Financially savvy folks- 401Ks

[teachermom2834]

My dh has three 401K accounts. Two from a previous employer and one with his current employer. They all have a significant (to us!) amount in them. I have been wondering if we should roll the old ones into the current one? Is there an advantage to having them separate? We don't manage them. We have them in funds based on dh's age and just leave them alone.

 

I remember when dh was let go we had to take some money out of it to live on while he looked for work. We needed the signature of his employer that had just let him go. I guess I would want to keep a 401K not tied to his current employer in case we were in that situation again?

[sgo95]

I think that when you rollover old 401(k)'s, it's typically into a rollover IRA at whatever financial institution you like (vanguard, fidelity, etc.), not into your current 401(k) plan.  They make it pretty easy to do, too.

 

Edited January 12, 2018 by sgo95

[solascriptura]

I suggest that you look into a rollover into Vanguard.

[sgo95]

If you have traditional 401k's, check with whoever you get things set up with about going into a Roth account vs a tradition.  I think there are some taxes you would pay upfront, but it's better, in terms of taxes, when it comes time to pull the money out in retirement. 

 

You'd want to talk to someone who could advise you on the specific tax implications of converting funds into a Roth IRA instead of a traditional IRA.  Depending on your tax bracket now vs. in retirement, you may end up paying more in taxes to convert funds into a Roth IRA than you'd save on taxes you'd pay on IRA withdrawals in retirement.

Edited January 12, 2018 by sgo95

[BarbecueMom]

One pitfall with the rollover IRA - depending on the state, it may not be protected from creditors the way a 401K plan is.  If a creditor obtains a judgment against your accounts, they can (in some states) take the money from the IRA.  This happened to a relative in her late 50's with a rollover account, and now she has zip.  In that situation, it wasn't feasible to file bankruptcy which I think was the only way to stop the account freeze and garnishment.

 

If you are reasonably confident you will probably never default on a debt, rolling over gives you more control over the funds in the account.  Better choices, lower expenses.

[SereneHome]

"Back door" Roth IRAs are not allowed under the new tax plan, but I don't remember when it will go into effect.

 

If you do decide to roll into Vanguard, rolling two 401K into one might be beneficial bc some of their funds will have lower expense ratio for larger balances.

[BarbecueMom]

"Back door" Roth IRAs are not allowed under the new tax plan, but I don't remember when it will go into effect.

 

If you do decide to roll into Vanguard, rolling two 401K into one might be beneficial bc some of their funds will have lower expense ratio for larger balances.

 

Whoa, seriously?  I've been off the MMM boards for a while and missed that.

[Bootsie]

First, you would want to check and see if the current employer's plan allows for rolling over existing plans into its plan.  

 

Second, you would want to check and see what types of investment possibilities are available and what types of fees are being charged for each of the plans.  Even if two employers use the same managers, the investment possibilities under that manager are often limited to a handful of choices.  The biggest advantage I see in leaving the funds where they are is that you might have more choices of how the money is invested.  If you are passively using a retirement date fund, that may not be such an issue for you,  

 

Often you have greater flexibility regarding how the money is invested if you rollover into an IRA.  Also, if your former employer makes changes to its plan (changes its manager and changes the investment options) you may be forced to make changes to your portfolio if you keep the plan with the former employer.  

[teachermom2834]

Thanks, all. We are finally reaching a point of doing something other than just keeping our heads above water and there is finally enough in these accounts to get our attention. (And the recent market gains have gotten our attention). It's time to take a look at our overall picture and figure out where we are going.

 

Thanks!

[SereneHome]

Whoa, seriously?  I've been off the MMM boards for a while and missed that.

 

I thought so....I know they were trying to pull something back re:  Roth conversions.  I should have followed up better before posting.

[Frances]

I think that when you rollover old 401(k)'s, it's typically into a rollover IRA at whatever financial institution you like (vanguard, fidelity, etc.), not into your current 401(k) plan. They make it pretty easy to do, too.

My husband and I both rolled over old 401(k)s into our current 401(k)s. We each like our current ones and wanted everything together.

