Author Topic: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?  (Read 4348 times)

msilenus

  • Pencil Stache
  • ****
  • Posts: 517
After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« on: December 05, 2013, 01:13:43 PM »
Hi all,

I'll probably be doing my first after-tax 401(k) -> Roth conversion soon.  I understand that I have a choice of taking that money and putting it into my Roth IRA, or my Roth 401(k), through different mechanisms.  There don't seem to be a lot of pros or cons in either direction.  From what I can tell:

* The Roth 401(k) offers no transaction fees.
* The Roth 401(k) is less hassle: the money would go straight into my elections.
* The Roth IRA offers more flexibility.  (But I like my Roth 401(k) options just fine.)
* The Roth 401(k) cannot be withdrawn from while I work from my employer, for any reason.  (This isn't a big concern for me.)

You can probably guess that I'm leaning toward doing the Roth 401(k), and I am.  However, I'd be very interested to learn if there are any considerations I'm missing?

Thanks!

Cald

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #1 on: December 05, 2013, 07:29:57 PM »
One advantage of converting to a Roth IRA is that this will start the 5 year clock on those funds.

I read this elsewhere first, but this was the first place I found this when searching just now:
Quote
As for the person who converts to a Roth: In a conversion, you have to hold the assets in a Roth for five years or until turning 59, whichever comes first, to make penalty-free withdrawals of your converted amounts. Here, each conversion has its own five-year clock.
Source: http://online.wsj.com/news/articles/SB125754645803734655 (3rd paragraph in the answer)

If you convert into a Roth 401(k), and only roll into the Roth IRA once you leave that job, you'd have to wait for 5 years starting then before you can draw on the base funds of the Roth IRA. If it's possible to go from Roth 401(k) to a Roth IRA without leaving the job then this might be a negligible advantage.

WillPen

  • 5 O'Clock Shadow
  • *
  • Posts: 57
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #2 on: December 05, 2013, 09:14:05 PM »
I think the Roth allows more options on how the money is handled should you pass on -- how it's distributed, who it's distributed to, and when it's distributed. I'm in the middle of reading a book about this now but haven't converted it to memory so I could be mistaken :)

abliviax

  • 5 O'Clock Shadow
  • *
  • Posts: 18
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #3 on: December 06, 2013, 05:16:38 PM »
Dear miscellaneous --

Your Roth IRA would be more flexible in many ways.  A few possible downsides are:

- Your Roth 401k may offer you more collective buying power.  You may access to "institutional" versions of mutual funds/ETFs that are unavailable to the single investor.
- If it matters to you, that money is also more sheltered if you are sued.  (401k have more protection).

I think rolling it is often the best decision.  Make sure you understand expense ratios, look for a deal with some free trades/cash to switch, and proceed!

Forrest

engineerjourney

  • Bristles
  • ***
  • Posts: 301
  • Age: 32
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #4 on: December 07, 2013, 09:16:09 PM »
I believe you have to take distributions from Roth 401Ks at age 70 or so where as the Roth IRA does not have this rule.  That could be a disadvantage or not matter at all depending on your income and tax bracket goals in retirement. 

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #5 on: December 08, 2013, 01:21:13 PM »
You'll almost always have access to better investment options in an IRA, unless you happen to work at one of those rare employers who offer a bunch of institutional index funds in their 401k plans.

Cooperd0g

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #6 on: December 08, 2013, 07:46:03 PM »
Also, consider the fees. Even if your 401(k) has nice low cost funds like Vanguard, it will most likely still have custodial fees whereas an IRA direct with Vanguard will only have the expense ratio of the fund(s).
« Last Edit: December 09, 2013, 10:58:58 AM by Cooperd0g »

msilenus

  • Pencil Stache
  • ****
  • Posts: 517
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #7 on: December 08, 2013, 10:37:45 PM »
Thanks for the advice all.  (And for any more that comes.)

I'm leaning more in the IRA direction now.  A big factor is that I simply think I understand the implications of that better.  Does anyone know if the paperwork is any different between the two options?   Is there paperwork?

WillPen

  • 5 O'Clock Shadow
  • *
  • Posts: 57
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #8 on: December 09, 2013, 07:41:27 AM »
If it is indeed after-tax account you should just be able to do a roll over (meaning the transaction is handled between institutions, and you don't have to worry about anything). Should be apples to apples, right?

I would call both providers and ask what you need to do. When I rolled my wife and I's 401ks over to IRAs, I could completely handle 1 online, and the other needed some Vanguard forms faxed over. But that was the extent of my involvement. No need to cut checks to me or anything.

Will

msilenus

  • Pencil Stache
  • ****
  • Posts: 517
Re: After-Tax 401(k) conversion: Roth IRA or Roth 401(k)?
« Reply #9 on: December 16, 2013, 07:34:42 PM »
Thanks again for the input, all.  I did the conversion today.  Flip-flopped back to the Roth in-plan conversion.  The big factors (aside from the ones outlined in my original post) were:
1) I determined that I can keep my plan after leaving my employer without any increase in fees.  That can change, but I don't expect it to.
2) Confirmed that after leaving my employer I can make Roth principle withdrawals directly from the Roth 401(k).  Conversions before then will season within the 401(k) as normal.  There's no need to do a second rollover to an IRA and reset seasoning timeframes, so long as I keep my money in the plan.
3) Liability protection.  I don't live in a state that extends similar protections to IRAs.

The last is the lynchpin.  I was already planning on trying to defer withdrawals from tax-advantaged accounts for as long as possible.  As taxable assets dwindle, we'll get more and more immune to lawsuits.  Eventually, that should save a chunk on insurance every year.  Immediately, the damage potential from a huge judgment will be reduced somewhat.

I'm gambling a bit that the things I like about my plan won't change.  The call is borderline enough that I'm not too worried about that.  It's a wager, but downside is limited.