Should I move 401K? If so where?

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mrbluewho
Posts: 10
Joined: Thu Jan 18, 2018 4:37 pm

Should I move 401K? If so where?

Post by mrbluewho » Sun Apr 15, 2018 2:12 pm

Hello!

Soon I will be leaving my current company where I have had my only 401K to go to grad school. I will be in grad school for over 2 years, so I won't be able to contribute to roll it over to a new employer for some time. I transferred my Roth IRA to Vanguard, so I'm pleased with that setup, but I am trying to have a good plan with these 401k investments going into grad school.

First, the details:

Emergency funds: Three to six months of expenses
Debt: None
Tax Filing Status: Single
Age: 27
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 18%

Current retirement assets (Mid five figures total between two accounts)

Roth IRA through Vanguard (3 fund lazy portfolio)

35% Vanguard total stock admiral (VTSAX)
12% Vanguard total bond investor (VBMFX)
10.5% Vanguard total international investor (VGTSX)

403b through Fidelity
Company match of 4%

Fixed Income
3.8% WA CORE PLUS BOND I (WACPX) (Expense: 0.52%)

Large Value
8.1% ALZGI NFJ DIV VL ADM (ANDAX) (0.99%)

Large Growth
8.9% FID GROWTH DISC K (FGDKX) (0.54%)

Small Value
10.4% Fidelity Low Price Stock (FLP) (0.68%)

International
4.5% DFA EMERGING MARKETS (DFEMX) (0.58%)
6.8% DODGE & COX INTL STK (DODFX) (0.64%)

100% Total

Contributions

New annual Contributions
$7500 + 4% match in 403b
$5500 Roth IRA

Questions:

1) Now that I’m leaving my job in the next month and won’t be working for two years, what should I do with my 401K? Move to another type of account?
2) I’m not pleased with the current list of funds that I have given the high ER. If I should keep my money at Fidelity, out of the index funds below, which should I select? Or should I add them to another fund provided? See below.
3) Although my desired allocation is 80/20, my Roth IRA is the only account that really reflects that, in its own breakdown. I’d like to get my overall account with the 80/20 breakdown. Should I increase the bond allocation in my Roth IRA to account for the difference between my desired allocation and actual breakdown?

Thank you for viewing!


Low Cost Funds available in 403(b)

FID 500 INDEX INST (FXSIX) 0.03%
FID LG CP GR IDX PR (FSUPX) 0.05%
FID LG CP VL IDX PR (FLCHX) 0.05%
FID SM CAP IDX PR (FSSVX) 0.05%
FID EM MKTS IDX PR (FPMAX) 0.13%
FID INTL INDEX PR (FSIVX) 0.06%

Total list of funds offered

Investments you currently own ALZGI NFJ DIV VL ADM (ANDAX)
Stock Investments Large Cap 0.99%

CALVERT EQUITY A (CSIEX)
Stock Investments Large Cap 1.08%

DOMINI IMPACT EQ INV (DSEFX)
Stock Investments Large Cap 1.09%

FID 500 INDEX INST (FXSIX)
Stock Investments Large Cap 0.03%

Investments you currently own FID GROWTH DISC K (FGDKX)
Stock Investments Large Cap 0.54%

FID LG CP GR IDX PR (FSUPX)
Stock Investments Large Cap 0.05%

FID LG CP VL IDX PR (FLCHX)
Stock Investments Large Cap 0.05%

Investments you currently own FID LOW PRICED STK (FLPSX)
Stock Investments Mid-Cap 0.68%

FID SM CAP IDX PR (FSSVX)
Stock Investments Small Cap 0.05%

Investments you currently own DFA EMERGING MARKETS (DFEMX)
Stock Investments International 0.58%

Investments you currently own DODGE & COX INTL STK (DODFX)
Stock Investments International 0.64%

