Leaving Employer; convert 401k balance to new 401k or roth IRA?

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Topic Author
conlaw1234
Posts: 35
Joined: Mon Jun 11, 2018 9:58 am

Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by conlaw1234 »

Hello Bogleheads!

My wife (33) is leaving her employer and has a 401k balance of approx. $65k. It seems she has the option to transfer her existing 401k balance to a traditional IRA, roth IRA, or new employer's 401k plan. We do the backdoor Roth IRA every year so traditional IRA is not the ideal account IMO. Thus, i think we are left with two choices:

1. Transfer existing 401k balance to Roth IRA (and pay taxes)
2. Transfer existing 401k balance to the new 401k plan (and do not pay taxes)

With option 1, I estimate that we'd have to pay approximately $15k extra in taxes based upon calculation on the IRS withholding website and where I think we'd end up w/r/t tax bracket. This is not the biggest deal, but, obviously still need to fork over $15k, which, I think, can do done either one of two ways:

1. Increase our current withholding so that we pay extra over time that amounts to the $15k; or
2. Make an estimated payments of $15k over the course of this tax year

I wanted to get input on what would be the best financial decision over the long term. Obviously with the Roth IRA, we'd never pay taxes on the distributions once we take them out 30 + years from now. But, the downside is paying taxes right now.

If there is additional information needed or if I left out something crucial, please let me know and I'll be happy to provide the missing information.

Thanks in advance!

++++++

New Information based upon replies:

The funds in the new 401k are good (better than old 401k plan) including Vanguard S&P 500 index, TSM, etc. The expense ratios are .04% which is far lower than the old 401k plan which is .50 for the same fund.

Yes, she has the new job and there are low cost options. The one that we'd choose are either vanguard TSM or S&P 500 index, both of which has an E/R of .04.

I think because the E/R in the old 401k is substantially higher than the new plan, we wouldn't consider leaving the money in the old 401k plan.

We are young (both of us are 33) and our total AA is 95% stocks and 5% bonds. We'd keep it aggressive and I think are comfortable with downturns, including the recent COVID-19 short-lived bear market.

With regards to a special circumstance, this year is a low income year for us. My wife hasn't really worked this year thus far (maternity leave and COVID-19) and will be part-time from now until the end of the year (personal decision to care for our child). Thus, our combined income is approximately 40% lower than what it was in prior years and would be in future years.

There does not seem to be an option for in-plan conversion in the new (and old) 401k plan.
Last edited by conlaw1234 on Sat May 30, 2020 2:01 pm, edited 2 times in total.
tashnewbie
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Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by tashnewbie »

What are fund options in new 401k?
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ruralavalon
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Location: Illinois

Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by ruralavalon »

conlaw1234 wrote: Sat May 30, 2020 12:17 pm Hello Bogleheads!

My wife (33) is leaving her employer and has a 401k balance of approx. $65k. It seems she has the option to transfer her existing 401k balance to a traditional IRA, roth IRA, or new employer's 401k plan. We do the backdoor Roth IRA every year so traditional IRA is not the ideal account IMO. Thus, i think we are left with two choices:

1. Transfer existing 401k balance to Roth IRA (and pay taxes)
2. Transfer existing 401k balance to the new 401k plan (and do not pay taxes)

With option 1, I estimate that we'd have to pay approximately $15k extra in taxes based upon calculation on the IRS withholding website and where I think we'd end up w/r/t tax bracket. This is not the biggest deal, but, obviously still need to fork over $15k, which, I think, can do done either one of two ways:

1. Increase our current withholding so that we pay extra over time that amounts to the $15k; or
2. Make an estimated payments of $15k over the course of this tax year

I wanted to get input on what would be the best financial decision over the long term. Obviously with the Roth IRA, we'd never pay taxes on the distributions once we take them out 30 + years from now. But, the downside is paying taxes right now.

If there is additional information needed or if I left out something crucial, please let me know and I'll be happy to provide the missing information.

Thanks in advance!
There decision depends almost entirely on funds offered and expenses, information not yet provided.

What funds are offered in her old employer's 401k plan? Please give fund names, tickers and expense ratios. Is there an account maintenance fee if she leaves her account there, and if so how much?

