Author Topic: Rolling 401k into traditional or Roth IRA?  (Read 2084 times)

Sweetpotatofries

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Rolling 401k into traditional or Roth IRA?
« on: January 05, 2017, 09:01:13 AM »
If I leave my current employer for a self-employed career path and choose to take my 401K with me and roll it into an IRA, is it better to roll it into the traditional IRA and leave it there or roll it into a traditional IRA and then do a Roth conversion? My current tax bracket is 28% so I'd have to pay tax on what will likely be about $50,000 currently in the 401K (which hurts to think about) if I did the Roth conversion. However, might that amount of tax be outweighed in the long run by the tax free growth on the remainder? I'm only 26 so it's a long investment horizon to withdrawal.

NoStacheOhio

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #1 on: January 05, 2017, 10:27:31 AM »
It depends on your current 401k plan. If there are no "inactive account fees" or anything like that, and you have access to good funds, then it's perfectly reasonable to keep it where it is.

Generally, rolling to a traditional IRA is your best plan. You can always do more gradual Roth conversions, so you don't take the tax hit all at once if you want to go that route.

Spork

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #2 on: January 05, 2017, 10:38:22 AM »
It depends on your current 401k plan. If there are no "inactive account fees" or anything like that, and you have access to good funds, then it's perfectly reasonable to keep it where it is.

Generally, rolling to a traditional IRA is your best plan. You can always do more gradual Roth conversions, so you don't take the tax hit all at once if you want to go that route.

This.  Don't think about A or B.  It's not an all or nothing proposal. 

If you estimate that your retirement tax bracket is going to be higher than your current tax bracket... you convert some amount up to the top of your tax bracket.
But.. if you're in the 28% bracket now... it is also somewhat likely that you'll be in a lower bracket later.  If that's the case, it makes sense to just let it bake in the traditional IRA, then start converting when you slide down one or two brackets in retirement.

There is, of course, the whole "you can't pull it out for 5 years" clause on the conversion.  So, if you "convert later" you'll also need to have some forethought in how you'll finance that first 5 years.

Sweetpotatofries

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #3 on: January 05, 2017, 10:55:01 AM »
It depends on your current 401k plan. If there are no "inactive account fees" or anything like that, and you have access to good funds, then it's perfectly reasonable to keep it where it is.

Generally, rolling to a traditional IRA is your best plan. You can always do more gradual Roth conversions, so you don't take the tax hit all at once if you want to go that route.

This.  Don't think about A or B.  It's not an all or nothing proposal. 

If you estimate that your retirement tax bracket is going to be higher than your current tax bracket... you convert some amount up to the top of your tax bracket.
But.. if you're in the 28% bracket now... it is also somewhat likely that you'll be in a lower bracket later.  If that's the case, it makes sense to just let it bake in the traditional IRA, then start converting when you slide down one or two brackets in retirement.

There is, of course, the whole "you can't pull it out for 5 years" clause on the conversion.  So, if you "convert later" you'll also need to have some forethought in how you'll finance that first 5 years.

For some reason I thought you paid a penalty for converting some but not all funds in a traditional IRA to a Roth (i.e.: say I roll it all into a traditional now, then convert some each year).

I'm planning to roll all into some kind of IRA because my employer would charge extra for a former employee to stay in their plan, and while we have relatively good low cost options I'd prefer to have it in Vanguard.

NoStacheOhio

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #4 on: January 05, 2017, 11:07:27 AM »
For some reason I thought you paid a penalty for converting some but not all funds in a traditional IRA to a Roth (i.e.: say I roll it all into a traditional now, then convert some each year).

I'm planning to roll all into some kind of IRA because my employer would charge extra for a former employee to stay in their plan, and while we have relatively good low cost options I'd prefer to have it in Vanguard.

You just pay vanilla income tax on the money converted, same as if you earned it from a job. Like Spork said, if you want to do a Roth conversion, convert up to the top of your current bracket for a given year (or however much tax you're comfortable paying below that amount). IIRC, you can do a conversion up until the April deadline, so you could do your taxes first, then decide how much to convert. Someone will correct me if I'm wrong on that though.

If they're charging a fee, then rolling to an IRA is a good idea.