FID EM MKTS IDX PR (FPMAX)
Stock Investments International 0.13%

FID EMERGING MKTS (FEMKX)
Stock Investments International 0.97%

FID INTL DISCOVERY (FIGRX)
Stock Investments International 0.94%

FID INTL INDEX PR (FSIVX)
Stock Investments International 0.06%

LZRD EMRG MKTS EQ O (LZOEX)
Stock Investments International 1.35%

VANGUARD ENERGY ADM (VGELX)
Stock Investments Specialty 0.33%

FID BALANCED K (FBAKX)
Blended Investments* N/A 0.46%

FID FREEDOM 2005 K (FSNJX)
Blended Investments* N/A 0.44%

FID FREEDOM 2010 K (FSNKX)
Blended Investments* N/A 0.47%

FID FREEDOM 2015 K (FSNLX)
Blended Investments* N/A 0.5%

FID FREEDOM 2020 K (FSNOX)
Blended Investments* N/A 0.54%

FID FREEDOM 2025 K (FSNPX)
Blended Investments* N/A 0.57%

FID FREEDOM 2030 K (FSNQX)
Blended Investments* N/A 0.61%

FID FREEDOM 2035 K (FSNUX)
Blended Investments* N/A 0.64%

FID FREEDOM 2040 K (FSNVX)
Blended Investments* N/A 0.64%

FID FREEDOM 2045 K (FSNZX)
Blended Investments* N/A 0.64%

FID FREEDOM 2050 K (FNSBX)
Blended Investments* N/A 0.64%

FID FREEDOM 2055 K (FNSDX)
Blended Investments* N/A 0.64%

FID FREEDOM 2060 K (FNSFX)
Blended Investments* N/A 0.64%

FID FREEDOM INC K (FNSHX)
Blended Investments* N/A 0.42%

MIP CL 1
Bond Investments Stable Value 0.77%

Investments you currently own WA CORE PLUS BOND I (WACPX)
Bond Investments Income 0.52%

mega317
Posts: 2554
Joined: Tue Apr 19, 2016 10:55 am

Re: Should I move 401K? If so where?

Post by mega317 » Sun Apr 15, 2018 2:35 pm

Are there really only 2 fixed income options? What is the rate on the stable value?

Probably would keep the 401k at Fidelity because you have very good options. Normally I'd say bonds in 401k rather than Roth but if you don't have good options then bonds in Roth is totally fine. And to be honest with a mid-5 figure portfolio it doesn't matter one lick what you do. Just continue to save what you can, and when you get a real job your annual contributions will likely/hopefully dwarf what you already have.

mhalley
Posts: 6012
Joined: Tue Nov 20, 2007 6:02 am

Re: Should I move 401K? If so where?

Post by mhalley » Sun Apr 15, 2018 4:07 pm

Sometimes 403b have a lot of additional expenses in addition to the er of certain funds. Check to see that you are not having to pay other fees. The usual recommendation is to use the s&p500 plus the small cap index in order to approximate the the total stock market fund. Then add international if you desire it.
https://www.bogleheads.org/wiki/Approxi ... ock_market
One option might be to roll it to an ira at vanguard so you can convert it to a roth during these years of low taxes.

GABulldogs230
Posts: 2
Joined: Sun Apr 15, 2018 4:07 pm

Re: Should I move 401K? If so where?

Post by GABulldogs230 » Sun Apr 15, 2018 4:16 pm

Fidelity is just fine, but I would stick with the index funds offered, which are very similar to the Vanguard counterparts even though they track different indexes in some instances, As far as getting your account to 80/20, I would look across all of your accounts at what the options are for bonds. In an environment with rising bond yields holding that much of an allocation to bonds at your age is really unnecessary, unless there is another reason for you to want to hold bonds at that level. 100% Equities will continue to provide maximum opportunity for total return given that you have many decades until retirement.

mrbluewho
Posts: 10
Joined: Thu Jan 18, 2018 4:37 pm

Re: Should I move 401K? If so where?

Post by mrbluewho » Sun Apr 15, 2018 5:45 pm

Thanks for the replies! Seems like it may be a good idea to keep things invested with Fidelity since the fund options are ok.
mega317 wrote:
Sun Apr 15, 2018 2:35 pm
Are there really only 2 fixed income options? What is the rate on the stable value?
Looks like it's just the two. The stable value has the following rate of return:

1 Year 3 Year 5 Year 10 Year/LOF* Returns As Of
1.34% 1.26% 1.14% 1.41% 03/31/2018
mhalley wrote:
Sun Apr 15, 2018 4:07 pm
Sometimes 403b have a lot of additional expenses in addition to the er of certain funds. Check to see that you are not having to pay other fees. The usual recommendation is to use the s&p500 plus the small cap index in order to approximate the the total stock market fund. Then add international if you desire it.
https://www.bogleheads.org/wiki/Approxi ... ock_market
One option might be to roll it to an ira at vanguard so you can convert it to a roth during these years of low taxes.
There is a column for shareholder fees, but every one of the accounts besides the DOMINIC IMPACT EQ INV (DSEFX) says that there are no additional fees. The fee for this fund is "Short term trading fees of 2% for fee eligible shares held less than 30 days."

