Rolling over old employer 401k to IRA - Roth or Traditional?

[Apocalyptica602]

Hi all,

Recently separated from my old employer of 5 years, with a decent fully vested 401k balance of ~$117k.

Looking to roll it over, the 401k selections aren't bad but Vanguard's equivalent options are better. Should I do Roth, or Traditional? I'm thinking traditional because it makes sense to continue to defer the taxes based our high incomes (Gross ~$220k / year) but I'm just looking for a sanity check.

Only reason I can think of to support the Roth option is that in 5 years it'll be a big head start to our backdoor-roth ladder since we're only planning on working another ~10 years. However, if we're going to take a haircut on taxes like I imagine then we should hold off.

Thoughts, opinions?

Thanks!

[Zaga]

Absolutely go with traditional in your situation!  Don't backdoor a Roth until and unless you have low income years to do it in.  It's totally okay to end up with a lot in traditional, that will be us as well.

[Davids]

Do traditional, once you are ready and have low income years ahead of you when you pull the plug then do the Roth Conversion Ladder.

[seattlecyclone]

Do you already have any money in pre-tax traditional IRAs? If not, you're currently capable of making backdoor Roth IRA contributions, but rolling your 401(k) into a traditional IRA would effectively close that back door. At your income level you probably can't make direct contributions to a Roth IRA, so if your new 401(k) options aren't terrible you probably should roll this money into your new 401(k).

As for the first five years of early retirement, there are several options likely to turn out better than doing a large Roth conversion while you're still in a high tax bracket. First of all, at your income level you should be able to max out your 401(k)s and still have quite a bit left over to save in your Roth IRAs and taxable account after that. The Roth contributions and all of the taxable money can be withdrawn without penalty at any age. Even if you somehow aren't able to save up quite enough money through these routes, keep in mind that making a Roth conversion now will cost taxes at your current marginal rate (and maybe even a higher bracket if you do $117k all at once). Making direct withdrawals when you're retired will cost your retirement marginal rate plus 10%. This percentage could very easily be lower than your current tax bracket!

[Apocalyptica602]

Thanks for all of the advice. Traditional it is!

I currently don't have a traditional IRA, we've been able to get our MAGI just low enough to still be able to contribute to Roths, through maxing our 401ks and HSA etc.

Been saving up for a downpayment on a house so there's an after tax ~4k a month that would typically be going into a taxable account after that, so once we move in and get settled that flow will get redirected.

My new company actually has some pretty damn good 401k options, so it's about a wash re: expense ratios and high quality funds, so the intangibles are that I prefer vanguard's interface and superior compatibility with Mint.

Thanks!

[MoonLiteNite]

I would roll it into an IRA over 401k plan. 100% chance you have more options with an IRA.
As for Traditional vs Roth, i do not know. When i did mine i kept it as traditional just to avoid tax BS.
My current investments is 75/25 roth/traditional.

When i FIRE, the goal is to roll everything to roth IRA at that point, and be able to remove my contributions tax free. and then when i hit that magical age, be able to take out the traditional contributions without penalty. I personally figured this would be easier than playing with ladders and 72t

[LeRainDrop]

Hey, just wanted to chime in with some very recent experience rolling over a 401(k) to Vanguard.  I had both a traditional 401(k) and a Roth 401(k) with Schwab.  When I called Vanguard to initiate the roll-overs, they strongly recommend that if you're rolling over the traditional 401(k) you move all those funds to a traditional IRA to create a clean paper trail.  Then, once the rollover funds have cleared, if you decide it's worth converting some from the traditional IRA to a Roth IRA, you can do that as a next move.  (Although in your situation and mine, I would not take that second step to convert any from the traditional IRA to the Roth IRA.)  By the way, calling Vanguard to initiate the rollover was a great way to do this.  The Vanguard rep even conferenced in the Schwab rep so that instructions could be given directly between the financial institutions.  Schwab still had to mail the checks to me and then I had to mail them to Vanguard, but that was no big deal.