Author Topic: 401k to Roth conversion  (Read 1376 times)

campath

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401k to Roth conversion
« on: July 18, 2014, 10:12:13 PM »
Hello everyone,

First post here at MMM. Hoping someone can guide me about my saving strategy.

I will be working for my current employer for 2 years. The company offers a 401k with pretty good investment options but no match whatsoever. Currently all my savings are in a Roth IRA and a brokerage account. While I would like to save as much as possible, I don't want to have my money locked into a traditional IRA which it would if I rollover the 401k after quitting and the lack of an employer match is also discouraging.

As far as I see I have 2 options,
1. Set some money aside every paycheck and put it into my brokerage account (apart from $5500 in the Roth which I would do anyways).
2. Pay into the 401k for now and pay the penalty to do a Roth conversion after 2 years.

Am I right in understanding that by choosing option 2, I would be paying more in taxes/penalties overall but would end up with my assets in a Roth vessel which is better for long term growth. How would you do the math to see which is better?

surfhb

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Re: 401k to Roth conversion
« Reply #1 on: July 18, 2014, 10:19:44 PM »
Why not?    401ks are tax deferred savings.   Doing both a ROTH and 401k is always advised.

Cheddar Stacker

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Re: 401k to Roth conversion
« Reply #2 on: July 18, 2014, 10:28:31 PM »
There is no penalty for the conversion, only tax.

If your 401k has a roth option choose that. If they don't what you are doing is deferring tax from year 1 and 2 into year3 which could result in higher overall taxes.

Make your roth ira contribution for sure. If you have a roth 401k option do it next. If not just put any investments above 5,500 into a taxable account.