That index fund suggestion makes sense. I'll look into it further. Thanks! I currently have a Roth IRA, so I couldn't convert it to this account. I could convert it to a traditional IRA, but I'm not sure this would be outrageously advantageous. Then again, I don't know much on the topic at this point.
GABulldogs230 wrote:
Sun Apr 15, 2018 4:16 pm
Fidelity is just fine, but I would stick with the index funds offered, which are very similar to the Vanguard counterparts even though they track different indexes in some instances, As far as getting your account to 80/20, I would look across all of your accounts at what the options are for bonds. In an environment with rising bond yields holding that much of an allocation to bonds at your age is really unnecessary, unless there is another reason for you to want to hold bonds at that level. 100% Equities will continue to provide maximum opportunity for total return given that you have many decades until retirement.
That perspective makes sense, given how many years I have until retirement. A 90/10 split might be a good compromise. I'll consider it all.

Thanks again!

NancyABQ
Posts: 225
Joined: Thu Aug 18, 2016 3:37 pm

Re: Should I move 401K? If so where?

Post by NancyABQ » Sun Apr 15, 2018 5:57 pm

One thing to consider -- will your income be quite low in the next 2 years, compared to what you expect it to be later on in your career?

If so, you might want to rollover the 401K to a Rollover IRA account, and then convert some of it to a Roth IRA, during the next two years.

When you go back to work after you are done with school, if you have kept the remaining Rollover IRA funds separate from any Traditional IRA contributions, then it should be easy for you to roll it back into the new company 401k, if applicable.

If you do the Roth conversions, you could look at your expected tax rate (maybe you will be at 12% or even lower?) and convert up to the top of the 12% bracket, for instance.

To summarize:

1) Rollover the 401K to a Rollover IRA (at Vanguard or wherever your like). Invest in low-cost index funds.
2) During the next 2 years, while your income is low, do conversions from that IRA to a Roth IRA, to the amount that makes sense for your tax/income situation.
3) During the next 2 years, make either Traditional IRA or Roth IRA contributions with any earned income. If you make Traditional IRA contributions, put them in a different account from the Rollover IRA (don't mix these funds).
4) After 2 years, when you get a job with a 401K, you should have the option to roll any remaining Rollover IRA funds back into the 401K.

I did something similar to you, going back to school for several years in the middle of my career, and at that time I was oblivious to the existence of Roth IRAs. I wish I had done what I am recommending for you, at the time!

mrbluewho
Posts: 10
Joined: Thu Jan 18, 2018 4:37 pm

Re: Should I move 401K? If so where?

Post by mrbluewho » Sun Apr 15, 2018 9:49 pm

NancyABQ wrote:
Sun Apr 15, 2018 5:57 pm
One thing to consider -- will your income be quite low in the next 2 years, compared to what you expect it to be later on in your career?

If so, you might want to rollover the 401K to a Rollover IRA account, and then convert some of it to a Roth IRA, during the next two years.
This is a great suggestion that I hadn't thought of! I will have 0 income besides student loans, and a much higher income later in my career. The tax bracket that I'll be in won't be very high, I assume.

One question I have is will this account get taxed at the rate of the state I earned the money or where I reside when I cash it out? The state that I earned the income didn't have a state income tax.
NancyABQ wrote:
Sun Apr 15, 2018 5:57 pm
1) Rollover the 401K to a Rollover IRA (at Vanguard or wherever your like). Invest in low-cost index funds.
2) During the next 2 years, while your income is low, do conversions from that IRA to a Roth IRA, to the amount that makes sense for your tax/income situation.
3) During the next 2 years, make either Traditional IRA or Roth IRA contributions with any earned income. If you make Traditional IRA contributions, put them in a different account from the Rollover IRA (don't mix these funds).
4) After 2 years, when you get a job with a 401K, you should have the option to roll any remaining Rollover IRA funds back into the 401K.
Thank you for the step by step instructions! That makes a lot of sense. This money can be contributed to the Roth IRA because it was earned income, correct?

