Figuring It All Out (Convert 401k to TIRA??)

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SD2001
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Figuring It All Out (Convert 401k to TIRA??)

Post by SD2001 »

Hi,

This is my first time posting. So here it goes...I am trying to figure out what to do with my old 401k plan at Schwab. Any advice is much appreciated!

A little about myself: 30 year old, single tax filing status; base salary 90 K (but total income fluctuates, i.e. 2012 income was around 120K). Target asset allocation: 60% Stocks, 15% Bonds, 25% International Stocks

I have two 401k accounts - one at my current employer and the other is an old 401k plan at Schwab. I do not have any IRA accounts opened yet. Currently, I'm working on maximizing my contributions in the current employer 401k account, which happens to also offer a Roth 401k (that I recently discovered and have not contributed anything to). I'm also working on saving for a mortgage down payment with the hopes of purchasing my first home in 5-6 years from now.

I'm not sure I like the investment choices I have at Schwab 401k plan and the fact that I no longer can contribute money into it. So, I am thinking of a rollover TIRA or a Roth IRA. Should I do a rollover? If so, stay at Schwab or go to Vanguard for the rollover where I am keen on purchasing Vanguard index funds?

I currently do not have any IRA accounts, does it makes sense to try a backdoor Roth coversion? Given my 2012 income level, I don't know if I'm eligible for Roth IRA (but my income this year could be less). Here is the info about my Schwab 401k plan and investments:

Percentages within 401k Schwab portfolio (5 figures)
33% - Invesco Growth and Income Fund R5 Class ACGQX
20% - JPMorgan Large Cap Growth Fund Class R6 JLGMX
23% - Prudential Jennison Small Company Fund Class Q PJSQX
24% - Vanguard FTSE All-World ex-US Index Fund Institutional Shares VFWSX

All funds available at Schwab plan:
Invesco Growth and Income Fund R5 Class ACGQX
JPMorgan Large Cap Growth Fund Class R6 JLGMX
Schwab S&P 500 Index SWPPX
Artisan Mid Cap Value Investor ARTQX
Morgan Stanley Inst. Mid Cap Growth MPEGX
Prudential Jennison Small Company Fund Class Q PJSQX
Vanguard FTSE All-World ex-US Index Fund Institutional Shares VFWSX
Oakmark Equity & Income I OAKBX
PIMCO Total Return Instl. PTTRX
Galliard Retirement Income FUnd Class 35 PTTRX

401k plan at current employer investment election (no match but have profit-sharing):
10% Fidelity Spartan US Bond Index FBIDX
15% Oakmark Equity & Income OAKBX
55% Vanguard Instit. Index VINIX
10% Blackrock Equity Dividend MADVX
10% IVA Worldwide IVWIX

Thanks in advance for any input and advice!!
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roymeo
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by roymeo »

I've certainly rolled all of my former employer 401(k)'s over to a Traditional IRA (at Vanguard).
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medstudent12
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by medstudent12 »

Welcome to the forum!

Hopefully some more experienced members will be along, but in the meantime, here are my proverbial $0.02:

First, your desired bond allocation is just a bit low compared to what is traditionally recommended on this forum. If you have a good reason for this, then that's fine, but I suspect that most here would recommend at least 20%. Obviously, it's not a huge difference, but just so you know. That being said: your actual bond allocation seems to be quite a bit lower. From what I can tell, your only bond holding is the Fidelity bond index, which would make your actual bond allocation quite a bit lower than 15%.

Second, with regards to your current 401k, your funds are a little redundant. OAKBX, for example, is a large blend. MADVX is a large value. VINIX is a large blend with the lowest ER. If you post available funds for this 401k, we might be able to give some better advice, but unless you have personal reasons as to why you have three different large-cap funds, I'd recommend putting all of your large-cap allocation into the VINIX fund and saving yourself some money.

Now, as for your original questions: Your base income for this year (90K) will be within the limits for Roth IRA eligibility - the limit for full eligibility is $112,000 this year. Your income for last year is in the phase-out range, but still partially eligible. The question that must be asked before reflexively contributing to a Roth is the following: Do you expect to be in a higher tax bracket during retirement? If yes, then it makes sense to pay taxes now rather than later (i.e. use a Roth account). If no, then it makes since to use a tax-deferred account to pay taxes at a lower rate later. There are a couple of caveats: first, you are relatively young, which means that anything in a Roth would have many years to earn money for you tax-free, which means that it probably is a good choice. Second, (and this is more speculation than anything) some people feel that taxes are only likely to be worse in the future. In fact, they are more merciful now then they have been for while. So it might be best to pay now and just not have to worry about it later (hopefully...).

Regarding your conversion: If you expect your income to go up, and you plan to do backdoor Roth IRAs in the future, then having a traditional IRA will complicate things when you make those conversions later. Therefore, depending on the amount of money held in your old 401k, it might be best to 1) leave it there or 2) if it's a relatively small amount, pay the taxes needed to convert it into a Roth. If you do leave it, not all the fund options are bad - SWPPX is a particularly good option, for example.

