401K -> IRA -> Roth IRA question

[Guest sudhirao]

hello all!

i am 33 and its about a year since i left my previous employer. i still have a 401K account with them and am wondering if it'd be a good idea to rollover the money in it into a regular IRA and then to a Roth IRA.

can somebody give me pointers on all the factors i should consider while doing so?

at what rate will i have to pay taxes when i do the conversion (IRA -> Roth IRA)?

also, i do have a new 401K plan with my current employer as well.

thanks,

sudhir

[Guest buxbaum2]

Sudhir,

I am assuming that your balance in your old 401(k) was more than $5000 so you did not get a taxable distribution with the 10% penalty due to the fact your are under 59 1/2. So if this is the case then you are OK for now. As a result of this, you do have the right under ERISA to keep the balance in the 401(k) until age 70 1/2; at which time the IRS requires that you take it out. In terms of rolling it over to an IRA or to another employer plan, that is up to you but here are the benefits of both.

First of all, they are both vehicles for retirement. These days you can never have enough in terms off retirement savings.

Lets first start with an IRA. Moving money into an IRA is not a bad idea. There are multiple types of IRA's including traditional, and Roth to name a few. The traditional allows you to continue to defer the money from taxation, and offers a number of different funds to invest in. There are plenty of companies that can help you with this (i.e., Vanguard, TIAA-Cref, Merrill Lynch, etc...) A Roth on the other hand has its advantages to, however since you money is currently sitting in a qualified retirement plan; you would have to take a tax hit in order to put the money into a Roth. A Roth is an after-tax retirement account where once you decide to take the money, it will already have been taxed thus you would not incur other taxes as long as you take it after Age 59 1/2. One thing to bear in mind is that most IRA's carry acct fees and transaction fees which can add up rather quickly. I would definitely research the internet and the companies I names above to get an idea. Then I would speak with a Financial Advisor or Financial Planner for more professional investment assistance.

On the other hand, you mentioned that you have a new 401(k). You should be able to roll your current 401(k) balance into your new 401(k), (as long as the plan permits it.). This will allow you to keep your costs low and invest in pooled funds with other employees. Here you can still defer your funds while getting matched on some. That is one thing you cannot do with an IRA. There are no matched with IRA's. Companies have different rates at which they match, however the fact that they match is worth it right there. Because you are so young, it might be wise to go this route because of the match (free money).

It is ultimately your choice as to how to invest these funds. Before doing anything, talk with someone from your benefits department and ask them for a SPD of your Plan to review. Ask them who your 401(k) administrator is and look at their website. Once you have this info, speak with a financial advisor or retirement specialist and ask them what your options are. Then compare the two (2).

Best of Luck.

[GBurns]

Any of the investment providers are able to run a projection for you showing not only what the taxes would be for the conversion, but also the long term differences in accumulation and taxes for both choices so that you can see whether you prefer tax now or tax later. Make sure that you use low, medium and high future tax rates since your retirement tax bracket is not yet known.

It is good advice to contribute to your new 401(k) so as to get as much match as possible. Whether you go higher than is needed for maximum match might be based on the quality of the available investments compared to what is available for the IRA.

I did not understand what buxbaum2 meant by "invest in pooled funds with other employees". Pooled funds should be avoided and your account should have fairly frequent valuation and allow frequent low cost changes in investments.