NancyABQ
Posts: 225
Joined: Thu Aug 18, 2016 3:37 pm

Re: Should I move 401K? If so where?

Post by NancyABQ » Sun Apr 15, 2018 10:34 pm

mrbluewho wrote:
Sun Apr 15, 2018 9:49 pm
NancyABQ wrote:
Sun Apr 15, 2018 5:57 pm
One thing to consider -- will your income be quite low in the next 2 years, compared to what you expect it to be later on in your career?

If so, you might want to rollover the 401K to a Rollover IRA account, and then convert some of it to a Roth IRA, during the next two years.
This is a great suggestion that I hadn't thought of! I will have 0 income besides student loans, and a much higher income later in my career. The tax bracket that I'll be in won't be very high, I assume.

One question I have is will this account get taxed at the rate of the state I earned the money or where I reside when I cash it out? The state that I earned the income didn't have a state income tax.
If you are a resident of a state with an income tax, the conversion would be taxed at that state's rate. It has nothing to do with where the income was earned (unless some specific states have arcane rules about this?). I'm not sure if you might be able to maintain residency in your current state to avoid this. My guess is probably not, but it depends...
mrbluewho wrote:
Sun Apr 15, 2018 9:49 pm
NancyABQ wrote:
Sun Apr 15, 2018 5:57 pm
1) Rollover the 401K to a Rollover IRA (at Vanguard or wherever your like). Invest in low-cost index funds.
2) During the next 2 years, while your income is low, do conversions from that IRA to a Roth IRA, to the amount that makes sense for your tax/income situation.
3) During the next 2 years, make either Traditional IRA or Roth IRA contributions with any earned income. If you make Traditional IRA contributions, put them in a different account from the Rollover IRA (don't mix these funds).
4) After 2 years, when you get a job with a 401K, you should have the option to roll any remaining Rollover IRA funds back into the 401K.
Thank you for the step by step instructions! That makes a lot of sense. This money can be contributed to the Roth IRA because it was earned income, correct?
Don't confuse "conversions" with "contributions". Contributions can only be made with earned income from the year it was earned. So if you have 0 earned income, you won't be able to make any new contributions for that year.

A conversion of money in an existing Rollover IRA to a Roth IRA doesn't require any earned income that year. It would be totally separate from any "contributions" during that year. Conversions are taxed at ordinary income tax rates, and the amount you can convert in any given year is unlimited (not limited to $5500/year like contributions).

mrbluewho
Posts: 10
Joined: Thu Jan 18, 2018 4:37 pm

Re: Should I move 401K? If so where?

Post by mrbluewho » Mon Apr 16, 2018 12:38 am

NancyABQ wrote:
Sun Apr 15, 2018 10:34 pm

If you are a resident of a state with an income tax, the conversion would be taxed at that state's rate. It has nothing to do with where the income was earned (unless some specific states have arcane rules about this?). I'm not sure if you might be able to maintain residency in your current state to avoid this. My guess is probably not, but it depends...

Don't confuse "conversions" with "contributions". Contributions can only be made with earned income from the year it was earned. So if you have 0 earned income, you won't be able to make any new contributions for that year.

A conversion of money in an existing Rollover IRA to a Roth IRA doesn't require any earned income that year. It would be totally separate from any "contributions" during that year. Conversions are taxed at ordinary income tax rates, and the amount you can convert in any given year is unlimited (not limited to $5500/year like contributions).
This is pretty interesting, and good to know. So, hypothetically, if I were to convert all of the rollover IRA from a 401K to my Roth IRA I would pay taxes on the income, but it would get converted to the Roth? To limit the number of taxes, I could take out 5500 the next two years, correct? I just want to make sure that I'm really understanding.

Just kind of curious, why wouldn't I convert all of my 401k to a roth IRA? Is it because of all the taxes that I would pay at this point? This is all super insightful. Thanks!