If you do the rollover, I would just send it to Vanguard, where you are guaranteed to get some good fund options. If you don't like the fund options at Schwab, don't stay there.

Another thing to keep in mind: Your income seems to fluctuate, but if you foresee a soon-to-come lighter year where you might be in a lower tax-bracket, and you do want to convert your old 401k to a Roth IRA, it might be a good idea to wait until then to minimize your tax burden on the conversion.

Good luck!
JW-Retired
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by JW-Retired »

roymeo wrote: I currently do not have any IRA accounts, does it makes sense to try a backdoor Roth conversion? Given my 2012 income level, I don't know if I'm eligible for Roth IRA (but my income this year could be less).
Well check and see if you are. You said your 2012 income was $120K, so if that is gross income you could easily be under the Roth phase out MAGI limit of $112k. MAGI is AGI with some additive adjustments but it won't include your 401k contributions which ought to drop AGI/MAGI below your $120k gross.

To second medstudent12 about the rollover, at your income level at age 30, I would beware of creating a TIRA via rollovers. It looks like you may be higher than the Roth limits fairly soon and once you are the Roth option left is the "Backdoor Roth" approach. That only works well if you do not have any TIRA accounts (including rollovers) besides the one you make non-deductible contributions to and then immediately convert entirely to a Roth. The taxable part of the conversion is computed pro-rata over your entire basket of all types of TIRA accounts. See IRS form 8606.

Once you rollover significant 401k money to a TIRA you will have eliminated your Backdoor Roth option.
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MidA
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by MidA »

Welcome!
medstudent12 wrote:
Regarding your conversion: If you expect your income to go up, and you plan to do backdoor Roth IRAs in the future, then having a traditional IRA will complicate things when you make those conversions later. Therefore, depending on the amount of money held in your old 401k, it might be best to 1) leave it there or 2) if it's a relatively small amount, pay the taxes needed to convert it into a Roth.
There is also option 3: Rollover your old 401k into your current 401k so that you preserve your ability to do backdoor Roths in future. This assumes you are happy with the options in your current 401k, and that your plan allows for such a rollover (a great many do).

Also, to echo JW Nearly Retired, contributing more to a traditional 401k should drop your AGI/MAGI, putting more money in your pocket to max out contributions and save for your future down payment.
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Watty
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by Watty »

One thing to watch out for is that right now the old 401K is clearly something that you accumulated while you were single. If you move it to an account you will be making future contributions to and you get married then in a divorce it could be considered something that would be split with your ex-spouse. There are likely a lot of different situations and different state laws but you might want to look into that.
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Duckie
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by Duckie »

SD2001, what are all the options and their expense ratios in the two plans?
Topic Author
SD2001
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by SD2001 »

Hi Everyone!

Thanks for all the advice so far! I'm still digesting it and will definitely go home and review some more the suggestions given so far. But to answer Duckie's question, my options (plus expense ratios) in the two 401k plans are the following:

All funds available at Schwab plan:
Invesco Growth and Income Fund R5 Class ACGQX .47
JPMorgan Large Cap Growth Fund Class R6 JLGMX .65
Schwab S&P 500 Index SWPPX .09
Artisan Mid Cap Value Investor ARTQX 1.20
Morgan Stanley Inst. Mid Cap Growth MPEGX .71
Prudential Jennison Small Company Fund Class Q PJSQX .70
Vanguard FTSE All-World ex-US Index Fund Institutional Shares VFWSX .12
Oakmark Equity & Income I OAKBX .78
PIMCO Total Return Instl. PTTRX .46
Galliard Retirement Income FUnd Class 35 PTTRX .35

401k plan at current employer investment election (no match but have profit-sharing):
Oakmark Equity & Income I OAKBX 0.78
Royce Premier Invmt RYPRX 1.12
First Eagle Global A SGENX 1.16
Fidelity Capital & Income FAGIX 0.76
Vanguard Institutional Index Instl VINIX 0.04
BlackRock Equity Dividend Instl MADVX 0.72
Loomis Sayles Bond Instl LSBDX 0.63
IVA Worldwide I IVWIX 1.03
Oppenheimer Intl Growth OIGYX .87
Nuveen Investment Trust II: Nuveen Tradewinds Emerging Markets NTEIX 1.54
Spartan U.S. Bond Index Investor FBIDX 0.22
PIMCO All Asset A PASAX 1.45(gross)/1.38 (Net)
Metropolitan West Total Return Bond I MWTIX 0.41
FPA New Income FPNIX 0.57
Neuberger Berman LgCp Discp Gr Instl NLDLX 0.78
BMO Prime Money Market Y MARXX 0.47
Federated US Treasury Cash Reserves I UTIXX 0.2
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Duckie
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by Duckie »

SD2001, you have two good funds in the old 401k and two good funds in the new 401k. But you're missing US mid/small caps.