What funds are offered in her new employer's 401k plan? Please give fund names, tickers and expense ratios. Does her new employer's 401k plan permit Roth contributions? Does her new employer's 401k plan permit in-plan Roth conversions?

There are three basic options.

1) If her old employer's 401k plan offers good funds with low expense ratios, and there is no account maintenance fee or only a small one, then it may be better to leave the old 401k account where it is.

2) If her new employer's 401k plan offers equal or better funds with equal or lower expense ratios then it may be better to rollover the old 401k account into the new employer's 401k plan.

3) If neither plan offers good funds with low expense ratios then it may be better to rollover her old 401k account to a traditional IRA at a low cost provider like Vanguard of Fidelity, and then convert to a Roth IRA as desired.
Last edited by ruralavalon on Sat May 30, 2020 12:36 pm, edited 3 times in total.
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nolesrule
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Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by nolesrule »

Don't forget to include Option 3 in your analysis. Leave the money where it is in the old employer 401k.

You should look at the expenses in both the old 401k and the new 401k. if you are currently doing a Backdoor Roth, you are probably at a marginal tax rate where it doesn't make sense to do a Roth conversion of the money just to maintain the ability to continue doing the backdoor Roth.
retiredjg
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Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by retiredjg »

If your income is high enough to need the back door in order to contribute to Roth IRA, it should probably be left in a tax-deferred account unless there is something special about your situation. "Something special" might include a low income year or seeing that your tax bracket will go up a few notches in the next year or two and stay there.

With no other information, I'd suggest leaving it where it is or putting it into the new 401 - depending on which is the better plan.
cherijoh
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Location: Charlotte NC

Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by cherijoh »

conlaw1234 wrote: Sat May 30, 2020 12:17 pm Hello Bogleheads!

My wife (33) is leaving her employer and has a 401k balance of approx. $65k. It seems she has the option to transfer her existing 401k balance to a traditional IRA, roth IRA, or new employer's 401k plan. We do the backdoor Roth IRA every year so traditional IRA is not the ideal account IMO. Thus, i think we are left with two choices:

1. Transfer existing 401k balance to Roth IRA (and pay taxes)
2. Transfer existing 401k balance to the new 401k plan (and do not pay taxes)

With option 1, I estimate that we'd have to pay approximately $15k extra in taxes based upon calculation on the IRS withholding website and where I think we'd end up w/r/t tax bracket. This is not the biggest deal, but, obviously still need to fork over $15k, which, I think, can do done either one of two ways:

1. Increase our current withholding so that we pay extra over time that amounts to the $15k; or
2. Make an estimated payments of $15k over the course of this tax year

I wanted to get input on what would be the best financial decision over the long term. Obviously with the Roth IRA, we'd never pay taxes on the distributions once we take them out 30 + years from now. But, the downside is paying taxes right now.

If there is additional information needed or if I left out something crucial, please let me know and I'll be happy to provide the missing information.

Thanks in advance!
She should also have the option to leave it in place for the time being.

Does your wife have a new job yet? Does she have the details on the 401k plan options? Are there good low cost options? Also look to see if they charge either a flat fee or %AUM fee on top of the fund expense ratios. It might be listed as a record keeping fee, administation fee, custodian fee etc. Flat fees shouldn't be too much of a concern if she plans to invest in the new plan, but variable ones could be. If the plan isn't all that low cost then I would hesitate to roll the money into the new 401k since it could be stuck there for a while.

An additional consideration is in which type of asset would you be investing these funds? I'm in the camp that bonds go into traditional retirement accounts, while ROTH and taxable should be stock index funds (excluding of course any emergency fund). If your Wife's 401k was chock full of bonds and you plan to keep it that way, then paying the taxes to make it Roth is a lot less compelling in my opinion.

Does the new plan offer both Roth and traditional sub-accounts? I'm retired but still have money in my former employer's 401k plan and they recently started offering the ability to do in-plan Roth conversions. They work like IRA Roth conversions (e.g., you still end up paying taxes in the year you do the conversion) but the funds go into the Roth sub-account of your 401k. This allows you to avoid all the issues with having pre-tax money in your t-IRA messing up your Back Door Roths -- without having to do the conversions before the end of the year.