StealthRabbit
Posts: 119
Joined: Sat Jun 13, 2009 1:25 am

Re: Should I move 401K? If so where?

Post by StealthRabbit » Mon Apr 16, 2018 3:57 am

401k is a safety net for liability claims that can nab an IRA (IRA is more accessibe to litigation claims).
If your investment choices are OK, I would stick with the 401k as a lifelong investment vehicle for this reason.

Yes, a 401k roll to a Roth will incur an income tax obligation. (do this roll and any Roth rolls during low income yrs (Such as while in grad school :beer )
Alternatively (in future employment with 401k), consider a 401k Roth (if offered).

I am of the mind:
1) Max any company contributions / tax credits
2) Max my Roths,
3) Run the numbers every yr to see if a T-Ira makes financial sense. (credits).
4) Find other / additional ways to grow wealth other than wage income. i.e. Diversified wealth growth
5) Try to create an inflation adjusted income source. to feed you through perpetuity.

For my situation... as I have since age 19...& now I'm finally beyond Critical Mass... I run several scenarios, but usually able to stay <9% effective rates, (investment RE + Career income + LLC's (businesses as well as IRA LLC's) + LTCG from trading stocks / properties + Qualified distributions (finally!) + use / contributions to DAF).

GABulldogs230
Posts: 2
Joined: Sun Apr 15, 2018 4:07 pm

Re: Should I move 401K? If so where?

Post by GABulldogs230 » Mon Apr 16, 2018 7:21 am

Converting to a Roth makes a lot of sense given the drop in income during grad school. This would allow the money to grow tax free for decades. Great suggestion.

NancyABQ
Posts: 225
Joined: Thu Aug 18, 2016 3:37 pm

Re: Should I move 401K? If so where?

Post by NancyABQ » Mon Apr 16, 2018 7:55 am

mrbluewho wrote:
Mon Apr 16, 2018 12:38 am
This is pretty interesting, and good to know. So, hypothetically, if I were to convert all of the rollover IRA from a 401K to my Roth IRA I would pay taxes on the income, but it would get converted to the Roth? To limit the number of taxes, I could take out 5500 the next two years, correct? I just want to make sure that I'm really understanding.

Just kind of curious, why wouldn't I convert all of my 401k to a roth IRA? Is it because of all the taxes that I would pay at this point? This is all super insightful. Thanks!
You can convert any amount. There's no reason to limit it to $5500 for the conversion. For example, if you literally have 0 other income for the year, you could convert $12000 (the amount of the standard deduction for 2018 for a single taxpayer) and it would be completely Federal tax-free. That much seems like a no-brainer. Then an additional $9525 in the 10% bracket is also probably a good deal.

Depending what the balance is in your 401k, it's possible you could convert the whole amount to Roth during the 2 years.

One issue is, you will want to have other money to pay the taxes due (i.e. not from the amount being converted), so if you don't have a lot of additional savings to pay the taxes from, you may want to only convert that first $12000.

Also, academic years don't generally align with calendar years, so if you are school for 2 years, is that only one full calendar year of 0 income? Keep that in mind, also. It's still worth converting ~$12000 during that one calendar year, in my opinion.

mrbluewho
Posts: 10
Joined: Thu Jan 18, 2018 4:37 pm

Re: Should I move 401K? If so where?

Post by mrbluewho » Mon Apr 16, 2018 12:43 pm

NancyABQ wrote:
Mon Apr 16, 2018 7:55 am
mrbluewho wrote:
Mon Apr 16, 2018 12:38 am
This is pretty interesting, and good to know. So, hypothetically, if I were to convert all of the rollover IRA from a 401K to my Roth IRA I would pay taxes on the income, but it would get converted to the Roth? To limit the number of taxes, I could take out 5500 the next two years, correct? I just want to make sure that I'm really understanding.

Just kind of curious, why wouldn't I convert all of my 401k to a roth IRA? Is it because of all the taxes that I would pay at this point? This is all super insightful. Thanks!
You can convert any amount. There's no reason to limit it to $5500 for the conversion. For example, if you literally have 0 other income for the year, you could convert $12000 (the amount of the standard deduction for 2018 for a single taxpayer) and it would be completely Federal tax-free. That much seems like a no-brainer. Then an additional $9525 in the 10% bracket is also probably a good deal.

