Tryndamere wrote:Hi guys,
I have some retirement questions.
Currently my company offers a 401k and a Roth 401k with a 50% match up to my first 6%. I am 28 years old, and have not started any retirement planning yet. I am currently in the 25% Federal Income (5% state) tax bracket.
First, I can save you a lot of angst over this. In your tax bracket, I think it's much more advantageous for you to do traditional 401(k) over Roth 401(k). I think the consensus on this board would say the same (with some detractors).
See Traditional versus Roth
Tryndamere wrote:I am having a hard time picking which one is better and I have a few questions.
1) Can I withdraw principal for free from my Roth 401k, like I can with a Roth IRA, if need be? I am getting mixed info on this and if I am interpreting correctly, it looks like you will be subject to the 10% early withdrawal only on the percentage that came from employer contributions (since they are tax free).
So for example, I contribute $600 into my Roth 401k and my employer contributes $400. I have a total of $1000. If I were to withdraw that principal for an emergency that was not a qualifying emergency, I would be able to take my $600 out free of charge but would be charged tax and the 10% penalty on the $400 that my employer contributed. Does this sound about right?
removed my wrong info...thanks for the correction below
Tryndamere wrote:2) I can convert either one into a Roth IRA when I leave my employer, right? Do I lose any money for doing this? Is one “cheaper” than the other to convert?
Upon leaving employment, a Roth 401(k) can be rolled over to a Roth IRA; no expense for doing so, and no taxable event. This is basically just changing custodians. Similarly, a traditional 401(k) can be rolled over to a traditional IRA. Again, if done correctly, then this is not a taxable event. This action is just the rollover. After the money gets to the new custodian, then you can choose different funds (typically, you'll have the money arrive in a money market fund, and then you can allocate as you wish).Roth IRA conversion
is a different action. Once you have money in a traditional IRA, then you may elect to convert all or a portion of it to a Roth IRA.
So, if you have a traditional 401(k) and you want to "convert" it to a Roth IRA, then that's technically a two-step process.
Tryndamere wrote:3) Is this a situation where I should just choose the Roth 401k if my tax bracket is low, but the traditional 401k if my tax bracket is high?
Generally, yes, but there can be other nuances. See Roth vs. Traditional link I added above. For the purposes of this question, I think most people would say your tax bracket is "high".
Tryndamere wrote:4) My company has a 5 year vesting period for the contributions. But what about the earnings that accumulates over the 5 years on those contributions? If my employers $400 that they contribute makes $40 in gains in a year and then I quit, do they only take their $400 back or do they take all $440 back?
I could be wrong, but I believe that the contributions and earnings from the employer vest on the same schedule. You might want to inquire with your plan.
Tryndamere wrote:5) Should I create a Roth IRA immediately, even if I only deposit $.01? Logic being that there is a 5 year period that a Roth IRA must be open to qualify for qualified distributions, so when I rollover my Roth 401k, it immediately has fulfilled that requirement. This would be a benefit if I wanted to use it for a qualified distribution like a down payment for a home, right?
Sorry, it doesn't work that way. They care about how long the money
is in the account, not how long you've had the account. This is why people need to keep good records of their Roth IRA contributions and transfers, if they are anywhere near that 5-year window.
Tryndamere wrote:Can you guys hack my fund options as well? I am having a hard time choosing what is optimal. I don’t mind being risky at all, I am 28 (and a poker player, hehe). Anybody have experience with any of these funds? Like any company in particular?
SSgA Cash Series U.S. Government Fund - Class L
Prudential Short-Term Corporate Bond Fund - Class R Ticker: JDTRX
JPMorgan Government Bond Fund - Class R2 Ticker: JGBZX
JPMorgan Core Bond Fund - Class R2 Ticker: JCBZX
T. Rowe Price Retirement Income Fund - Class R Ticker: RRTIX
T. Rowe Price Retirement 2010 Fund - Class R Ticker: RRTAX
T. Rowe Price Retirement 2015 Fund - Class R Ticker: RRTMX
T. Rowe Price Retirement 2020 Fund - Class R Ticker: RRTBX
T. Rowe Price Retirement 2025 Fund - Class R Ticker: RRTNX
T. Rowe Price Retirement 2030 Fund - Class R Ticker: RRTCX
T. Rowe Price Retirement 2035 Fund - Class R Ticker: RRTPX
T. Rowe Price Retirement 2040 Fund - Class R Ticker: RRTDX
T. Rowe Price Retirement 2045 Fund - Class R Ticker: RRTRX
T. Rowe Price Retirement 2050 Fund - Class R Ticker: RRTFX
T. Rowe Price Retirement 2055 Fund - Class R Ticker: RRTVX
Janus Balanced Fund - Class R Ticker: JDBRX
BlackRock Equity Dividend Fund - Class R Ticker: MRDVX
Alger Capital Appreciation Institutional Fund - Class R Ticker: ACARX
Janus Forty Fund - Class R Ticker: JDCRX
Neuberger Berman Socially Responsive Fund - Class R3 Ticker: NRARX
Nuveen Mid Cap Index Fund - Class R3 Ticker: FMCYX
Goldman Sachs Small Cap Value Fund - Class R Ticker: GSQRX
Fidelity Advisor Small Cap Fund - Class T Ticker: FSCTX
Janus Overseas Fund - Class R Ticker: JDIRX
Thornburg International Value Fund - Class R3 Ticker: TGVRX
Oppenheimer Developing Markets Fund - Class N Ticker: ODVNX
Prudential Jennison Natural Resources Fund - Class R Ticker: JNRRX
Columbia Seligman Communications and Information Fund - Class R Ticker: SCIRX
I appreciate all the help and please let me know I should be supplying more information.
Could edit your original post, and post the expense ratio
for each of these funds? This will help. Otherwise it's like ordering from a menu but without the prices. Be sure to enter the expense ratios for the funds as they are in your company's specific plan; often the fund expense ratios in 401k/403b/457 plans are different from the "retail" expense ratios you will find for a fund when doing an internet search.