If this were an option, I would consider gradually converting from Traditional to Roth over the course of the next several years to limit the tax bite in any one year. It would also give you the option to convert when "stocks are on sale" if continuing/future bad economic news causes the floor to fall out of the stock market.
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Watty
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Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by Watty »

conlaw1234 wrote: Sat May 30, 2020 12:17 pm Obviously with the Roth IRA, we'd never pay taxes on the distributions once we take them out 30 + years from now. But, the downside is paying taxes right now.
You also need to remember that if you do not do the Roth conversion then you would also have an extra $15k in your taxable account that would also grow for 30+ years.

I would just leave it in the old or new 401k.

Unless the tax laws change you will likely be able to do Roth conversions in a lower tax bracket after you retire.

30 years is also a long time and you are a long ways from actually being in a high retirement tax bracket. I am retired now but over the years, especially when I was in my 50s, I saw a lot more people than I would have expected run into setbacks in their life with careers, health, the death of a spouse, divorces, etc that caused them to end up in a lower than expected retirement tax bracket.

You may also get to be in your 50s and realize that you can retire early very comfortably in a lower tax bracket instead of working another 10 years. I retired when I was 58 and with a paid off house you really do not need to be in a high tax bracket to be very comfortable.
Topic Author
conlaw1234
Posts: 35
Joined: Mon Jun 11, 2018 9:58 am

Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by conlaw1234 »

This is a very good point! Thanks!
ovacikar
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Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by ovacikar »

I rolled over my ex-employee fidelity 401k into a fidelity rollover and converted low fee sp500 mutual funds to fidelity zero index fund. I don't think zero index fund is offered in any 401k plans.
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ruralavalon
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Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by ruralavalon »

conlaw1234 wrote: Sat May 30, 2020 12:17 pmNew Information based upon replies:

The funds in the new 401k are good (better than old 401k plan) including Vanguard S&P 500 index, TSM, etc. The expense ratios are .04% which is far lower than the old 401k plan which is .50 for the same fund.

Yes, she has the new job and there are low cost options. The one that we'd choose are either vanguard TSM or S&P 500 index, both of which has an E/R of .04.

I think because the E/R in the old 401k is substantially higher than the new plan, we wouldn't consider leaving the money in the old 401k plan.

We are young (both of us are 33) and our total AA is 95% stocks and 5% bonds. We'd keep it aggressive and I think are comfortable with downturns, including the recent COVID-19 short-lived bear market.

With regards to a special circumstance, this year is a low income year for us. My wife hasn't really worked this year thus far (maternity leave and COVID-19) and will be part-time from now until the end of the year (personal decision to care for our child). Thus, our combined income is approximately 40% lower than what it was in prior years and would be in future years.

There does not seem to be an option for in-plan conversion in the new (and old) 401k plan.
In my opinion her better move would be to rollover her old 401k account into the new employer's 401k plan, rather than to a rollover IRA with a conversion to a Roth IRA.

That will protect your ability to do backdoor Roth IRAs in the future.

This year would be a good year to contribute to Roth IRAs, if eligible and that is practical for you. Will you be eligible this year?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
retiredjg
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Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by retiredjg »

conlaw, just so you know, if you add information to your original post, notifications do not go out to people following your thread so the new information may get overlooked. If you want to do that to keep information together (a very nice thing. :happy ) add another new post at the bottom saying that you have updated.

If your income is going way down this year, conversion to Roth might make sense. Otherwise, rolling into the new 401k seems like the best choice.
Topic Author
conlaw1234
Posts: 35
Joined: Mon Jun 11, 2018 9:58 am

Re: Leaving Employer; convert 401k balance to new 401k or roth IRA?

Post by conlaw1234 »

retiredjg wrote: Sun May 31, 2020 9:46 am conlaw, just so you know, if you add information to your original post, notifications do not go out to people following your thread so the new information may get overlooked. If you want to do that to keep information together (a very nice thing. :happy ) add another new post at the bottom saying that you have updated.

If your income is going way down this year, conversion to Roth might make sense. Otherwise, rolling into the new 401k seems like the best choice.
I didn't know that! thanks! Will do going forward!
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