am not currently maxing out my 401K as the fees are quite high, but am contributing to get my company match. Using that extra money to pay off student loans quickly, but once the loans are paid I do plan to contribute up to the max for 401K. 

I am assuming that because I am in one of the lower tax brackets now, it would make sense for me to go the Roth route and pay the taxes now, allowing my money to grow later. Can anyone advise whether this makes sense?

Also, have a few other questions about the logistics:

-With either option, will the money that I am rolling over (~$5,900) count as my 2015 contribution, or will I be able to add another $5,500 on top of the money rolled over?

-If I have more than $5,500 to roll over, where does the extra money go-just into a normal mutual fund?

-Will I need to pay that 25% tax next April, so need to put aside money for it?


I also plan to call Vanguard to discuss this, but want to be sure I am not going in blind and get sold on something that doesn't make sense for me. Help is appreciated!

[Cheddar Stacker]

Traditional will be tax free now, and taxed later when you take it out or convert it to Roth. You should be able to do this at a rate much lower than the 25% you are currently paying. I would go with Traditional for sure. 25% is a high bracket once you develop your tax planning skills.

The rollover is separate from contributions, so it doesn't count against the annual limits.

You can rollover $10M, or $100M, it all just goes into the account you setup, and the investment you choose. No limits.

The 25% tax would be due in April if you convert it to a Roth. Make sure by 12/31/15 you pay in at least 100% of last years' total tax in order to avoid penalties/interest.

Lastly, I'd max the 401k before paying down SL debts unless the interest rates on that debt are > 5-6%. 25% tax is just too much to pay without maxing your 401k.

[Lady Fordragon]

I agree that Traditional seems like the right path to take now for all of the reasons mentioned above.  As much as I hate debt, I would also have to agree that you should work on maxing out your 401k before paying down your SLs since these contributions help lower your taxes now while you're making more money than when you're in retirement.

[cashstasherat23]

Traditional will be tax free now, and taxed later when you take it out or convert it to Roth. You should be able to do this at a rate much lower than the 25% you are currently paying. I would go with Traditional for sure. 25% is a high bracket once you develop your tax planning skills.

The rollover is separate from contributions, so it doesn't count against the annual limits.

You can rollover $10M, or $100M, it all just goes into the account you setup, and the investment you choose. No limits.

The 25% tax would be due in April if you convert it to a Roth. Make sure by 12/31/15 you pay in at least 100% of last years' total tax in order to avoid penalties/interest.

Lastly, I'd max the 401k before paying down SL debts unless the interest rates on that debt are > 5-6%. 25% tax is just too much to pay without maxing your 401k.

Thanks, this is really helpful! I am working on developing tax planning skills, but definitely still a novice.

As for the student loans, I have two at 3.15% and two at 6.55% (only $6,891.72 left of the 6%!) . Once the 6% ones are gone I definitely intend to step up the 401K contributions, but I also have some pretty high fees in my new 401K, so working on figuring out the best way to do that. Seems like traditional is the way to go if I can figure out to maximize my tax advantages!

[Scandium]

Also, if you're in the 25% tax bracket consider rolling it into your current 401k, rather than a Vanguard IRA. An IRA will limit your ability to do a back-door Roth conversion which you may have to do if your AGI is/will be over the limit.

How high are the high fees in your 401k?

[cashstasherat23]

Also, if you're in the 25% tax bracket consider rolling it into your current 401k, rather than a Vanguard IRA. An IRA will limit your ability to do a back-door Roth conversion which you may have to do if your AGI is/will be over the limit.

How high are the high fees in your 401k?

I picked two of the lowest funds in the program, and the fees are .13% and .20%, which are actually not bad, but they are pretty much the only two under 1%. I didn't know that rolling it into my current 401K was an option, but I will definitely look into that!

[Scandium]

Also, if you're in the 25% tax bracket consider rolling it into your current 401k, rather than a Vanguard IRA. An IRA will limit your ability to do a back-door Roth conversion which you may have to do if your AGI is/will be over the limit.

How high are the high fees in your 401k?

I picked two of the lowest funds in the program, and the fees are .13% and .20%, which are actually not bad, but they are pretty much the only two under 1%. I didn't know that rolling it into my current 401K was an option, but I will definitely look into that!

Are those well-diversified index funds? If so that's a great 401k!

You could roll your old 401k into your new one, and open a separate Roth account. We'd need to know your salary (i.e whether you get the IRA deduction) and your 401k fund options to make a definite recommendation.

[cashstasherat23]

Also, if you're in the 25% tax bracket consider rolling it into your current 401k, rather than a Vanguard IRA. An IRA will limit your ability to do a back-door Roth conversion which you may have to do if your AGI is/will be over the limit.

How high are the high fees in your 401k?

I picked two of the lowest funds in the program, and the fees are .13% and .20%, which are actually not bad, but they are pretty much the only two under 1%. I didn't know that rolling it into my current 401K was an option, but I will definitely look into that!

Are those well-diversified index funds? If so that's a great 401k!

You could roll your old 401k into your new one, and open a separate Roth account. We'd need to know your salary (i.e whether you get the IRA deduction) and your 401k fund options to make a definite recommendation.

Sorry, just was able to get back and check this, and saw a new reply!

They are not really well diversified right now. I currently have 89% in a large cap fund (the .13%) and 10% in the midcap (.20%), but I am 24, so don't feel too worried about such a risky portfolio.

Right now, my salary is $52,000. Not sure exactly what you mean about 401K fund options, but the 401K is through MassMutual, and those are two of the lowest fee options, if not the lowest, in the plan.

[forummm]

Also, if you're in the 25% tax bracket consider rolling it into your current 401k, rather than a Vanguard IRA. An IRA will limit your ability to do a back-door Roth conversion which you may have to do if your AGI is/will be over the limit.

How high are the high fees in your 401k?

I picked two of the lowest funds in the program, and the fees are .13% and .20%, which are actually not bad, but they are pretty much the only two under 1%. I didn't know that rolling it into my current 401K was an option, but I will definitely look into that!

Are those well-diversified index funds? If so that's a great 401k!

You could roll your old 401k into your new one, and open a separate Roth account. We'd need to know your salary (i.e whether you get the IRA deduction) and your 401k fund options to make a definite recommendation.

Sorry, just was able to get back and check this, and saw a new reply!

They are not really well diversified right now. I currently have 89% in a large cap fund (the .13%) and 10% in the midcap (.20%), but I am 24, so don't feel too worried about such a risky portfolio.

Right now, my salary is $52,000. Not sure exactly what you mean about 401K fund options, but the 401K is through MassMutual, and those are two of the lowest fee options, if not the lowest, in the plan.

Those funds are pretty diversified (almost 1000 stocks). You just don't have international or bonds. I think that's OK given the amount you have invested and your age.