Spork

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #5 on: January 05, 2017, 11:30:25 AM »
For some reason I thought you paid a penalty for converting some but not all funds in a traditional IRA to a Roth (i.e.: say I roll it all into a traditional now, then convert some each year).

I'm planning to roll all into some kind of IRA because my employer would charge extra for a former employee to stay in their plan, and while we have relatively good low cost options I'd prefer to have it in Vanguard.

You just pay vanilla income tax on the money converted, same as if you earned it from a job. Like Spork said, if you want to do a Roth conversion, convert up to the top of your current bracket for a given year (or however much tax you're comfortable paying below that amount). IIRC, you can do a conversion up until the April deadline, so you could do your taxes first, then decide how much to convert. Someone will correct me if I'm wrong on that though.

If they're charging a fee, then rolling to an IRA is a good idea.

Okay, I'm going to correct you.  But I'm not 100% confident in my standing. ;)

I believe if you can do standard Traditional or Roth contributions for the previous tax year, but you CANNOT do conversions.  In other words, you can convert up to Dec 31 (assuming the market is open and it gets processed before midnight).  Conversions on Jan 1 count for the next tax year.

To make it even more silly/confusing, you can convert on Dec 31, then decide you don't want to convert and roll that back.  Rolling it back can happen up until the tax deadline.

And like NoStash said... Someone please correct me if I am wrong.

ImCheap

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #6 on: January 05, 2017, 12:14:34 PM »
Unless you think you will be in the 28% bracket or higher the rest of your life you could convert it to Roth but.......Being 26 and who really know what is going happen roll to a tIRA and worry about conversion(s) latter.

Begin Rant:

I think many people over use a Roth, everyone needs something to fill in the lower bracket + plus the unknown of what our tax system will look like in the next 40-60years is anyone's guess

End Rant.


I admit where would be the best spot to hold the lute alludes me at times. Anything around 50/50 (tIRA/rIRA) or 33/33/34 (tIRA/rIRA/Taxable) is within reason of being sane. The one thing for sure I know, I want the ability to fill in the 0% bracket with tIRA if possible.
« Last Edit: January 05, 2017, 12:16:27 PM by ImCheap »

Polish_Hammer

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #7 on: January 06, 2017, 12:42:50 PM »
you don't have to go the roth conversion ladder route to Retire early.  You can always use rule 72T and take out a fixed amount per year until 59 1/2.  Having the fixed amount risk is only an issue if you were more than 10 years away from 59.

catccc

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #8 on: January 06, 2017, 02:26:55 PM »
at 28%, I would wait to convert.  When I consolidated 401Ks from former employers, I was going from a 25% bracket to a 15% bracket and went with the Roth.  But it made sense at the time because I was going to temporarily be in a lower bracket.

to echo another response, you just want to make sure you have a good mix of taxable and tax free amounts to withdraw in retirement so you can work those brackets to your advantage.  Right now Roths are about $250K of our $450K in tax advantaged retirement accounts.

MDM

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #9 on: January 06, 2017, 09:23:44 PM »
My current tax bracket is 28%....
However, might that amount of tax be outweighed in the long run by the tax free growth on the remainder?

In short, no.  Yes, it might but it also might not.

See Traditional versus Roth - Taxes.

The "correct" answer to your question will be known only when you know the marginal rate at which those converted dollars and their growth were (or would have been) withdrawn.

Most people will have retirement marginal rates under 28%, so most people should not convert traditional to Roth now and pay 28%.  Don't know if you are "most people" or not. :)

financiallypossible

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Re: Rolling 401k into traditional or Roth IRA?
« Reply #10 on: January 09, 2017, 10:10:45 AM »
My current tax bracket is 28%....
However, might that amount of tax be outweighed in the long run by the tax free growth on the remainder?

In short, no.  Yes, it might but it also might not.

See Traditional versus Roth - Taxes.

The "correct" answer to your question will be known only when you know the marginal rate at which those converted dollars and their growth were (or would have been) withdrawn.

Most people will have retirement marginal rates under 28%, so most people should not convert traditional to Roth now and pay 28%.  Don't know if you are "most people" or not. :)

100% agree with this logic.