Depending what the balance is in your 401k, it's possible you could convert the whole amount to Roth during the 2 years.

One issue is, you will want to have other money to pay the taxes due (i.e. not from the amount being converted), so if you don't have a lot of additional savings to pay the taxes from, you may want to only convert that first $12000.

Also, academic years don't generally align with calendar years, so if you are school for 2 years, is that only one full calendar year of 0 income? Keep that in mind, also. It's still worth converting ~$12000 during that one calendar year, in my opinion.
This makes a ton of sense. Thank you!

For 2018, I will only have been working 4 months. In 2019, the entire year will be 0 income. Lastly, in 2020, depending on when I get a job, it could be anywhere from 0-4 months. 2019 I will definitely do this, and possibly for 2018/2020.

The one hold up I have is residency. I will be moving from a place with no state income tax to Ohio, which does have a state income tax. Looking at a quick calculator for Ohio state tax, it does seem like there is a slight income tax, and a much larger local tax. Converting this money in Ohio would shave a little off the top, and with plans to retire in a state tax free state, this plan could still be better, correct? Also, I guess I don't know if I'll actually retire in a state tax free state since I haven't really started my career..

NancyABQ
Posts: 225
Joined: Thu Aug 18, 2016 3:37 pm

Re: Should I move 401K? If so where?

Post by NancyABQ » Mon Apr 16, 2018 8:54 pm

mrbluewho wrote:
Mon Apr 16, 2018 12:43 pm
The one hold up I have is residency. I will be moving from a place with no state income tax to Ohio, which does have a state income tax. Looking at a quick calculator for Ohio state tax, it does seem like there is a slight income tax, and a much larger local tax. Converting this money in Ohio would shave a little off the top, and with plans to retire in a state tax free state, this plan could still be better, correct? Also, I guess I don't know if I'll actually retire in a state tax free state since I haven't really started my career..
I wouldn't let a (probably small) state tax influence the decision much.

Here is info on Ohio income taxes: https://www.tax.ohio.gov/ohio_individua ... rates.aspx
"Beginning with tax year 2017, Ohio's individual income tax brackets have been adjusted so that taxpayers with less than $10,650 of income are not subject to income tax. Also, the tax brackets have been indexed for inflation per Ohio Revised Code section 5747.025."

The idea behind a Roth conversion, in this case, is that you are doing it at a time when you think your taxes will be lower than they would be later in your life. Once you do the conversion, those investments (and their future decades of earnings) are completely tax free to withdraw, while the ones in the traditional IRA/401K will eventually be subject to RMDs and will be taxed at whatever your future tax rate is at age 70.

There are calculators online that will tell you whether Roth conversions make sense, based on your current tax rate, and your estimated future tax rate.

But my main point is, you don't have to have ZERO tax rate, for a Roth conversion to be a good idea. You just want to have a current tax rate that is lower than your anticipated future tax rate. So in this case, at least for that year where you would otherwise have ~0 income, it is going to be a good idea, even if you do have to pay some state taxes on it. You do need to have enough available (non-retirement) funds to pay the taxes, though.

To put some numbers on it -- if the state tax was 5% and fed tax is 0%.... that is a total of 5% taxes if you do it in 2019. When you are 70, if the tax brackets are similar to now, if state tax was 0% and fed tax was 12% or 22%.... no matter how you look at it, it's a big win to do the conversion in 2019. It is probably also a win to do it in the Federal 10% bracket.

I'd suggest that you get advice here with specific numbers for the amounts and your expected income, for 2018, 2019 and 2020, and people can probably give you specific advise on what makes sense for you.

mrbluewho
Posts: 10
Joined: Thu Jan 18, 2018 4:37 pm

Re: Should I move 401K? If so where?

Post by mrbluewho » Wed Apr 18, 2018 4:47 pm

Thank you so much for all of this insight! It does make a lot of sense. It does seem like a better idea to pay the state tax than have an increased federal tax in the future. I will rollover my 403b to a Traditional IRA (I believe it can be used as a rollover IRA) at Vanguard and convert it to my Roth come next year!

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