Author Topic: Rollover to Tradional IRA or Roth?  (Read 1929 times)

Rekon

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Rollover to Tradional IRA or Roth?
« on: June 17, 2016, 12:16:06 PM »
First, here is some background information:

I'm 28 years old and married.  My wife and I currently earn 130k combined.  We both contribute 5% each (total of 10%) to our 401k and receive a company match of 4% each (total of 8%).  So, with company match my wife and I contribute 18% into our employer 401k plans.  These are our only retirement accounts at the moment.

I just recently switched companies and I'm not sure what to do with my 401k from my previous employer.  My 401k with my previous employer is a little over $50k.

I'm in between two options: 

A. Roll it over to a traditional IRA with my new employer.
B. Roll it over to a Roth IRA account.

I understand I will pay taxes if I roll over to a Roth IRA account but my thinking is it may be better to pay takes on $50k now vs. when I retire.  I do expect our income to go up in the future.  I am currently enrolled in a MBA program and my wife is finishing up her undergrad. 

Thank you in advance!

Cromacster

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Re: Rollover to Tradional IRA or Roth?
« Reply #1 on: June 17, 2016, 12:26:39 PM »
What do you expect your income/expenses in retirement?  That is the key question, not what your earnings are going to be while you are still working.  Do you expect to be earning 130k+ while you are retired?

I would rollover to a Trad IRA, unless you plan to one day utilize the mega backdoor Roth.  Then I would roll it over to your new 401k.  Or someone correct me if this has been shut down.


Rekon

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Re: Rollover to Tradional IRA or Roth?
« Reply #2 on: June 19, 2016, 10:00:00 PM »
What do you expect your income/expenses in retirement?  That is the key question, not what your earnings are going to be while you are still working.  Do you expect to be earning 130k+ while you are retired?

I would rollover to a Trad IRA, unless you plan to one day utilize the mega backdoor Roth.  Then I would roll it over to your new 401k.  Or someone correct me if this has been shut down.

It's hard to say what my income/expenses will be in 32 years.   

What's a mega backdoor Roth?

Rekon

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Re: Rollover to Tradional IRA or Roth?
« Reply #3 on: June 20, 2016, 05:51:22 PM »
Any other advice?

nereo

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Re: Rollover to Tradional IRA or Roth?
« Reply #4 on: June 20, 2016, 06:05:11 PM »
What do you expect your income/expenses in retirement?  That is the key question, not what your earnings are going to be while you are still working.  Do you expect to be earning 130k+ while you are retired?

I would rollover to a Trad IRA, unless you plan to one day utilize the mega backdoor Roth.  Then I would roll it over to your new 401k.  Or someone correct me if this has been shut down.

It's hard to say what my income/expenses will be in 32 years.   

You should at least be able to make an educated guess.  Start with what your expenses are now.  Which expenses will go away? (e.g. retirement savings, maybe your mortgage, student loans, etc.)  Add any additional expenses you anticipate having (global travel? supporting parents/children/grandchildren).  That's a rough guess of what your future expenses will be.  For most people it will be a fraction of their current income.

If it's significantly worse the prevailing wisdom is to do a traditional IRA.  If you expect tax rates to be mostly the same in the future or increase it tilts even more towards a tIRA. 
If you think you'll spend more in retirement then you currently do then go with a ROTH and be prepared to pay up to 28% taxes on your rollover.

Quote
What's a mega backdoor Roth?
http://www.madfientist.com/after-tax-contributions/
Mega-backdoor ROTHs are a way to supercharge your savings, but not all 401(k) programs allow them.  Check with yours to find out.

MDM

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Re: Rollover to Tradional IRA or Roth?
« Reply #5 on: June 20, 2016, 06:11:05 PM »
See also https://www.bogleheads.org/wiki/Traditional_versus_Roth and https://www.bogleheads.org/wiki/Marginal_tax_rate.

For some perspective, check the amounts in a traditional account needed to reach current tax brackets, assuming a 4% withdrawal ratio.

E.g., for MFJ under 65, the top of the 15% bracket is $75,300.  Add $12,600 standard deduction and $8100 exemptions to get $96,000.  Divide by 4% to get $2,400,000.

Even with growth between now and retirement, that's a lot of room for traditional contributions.

Throw pensions, SS, and/or different tax brackets into the mix and things can change, but from what you have posted so far, traditional seems appropriate for now.