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401k through previous employer - Traditional or Roth IRA?
Posted on 5/24/23 at 4:45 pm
Posted on 5/24/23 at 4:45 pm
I'm trying to figure out what to do with an old 401k I started with my first job out of college (2017). Here's an account breakdown based on my contributions (Roth) and those of my previous employer (pre-tax).
I know I want to move it all to an IRA but unsure what makes the most sense. Whether to open up both a Roth & Traditional IRA and roll over the balances accordingly, or if I should try to convert that pre-tax balance to a Roth but I’ve read that there may be some possible restrictions/penalties there? Or if I should move it all to a Traditional IRA?
I also have a Roth 401k through my current company that I’ve had since Jan 2019 that’s sitting around $60k that I'll need to roll over in the near future as well. TIA
I know I want to move it all to an IRA but unsure what makes the most sense. Whether to open up both a Roth & Traditional IRA and roll over the balances accordingly, or if I should try to convert that pre-tax balance to a Roth but I’ve read that there may be some possible restrictions/penalties there? Or if I should move it all to a Traditional IRA?
I also have a Roth 401k through my current company that I’ve had since Jan 2019 that’s sitting around $60k that I'll need to roll over in the near future as well. TIA
This post was edited on 5/24/23 at 5:09 pm
1
Posted on 5/24/23 at 10:42 pm to GeorgeReymond
"Open up both a Roth & Traditional IRA"- DO THIS
"Convert that pre-tax balance to a Roth"- Do this if/when you have cash to pay the taxes. Conversion will be taxed as regular income. Spread it over several tax years if it would bump into next tax bracket or wait if you anticipate a low income year in future.
"Should move it all to a Traditional IRA?" DO NOT DO THIS (I'm not even sure its possible but if it is why would anyone want to move post tax Roth back to traditional?"
You might just want to rollover to current 401k if you like their plan but since you are moving that soon too, maybe just wait and roll everything into next employer's 401k if they have one. Be aware if you rollover to IRA the traditional will cause issues doing backdoor Roth if you ever have too much income to fund a Roth IRA. Advantage of IRA is potential for lower fees (but only if you choose a low cost brokerage) and more investment options.
***Be sure to do a direct rollover trustee-trustee so you dont have tax and penalty withheld! If you choose an indirect rollover they send you the $ (minus tax/penalty withholding) and you only have 60 days to get the entire original amount to new provider. You have to come out of pocket to make up the tax/penalty withheld and only get it back when you file taxes.
"Convert that pre-tax balance to a Roth"- Do this if/when you have cash to pay the taxes. Conversion will be taxed as regular income. Spread it over several tax years if it would bump into next tax bracket or wait if you anticipate a low income year in future.
"Should move it all to a Traditional IRA?" DO NOT DO THIS (I'm not even sure its possible but if it is why would anyone want to move post tax Roth back to traditional?"
You might just want to rollover to current 401k if you like their plan but since you are moving that soon too, maybe just wait and roll everything into next employer's 401k if they have one. Be aware if you rollover to IRA the traditional will cause issues doing backdoor Roth if you ever have too much income to fund a Roth IRA. Advantage of IRA is potential for lower fees (but only if you choose a low cost brokerage) and more investment options.
***Be sure to do a direct rollover trustee-trustee so you dont have tax and penalty withheld! If you choose an indirect rollover they send you the $ (minus tax/penalty withholding) and you only have 60 days to get the entire original amount to new provider. You have to come out of pocket to make up the tax/penalty withheld and only get it back when you file taxes.
This post was edited on 5/25/23 at 8:32 am
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