Author Topic: What would you do and why?  (Read 3805 times)

LiseE

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What would you do and why?
« on: March 22, 2016, 09:03:50 AM »
Need some advice ... here's the back story ...

  • I'm 50 .. DH 49
  • We are 5 years from FIRE
  • DH just lost his job and we have to do something with his company 401K
  • With my salary only we are still in the 25% tax bracket

I've been reading and learning about setting up a ROTH Pipeline so in 5 years time we will have a portion of our 401K money available however I'm thinking the pipeline may not be needed for the following reasons

  • If we are FIRE in 5 years and I'm 50, I will be able to draw from my 401K without penalty
  • Whatever $$ we convert to ROTH pipeline will still be taxed at 25%

So, what would you do with DH's 401K (which is in Vanguard and doing quite nicely)?  I'm thinking we should just roll it into a traditional IRA??


dandarc

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Re: What would you do and why?
« Reply #1 on: March 22, 2016, 09:10:31 AM »
Would not start the pipeline while still in the 25% bracket.

Since your plan is to retire once you are 55, you can always withdraw from your 401K, or a SEPP won't be as difficult for you as it would someone retiring a decade or two earlier.

Yes on the tIRA provided you don't have intentions to do a backdoor Roth IRA in the future.  If you are looking to fund a Roth via the back door, you'll want to leave this in the 401K to avoid gumming up the works.

LiseE

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Re: What would you do and why?
« Reply #2 on: March 29, 2016, 06:02:50 PM »
What about rolling his 401K into a non deductible IRA and then converting to Roth IRA?  We currently do not have any other IRA accounts so the exposure doesn't exist.

Is there a limit to how much you can move via the back-door roth conversion?  His 401K is 200k.


forummm

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Re: What would you do and why?
« Reply #3 on: March 29, 2016, 06:09:29 PM »
What about rolling his 401K into a non deductible IRA and then converting to Roth IRA?  We currently do not have any other IRA accounts so the exposure doesn't exist.

Is there a limit to how much you can move via the back-door roth conversion?  His 401K is 200k.



If his 401k is a traditional 401k (i.e. pre-tax), then you will have to pay regular income tax on it to convert it into a Roth. You don't want to do that.

nereo

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Re: What would you do and why?
« Reply #4 on: March 29, 2016, 07:23:45 PM »
What about rolling his 401K into a non deductible IRA and then converting to Roth IRA?  We currently do not have any other IRA accounts so the exposure doesn't exist.

Is there a limit to how much you can move via the back-door roth conversion?  His 401K is 200k.

First - to answer your question (what would I do and why):  If you are satisfied with how the 401(k) is invested I would leave it alone.  You can set up SEPPs to access that money penalty free before age 59.5.  Or you could convert it to a tIRA as a non-taxable event.

Second, why aren't you contributing to an IRA?  Start now and you can use that money to start a pipeline down the road (when you are no longer in the 25% tax bracket).

MustacheAndaHalf

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Re: What would you do and why?
« Reply #5 on: March 30, 2016, 06:42:25 AM »
"DH just lost his job and we have to do something with his company 401K"
"His 401K is 200k."

Legally, you can keep $5,000 or more at in the company 401k.  They can't force you to remove it.  Is there another consideration for pulling the $200k out of his old 401k plan?  Is the plan itself being dissolved?

What do you think of waiting until age 55 to start the Roth conversion ladder?  It sounds like the best timing is after both of you have retired from your jobs, but before you start drawing on social security.

LiseE

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Re: What would you do and why?
« Reply #6 on: March 30, 2016, 09:17:29 AM »
Quote
Second, why aren't you contributing to an IRA?

I thought we didn't qualify to contribute to an IRA since our combined gross income was too high (240K) but if I understand correctly, there is no income limitation to a Traditional IRA, correct?

We don't want to pull out the 200K from his 401K .. just wanted to understand what the best choice was for this money now that it was in play since he was severed from him company.  This 401K is with Vanguard and we want to keep it with Vanguard but under a personal account now.

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What do you think of waiting until age 55 to start the Roth conversion ladder?

Correct ... I just figured this out!  Starting the conversion ladder now is pointless since we are still in a high tax bracket but in five years when we FIRE we will be in lower bracket.



nereo

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Re: What would you do and why?
« Reply #7 on: March 30, 2016, 11:17:01 AM »
Quote
Second, why aren't you contributing to an IRA?

I thought we didn't qualify to contribute to an IRA since our combined gross income was too high (240K) but if I understand correctly, there is no income limitation to a Traditional IRA, correct?


There is a limit where you can no longer deduct your contributions to a tIRA.  Being above that limit is a perfectly valid answer to my question.
Now that your spouse has lost his job, are you below the tIRA contribution limit of $118k? You can still contribute to a tIRA at any income but you won't get a deduction.  This money can later be used as part of a ROTH pipeline.

robartsd

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Re: What would you do and why?
« Reply #8 on: March 30, 2016, 12:52:08 PM »
If there are not any fees with the 401k that would go away in a tIRA, I'd just leave it in the 401k.

LiseE

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Re: What would you do and why?
« Reply #9 on: March 30, 2016, 03:16:49 PM »
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This money can later be used as part of a ROTH pipeline.

This is why I was thinking we should convert it to a tIRA now while we have the opportunity to do so.  I'm not sure if there is a time limit on when we need to do something with this account if anything.  I seem to recall it's time sensitive .. we need to call Vanguard to understand this more clearly.

nereo

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Re: What would you do and why?
« Reply #10 on: March 30, 2016, 03:22:49 PM »
Quote
This money can later be used as part of a ROTH pipeline.

This is why I was thinking we should convert it to a tIRA now while we have the opportunity to do so.  I'm not sure if there is a time limit on when we need to do something with this account if anything.  I seem to recall it's time sensitive .. we need to call Vanguard to understand this more clearly.
THere is no time limit.  People often convert their 401(k)s decades later.
Call Vanguard and they can talk you through it.  The process takes about 15 minutes if you have all of your information handy.  You'll probably need to print out the documents and go to your bank to have a "medallion signature", but that's about it.