Old 401k
(SWPPX) Schwab S&P 500 Index Fund (0.09%)
(VFWSX) Vanguard FTSE All-World ex-US Index Fund Institutional Shares (0.12)

Current 401k
(VINIX) Vanguard Institutional Index Fund Institutional Shares (0.04%)
(FBIDX) Spartan U.S. Bond Index Fund Investor Class (0.22%)

You could put the international in the old 401k, the bonds in the new 401k, the 500 Index in both, then open a Roth IRA at Vanguard and buy 
(VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) to get the mid/small caps. Roughly 80% large caps (500 Index/Institutional Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market.

Or you could roll the old 401k over to a Traditional/Rollover IRA at Vanguard and along with the Roth IRA buy TSM, TISM, and Extended Market.
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SD2001
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by SD2001 »

Sorry Duckie, for Roth IRA purchases, what are you referring to as TSM, TISM, and Extended Market? I try looking it up and thought maybe they are ticker symbols...TSM is Taiwan Semiconductor Mfg. but TISM?
pkcrafter
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by pkcrafter »

Not Duckie, but:
TSM - Total Stock Market
TISM - Total International Stock Market
Extended Market (also called the completion index). Using this at 20% plus SP500 will approximate Total Stock Market. See this link and the one on Extended market in blue. Note too that Duckie's blue tickers are live links to info on the funds.

http://www.bogleheads.org/wiki/Approxim ... ock_Market

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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SD2001
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by SD2001 »

Thanks Paul.
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Kevin M
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by Kevin M »

As mentioned by others above, I would not rollover to an IRA--to preserve the option of doing tax-free back door Roth contributions in the future.

I think I would keep the old 401k for access to the great international stock index fund (FTSE AW-ex-US). I don't see a great international stock choice in the new 401k.

As Duckie pointed out, you have a good fund for large-cap US stocks in both 401k plans, which is great. That can make up the core of your stock holdings.

Using the extended market fund in a Roth to complement the S&P 500 funds in the 401k plans is fine, but personally I would just go with a small-cap fund, or even small-cap value if you believe in the Fama-French 3-Factor model (you can read a little bit about it in the Wiki, and much more about it in books by Larry Swedroe, William Bernstein, and others). Unless you have done the homework, sticking with the extended-market fund would be the most traditional way to go.

I personally prefer CDs to bond funds, but with a small allocation to fixed income, it doesn't make as much difference, so the Spartan bond fund is fine. If you wanted to use CDs, you would have to use the Roth (or taxable accounts), which would limit your ability to supplement the large-cap US stocks with an appropriate amount of smaller-cap stocks.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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SD2001
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by SD2001 »

Thanks, Kevin. Quick question.

I am completely new to investment and retirment savings. But I started to read books and articles. Maybe I'm pulling this out of context, but I seem to recall that some are arguing that based on the historical data (although past performance does not equal furture performance) that generally value funds is the better choice than growth funds becuase value funds have a better return. As such, it is recommended to try to have both growth and value funds in the portfolio. Would this also apply to the small caps category? Would I better off with a small caps value fund?

I haven't done the homework on extended market fund but just want to keep my eyes open and learn.
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Kevin M
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Re: Figuring It All Out (Convert 401k to TIRA??)

Post by Kevin M »

SD2001,

Relative price (Value) is one of the 3-factors; the other two are market (which you get by definition in a total stock market fund) and size (i.e., small-caps have historically provided higher returns). So some folks here "tilt" to value and small, which can be most easily done by simply adding a small-value fund to your portfolio. However, there is a lot of debate about this here, and my inclination is for folks to stick with total market funds unless they've done the homework, and are confident that tilting is right for them. Even Fama (of the Fama-French 3-Factor model) has said that total market funds are always efficient, and I believe he thinks they are a fine starting point for most investors.

By definition you get a balance of Value and Growth in a total market fund, or even a large-cap US stock fund like the S&P 500 funds in your plans. Some folks argue that these are more growth oriented, but the classification scheme used by Vanguard and many others splits the total market 50/50 into Growth and Value. This is why most of us are recommending to just stick with the low-cost S&P 500 index fund(s), and dump the higher expense funds, especially if they are actively managed.

The extended-market fund is really simple: it basically includes the (mostly mid-cap and small-cap) stocks in the total US stock market that aren't included in the S&P 500 (which are mostly large-cap) . So as Duckie recommended, if you mix the two in the right proportion, you can get the equivalent of a total US stock market fund. I don't think you will do much different by just going with a small-cap fund, and this will give you just a tiny bit of tilt to smaller-cap stocks. If you compare extended market fund to small-cap fund on a chart, you won't notice much difference, especially compared to the S&P 500 or Total Stock market. Small-cap has had slightly higher return over the last five years, but that could swing either way, depending on how mid-cap stocks do relative to small-cap stocks. If you keep either extended market or small cap to 20% or even 30% of your US stock allocation, you probably won't notice the difference (between using extended market or small cap).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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