[Frances]

"Back door" Roth IRAs are not allowed under the new tax plan, but I don't remember when it will go into effect.

 

If you do decide to roll into Vanguard, rolling two 401K into one might be beneficial bc some of their funds will have lower expense ratio for larger balances.

I believe you can still convert to a Roth, but the provision allowing you to change your mind and convert back within a specified time is now gone.

[frogger]

I'm not sure I understand the whole convert to a Roth IRA advice. I hear Suzie Orman and some others always repeat it but wouldn't it depend on your taxes now? I'm not particularly savy at this stuff though and would appreciate an explaination.

 

I figured if you were young, maybe in your 20's or early 30's and weren't at the peak earnings of your career it would make sense to pay the taxes now since you are in a lower tax bracket. If you were late 40's on up and were at the top of your personal career ladder and bringing in a decent amount of money you wouldn't want to pay the taxes now but rather wait until retirement. I know everybodies earning curves are different but in general it seems like you would pay the most taxes the decade or so before retirement.

[Frances]

I'm not sure I understand the whole convert to a Roth IRA advice. I hear Suzie Orman and some others always repeat it but wouldn't it depend on your taxes now? I'm not particularly savy at this stuff though and would appreciate an explaination.

 

I figured if you were young, maybe in your 20's or early 30's and weren't at the peak earnings of your career it would make sense to pay the taxes now since you are in a lower tax bracket. If you were late 40's on up and were at the top of your personal career ladder and bringing in a decent amount of money you wouldn't want to pay the taxes now but rather wait until retirement. I know everybodies earning curves are different but in general it seems like you would pay the most taxes the decade or so before retirement.

This is the advice I’ve heard also. Since I live in a high personal income tax state, and we are a two earner household both in our 50s, the tax savings right now for us are very significant with a regular 401(k) when maxing out our contributions. Who knows where we will be living at retirement. If I was going to covert to a Roth, it would not be now with a high federal marginal tax rate and living in a high tax state.

 

On the other hand, I’ve encouraged my young adult son to do a Roth IRA every year since he started earning a paycheck. I know several parents who fund them for their 20 something children once they have enough earned income.

Edited January 14, 2018 by Frances

[2squared]

I'm not sure I understand the whole convert to a Roth IRA advice. I hear Suzie Orman and some others always repeat it but wouldn't it depend on your taxes now? I'm not particularly savy at this stuff though and would appreciate an explaination.

 

I figured if you were young, maybe in your 20's or early 30's and weren't at the peak earnings of your career it would make sense to pay the taxes now since you are in a lower tax bracket. If you were late 40's on up and were at the top of your personal career ladder and bringing in a decent amount of money you wouldn't want to pay the taxes now but rather wait until retirement. I know everybodies earning curves are different but in general it seems like you would pay the most taxes the decade or so before retirement.

 

 

This is the advice I’ve heard also. Since I live in a high personal income tax state, and we are a two earner household both in our 50s, the tax savings right now for us are very significant with a regular 401(k) when maxing out our contributions. Who knows where we will be living at retirement. If I was going to covert to a Roth, it would not be now with a high federal marginal tax rate and living in a high tax state.

 

On the other hand, I’ve encouraged my young adult son to do a Roth IRA every year since he started earning a paycheck. I know several parents who fund them for their 20 something children once they have enough earned income.

 

In retirement a best-case scenario would be to have some pre-tax (401k) and post-tax (Roth) income flows.  However, you don't want to pay taxes at a higher rate now to avoid a lower rate in the future.  If your income is higher now than it would be in retirement, you are usually better off investing in a pre-tax 401k.  I would only convert an existing 401k to Roth IRA if you had an unusually low-income year.  Paying the tax hit now on a conversion (and potentially pushing yourself into a higher tax bracket in the current year) to save future taxes wouldn't be a gamble I would take. A bird in the hand and all that jazz.  

 

Generally employer 401k plans have higher expense ratios and less investment flexibility than a Vanguard rollover IRA. The one exception I know of is probably the government TSP.

 

When we had no tax liability, we contributed to Roth IRAs.  Most of our earning years, though, we contribute to pre-tax 401k plans. Never give up a free employer match.