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Question about rollover of existing 401(k) plan...
Posted on 3/5/10 at 12:12 pm
Posted on 3/5/10 at 12:12 pm
I have two additional 401(k) plans from my two previous employers in addition to my current 401(k) plan with my current employer.
I keep getting advice to rollover my prior plans into a Roth IRA instead of rolling them into my current plan. I admit I am not a retirement plan guru, because I don't see the benefit of paying taxes on the money I'm going to put into the Roth IRA when this money could be making money for me over the next 25 years (and yes I know the money will be taxed once I take it out compared to the Roth IRA in which it will not). I hear it is because I will be in a lower tax bracket now than when I retire, but if I don't plan on taking any money out of the plan until after I retire, wouldn't I be in a lower tax bracket if I don't have a job (income)?
I get a 100% match for the first 3% of my contributions, so the advice is to max out my current employers match, rollover my two prior 401(k) plans into a Roth IRA, and contribute any future contributions above the employer match to the Roth IRA. Can someone tell me why this logic makes sense?
I keep getting advice to rollover my prior plans into a Roth IRA instead of rolling them into my current plan. I admit I am not a retirement plan guru, because I don't see the benefit of paying taxes on the money I'm going to put into the Roth IRA when this money could be making money for me over the next 25 years (and yes I know the money will be taxed once I take it out compared to the Roth IRA in which it will not). I hear it is because I will be in a lower tax bracket now than when I retire, but if I don't plan on taking any money out of the plan until after I retire, wouldn't I be in a lower tax bracket if I don't have a job (income)?
I get a 100% match for the first 3% of my contributions, so the advice is to max out my current employers match, rollover my two prior 401(k) plans into a Roth IRA, and contribute any future contributions above the employer match to the Roth IRA. Can someone tell me why this logic makes sense?
2
Posted on 3/5/10 at 12:25 pm to TIGERSby10
You cannot rollover your 401k directly to a Roth anyway. You roll it into a Traditional IRA and then, if you choose to do so, you can convert your traditional IRA to a Roth IRA.
Traditional IRA is pre-tax dollars (like your 401k) and is tax-deferred (like your 401k).
A Roth IRA is after-tax dollars and grows tax free (which is why when you convert your Traditional to a Roth you will owe taxes on the total amount converted).
The benefit of a Roth over a Traditional is pretty simple ... while a Traditional IRA merely grows tax-deferred, a Roth IRA grows TAX-FREE! However, you lose the current-year tax deduction because it is after-tax dollars going into the Roth.
Order of preference for retirement savings:
1. Max out 401k to receive max company match
2. Put any excess savings into a Roth IRA (up to contribution limits).
3. If you still want to save more for retirement, save more into your 401k (even though you won't get a match).
4. Variable/Fixed annuity which is also tax-deferred
5. Non-IRA individual brokerage account.
Traditional IRA is pre-tax dollars (like your 401k) and is tax-deferred (like your 401k).
A Roth IRA is after-tax dollars and grows tax free (which is why when you convert your Traditional to a Roth you will owe taxes on the total amount converted).
The benefit of a Roth over a Traditional is pretty simple ... while a Traditional IRA merely grows tax-deferred, a Roth IRA grows TAX-FREE! However, you lose the current-year tax deduction because it is after-tax dollars going into the Roth.
Order of preference for retirement savings:
1. Max out 401k to receive max company match
2. Put any excess savings into a Roth IRA (up to contribution limits).
3. If you still want to save more for retirement, save more into your 401k (even though you won't get a match).
4. Variable/Fixed annuity which is also tax-deferred
5. Non-IRA individual brokerage account.
Posted on 3/6/10 at 12:28 am to JPLSU1981
(no message)
This post was edited on 11/27/11 at 10:30 pm
Posted on 3/6/10 at 6:26 pm to TIGERSby10
quote:
I hear it is because I will be in a lower tax bracket now than when I retire, but if I don't plan on taking any money out of the plan until after I retire, wouldn't I be in a lower tax bracket if I don't have a job (income)?
I would like to know the answer to this as well, as I'm 28 and also have a Roth IRA.
Let's say for whatever reason you retire before you turn 59. Would a traditional IRA be more beneficial in this instance seeing that the only taxable income you will likely have will be your IRA withdrawals. And I'm not saying taking everything out at one time, but strategically spacing out the withdrawals over a number of years.
Seems like there's many complex issues to consider, more than I can wrap my mind around.
Posted on 3/6/10 at 10:58 pm to Skin
No one knows what the tax code/brackets will be 30-years from now, much less 10 years. I would venture the majority of retirees have lower incomes in retirement than they do while working, especially those that are at the peak of their earnings if they have fared well.
To the OP, if your company plan has poor investment choices you would be better off rolling your former 401k's into a traditional IRA and then deciding what, if any, amount you would want to convert to a Roth. Potential tax diversification could be highly beneficial, ie cover all the bases with taxable, traditional, and Roth to reduce taxation risk. You could always do the rollover to a TIRA, and then estimate what amount you could convert to Roth without affecting your marginal tax bracket, plus you get two years to pay the conversion taxes. To me, the best features of Roths are the earnings are tax free, the IRS can not make you take RMD's like it will from 401k's and traditional IRA's, and in hardship you can withdraw contributions (not earnings) from Roth's after the account has been open for 5-years with no penalty prior to 59.5.
I would almost always prefer to establish a brokerage IRA instead of rolling prior 401k holdings into a new company plan unless it is a top shelf plan with very low cost options that offer a wide range of meaningful diversification. I am not aware of many 401k plans that offer access to emerging market ETF's, TIPS, good international small cap or international value ETF's, etc, but they normally have high cost large cap options and crappy fixed income choices with high expense ratios.
To the OP, if your company plan has poor investment choices you would be better off rolling your former 401k's into a traditional IRA and then deciding what, if any, amount you would want to convert to a Roth. Potential tax diversification could be highly beneficial, ie cover all the bases with taxable, traditional, and Roth to reduce taxation risk. You could always do the rollover to a TIRA, and then estimate what amount you could convert to Roth without affecting your marginal tax bracket, plus you get two years to pay the conversion taxes. To me, the best features of Roths are the earnings are tax free, the IRS can not make you take RMD's like it will from 401k's and traditional IRA's, and in hardship you can withdraw contributions (not earnings) from Roth's after the account has been open for 5-years with no penalty prior to 59.5.
I would almost always prefer to establish a brokerage IRA instead of rolling prior 401k holdings into a new company plan unless it is a top shelf plan with very low cost options that offer a wide range of meaningful diversification. I am not aware of many 401k plans that offer access to emerging market ETF's, TIPS, good international small cap or international value ETF's, etc, but they normally have high cost large cap options and crappy fixed income choices with high expense ratios.
This post was edited on 3/6/10 at 11:02 pm
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