To Roll Over or Not to Roll Over 401(k)? Advice?

Due to COVID, I was furloughed from my previous job. Thankfully, I was able to find new employment in education.

Since education has a pension structure instead of a 401(k) structure, I am left with the decision of what to do with my fully vested 401(k) from my previous employer (which - due to the hot stock market - currently sits at just under $8,500.)

Options:

  1. Leave my 401(k) alone at Principal.
  2. Convert my 401(k) to my Roth IRA - held at Vanguard.
  3. Roll over my 401(k) to a regular IRA (that I would have to set up with Vanguard)

Other pertinent information:

  • I am 44 so what is that ... another 23 years before retirement?
  • I don't really expect my tax bracket to change by the time I retire, but who knows. I assume taxes will continue to increase.
  • I don't expect to use/need the money before I retire.
  • I could pay the taxes on a Roth IRA conversion, however, it's a chunk of change during unpredictable times. 

What do you think I should do YNAB hive?

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  • I would pay the taxes and roll it to the Roth IRA.  Never leave it with a former employer.  What if they ever under?

    Like 3
  • Apparently you can't edit a post in the forum.  The last sentence of my reply should read:  "What if they went under?"

    Like 1
      • Annieland
      • I was told there would be no math.
      • Annieland
      • 5 mths ago
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      jwehrer I would guess the actual vested funds are held at an investment firm (Principal, I assume) and that shouldn’t be affected by his former company.

      Like 1
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 5 mths ago
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      • Reported - view

      However, even if that's the case, I'm with jwehrer for this situation. For that amount of funds, I'd consolidate it at Vanguard. If you can afford to pay the taxes, roll it over into your Roth.

      Like 2
  • jwehrer said:
    Apparently you can't edit a post in the forum.

    Click the three vertical dots in the upper right of your post. You can edit it within the first 30 minutes of its posting.

    Like 1
  • Historically, we’ve always rolled over old 401(k) funds into an IRA (not Roth).  And then contributed to our Roths separately.  The only exception is the 401(a) from when my husband worked at a University and that held the matching contributions which are unable to be moved until he’s 59 or something.

    Do you have any other Traditional IRAs?  We’re right around your age and just started doing back door Roth contributions.  Well, just me for now, because I have no Trad IRA that would be subject to the “pro-rata” rule and he does (and that’s another complicated tax calculation altogether).  If you think your future earnings could increase in the coming years to the point where tax-deferred contributions to an IRA would be disallowed, then you might want to avoid contributing to a new Traditional IRA (unless you already have one anyway).

    It also comes down to the investment product choices at the firm where your account currently sits.  My husband’s various employers rarely had decent choices, except maybe the 401(a) still at Fidelity.  So I liked just rolling it into the same Schwab Rollover IRA each time and diversifying it there.  

    So I guess I would do it the way we have in rolling it into a new traditional Ira, avoid paying the taxes, and instead use that tax “savings” on making sure you max your Roth contributions this year.

    Like 1
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 5 mths ago
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      • Reported - view

      Annieland You might look into rolling your husband’s traditional IRA into his 401k. Then he can start a backdoor Roth as well without the pro-rata consideration. He could even fund last year’s and this year’s. That’s what I did a few years ago to great effect. As a result, I’ve also been doing Mega Backdoor Roth contributions from my company 401k with after tax funds.

      Like 2
      • Annieland
      • I was told there would be no math.
      • Annieland
      • 5 mths ago
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      Superbone I will admit, I am sorely lacking in general 401k knowledge at this point.  Basically, I skip over those sections in everything I read :).  But it's on the list.  It's just in the past year I've finally been able to figure out how to pull this backdoor Roth thing, and only the year before that we could afford to contribute the federal max.  God willing, maybe in the next few years we can try a mega backdoor.  I didn't know (or forgot) that it gets around the pro-rata issue.  Thank you for the heads up!

      I always considered 401k's sort of "throwaway" accounts because the options, matches, and our ability to contribute historically sucked.  Things are so weird in a household where one person works and has never logged into a single retirement account, and the other person has zero income or credentials and tracks them daily :).

      Like 2
  • You know what? Scratch that.  Duh.  I actually OPENED my husbands Roth IRA with a $9k rollover from an old job, and then contributed the full amount each year.  Gosh, so I guess I’ve done it both ways.  So many jobs!  🤦‍♀️🤦‍♀️🤦‍♀️

    Like 1
  • Vote 2 for : Never leave it with your prior firm .  You're locked into their limited list of investments and fee structure.  With a self-directed IRA, you have many more opportunities for diversification and fee minimization.

