Author Topic: 23 years old, laid off, lost about 401k rollover  (Read 3156 times)

puar22

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23 years old, laid off, lost about 401k rollover
« on: March 01, 2015, 09:10:11 AM »
I recently got laid off and want to roll over my 401k to an IRA at Vanguard with minimum tax implications and to optimize my path towards living a mustachian life as soon as it can happen.

The situation:
- There's only about $900 that's vested in my 401k right now
- I had enough cash saved up to max out a Roth for 2014 but haven't opened the Roth IRA account yet
- Income was 50k
- Currently have 10k in cash

My understanding is that rolling over to a traditional 401k would not be taxed while a roth would be and affect taxable income. I know my income may be higher in the future, so all of this indicates that the roth would be a better choice. Is that correct?

The problem is I may take a break for a few months to take some classes and the higher income may not be for sure. So that makes me unsure of whether to rollover to a traditional IRA or a Roth. Any insight?

I live at home so it's not as important to have a significant amount of cash on hand. Is it better to just go ahead and max out the Roth for 2014 right now? Thanks!

zurich78

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Re: 23 years old, laid off, lost about 401k rollover
« Reply #1 on: March 01, 2015, 10:24:16 AM »
Given your situation, I'd just keep the money in the 401K for now if your former employer allows that (if you can't, it'll auto roll in to a Rollover IRA I believe).  If you get a new job with a 401K plan, you can roll that money in to your new 401K plan later.  The only real benefit to rolling that money in to a traditional IRA is your investment choices I believe are going to be more varied.

Then, I'd go ahead and make the Roth IRA max contribution for 2014 now.  You can withdraw your contribution (the $5,500, no earnings) at any time at no penalty if you run in to an emergency.  And since you live at home, it won't be likely you'll need to touch that money anyway so why not have it work for you?

For me, I like to keep my money out of any traditional IRA.  Mainly, because I always tend to work for companies that offer a 401K plan anyway (which I believe means I cannot make a deductible contribution to an traditional IRA).  Also, since I exceed the income limit for direct Roth contribution, I use a traditional IRA account as a vehicle to do a backdoor roth conversion but in order to avoid pro rata taxation, I have to keep my traditional IRA balance at zero.

RyanAtTanagra

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Re: 23 years old, laid off, lost about 401k rollover
« Reply #2 on: March 01, 2015, 12:23:37 PM »
Roll it over, there's no reason not too.  You most likely will have better investment options at vanguard (low expense index funds that 401k's usually do not have).  IRA rollover is not a taxable event and has no effect on contributing to a traditional or roth ira.

Unless you're talking about rolling over a traditional 401k into a roth ira, that's a lot different.  But going from trad 401k to trad ira is easy.

puar22

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Re: 23 years old, laid off, lost about 401k rollover
« Reply #3 on: March 01, 2015, 12:38:06 PM »
Thanks for the responses. My former employer is not allowing me to keep my money in the 401k.

So I guess rolling it into a Roth IRA is still more beneficial to traditional in this case?

RyanAtTanagra

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Re: 23 years old, laid off, lost about 401k rollover
« Reply #4 on: March 01, 2015, 12:45:08 PM »
Thanks for the responses. My former employer is not allowing me to keep my money in the 401k.

So I guess rolling it into a Roth IRA is still more beneficial to traditional in this case?

That will be a taxable event, which depending on your current tax bracket could be bad.  Usually ira -> roth conversions are done after retirement or during some other time when income is so low that taxes paid on the conversion are minimal.  Why not just roll it over into a traditional ira?  Or are you talking about a Roth 401k?

puar22

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Re: 23 years old, laid off, lost about 401k rollover
« Reply #5 on: March 01, 2015, 01:12:14 PM »
Quote
That will be a taxable event, which depending on your current tax bracket could be bad.  Usually ira -> roth conversions are done after retirement or during some other time when income is so low that taxes paid on the conversion are minimal.  Why not just roll it over ]into a traditional ira?  Or are you talking about a Roth 401k?

Yeah, I understand rolling it into a traditional IRA will be taxable which is why I wasn't quite sure. My income is at 50k. I can simply leave it into the traditional IRA after rolling it and not touching it again until several years later? Just looking for the optimal option

RyanAtTanagra

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Re: 23 years old, laid off, lost about 401k rollover
« Reply #6 on: March 01, 2015, 01:32:12 PM »
Quote
That will be a taxable event, which depending on your current tax bracket could be bad.  Usually ira -> roth conversions are done after retirement or during some other time when income is so low that taxes paid on the conversion are minimal.  Why not just roll it over ]into a traditional ira?  Or are you talking about a Roth 401k?

Yeah, I understand rolling it into a traditional IRA will be taxable which is why I wasn't quite sure. My income is at 50k. I can simply leave it into the traditional IRA after rolling it and not touching it again until several years later? Just looking for the optimal option

Not sure if that was a typo or a confusion of terms.  There are 4 basic retirement accounts:

Traditional 401(k)
Roth 401(k)
Traditional IRA
Roth IRA

You can rollover a Traditional 401(k) into a Traditional IRA and pay no taxes.
You can rollover a Roth 401(k) into a Roth IRA and pay no taxes.

You can convert a Traditional 401(k) into a Roth IRA, but this will be a taxable event.
You can probably convert a Roth 401(k) into a Traditional IRA, but this would be pointless.

Edit:

If you current have a traditional 401k, imo your best course of action would be to just roll it over into a traditional ira.  Worry about converting it to a roth ira later when your income is low enough that you will pay minimum or no taxes on the conversion.
« Last Edit: March 01, 2015, 01:36:31 PM by RyanAtTanagra »