    Roth versus regular  / the advice previously was Roth, always...but I don't think that's as straightforward anymore, given your relative youth and the direction we're heading as a country in debt. There's a lot more I can say on this, but here's the gist:  

    If the US finds itself, in 20 to 30 years, unable to meet its Social Security burden - does anyone really think  what will be called 'Roth millionaires' by the then political class, will escape taxation?  The government has shown its perfectly find with double taxation already, so I wouldn't bet on it.  My personal view is take the tax deduction NOW, not the promised one that could evaporate.

    Like 1
    • WhoMovedMyCheese I am in agreement with you. I've always been a little wary of the Roth because the government will do what the government will do regardless of promises made earlier. But at this particular point in time, the Roth is a good vehicle. Who knows about the future?

      Like
  • Quite frankly there's not enough information in this post to make a recommendation (filing status, current tax bracket, etc.), but here's my take...

    Most people will be in a lower tax bracket when they retire, and even if you don't and it's the same you may have an opportunity in the future to convert it while in a lower tax bracket than you will be in 2021, so it doesn't make sense to convert it at this time. Roll it to a traditional IRA or into the workplace plan.

    If you expect that you might at some point have income that precludes the possibility of making Roth contributions, keeping it in a 401k will allow backdoor Roth.
     

    Like 1
  • Whether to roll over from the 401K and whether to convert to Roth are actually 2 different questions.  I would highly recommend the rollover to Vanguard because it gives you many more investment options and is usually the most cost effective option (usually) as many 401K providers levy a monthly or quarterly service charge.  I don't mean to contradict @nolesrule but I think that converting your current pre-tax 401K money to Roth at age 44 probably makes sense as long as you have the cash on hand to pay the taxes.  However, that question should probably go to an investment advisor instead of this forum.🙂

    Like 1
      • nolesrule
      • Been waiting 5 years for the Stealing From the Future fix...
      • nolesrule
      • 5 mths ago
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      Budget_NC Feel free to disagree with me. You're wrong. 😉 It only makes sense to convert the funds in a year you will be in a lower tax bracket or to avoid having to withdraw them in a higher tax bracket. Otherwise it's actually a wash, and in the case of a wash there is no point doing it now, because you leave open the possibility of a future year with a lower tax bracket in which you can pull trigger, rather than closing that door permanently at the current rate.

      Granted, we are making an assumption here about the marginal tax rate of the money going in that was deferred, but the clues in the OPs post imply it's the same bracket.

      Like 2
      • Annieland
      • I was told there would be no math.
      • Annieland
      • 5 mths ago
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      nolesrule I agree with you.  Back when I rolled his $9k 401k to open his new Roth, we had a negative effective tax rate.  Know how I made contributions to our Roths for years?  I bought $2k of Apple stock in 2000 and held it.  So, starting in 2011 I sold around $11k+ worth to put into Roths.  Our LT Cap Gains rate was 0%.  I stopped 5 or 6 years later once I was able to cash flow our contributions in YNAB.  Would that money have done better still sitting in AAPL? Probably, but the shares I have left have a $0.001248 cost basis so I just leave it alone now.  

      Also, I know it's conventional wisdom that our tax brackets will be lower when we all retire.  But it's still scary to me, because I managed my mom's affairs for 10 years before she passed away in 2019, and even though she and my dad saved religiously in their IRAs, and ended up with a nice nest egg, I had to withdraw enough to buy a house every single year to support her nursing care costs.  Sure, it was deductible (to a cap that caught me off guard one year), but it skyrocketed her into the top tax bracket and the associated extra medicare costs.  

      Like 1
      • Budget_NC
      • Tomato_Snow_237e7f17927
      • 5 mths ago
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      nolesrule I might be wrong.  It has happened.🙂  But there are a couple of assumptions that I question, and the main one is that our marginal tax rate in retirement will definitely be less than the current tax rate.  Given federal spending and deficits, I see future tax rates going nowhere but up, and do not automatically assume that I will have less money in retirement and a lower tax rate.  I also believe that the current rates under the 2017 tax legislation are the lowest that we are ever going to see.  One other factor is the amount of time for earnings to grow tax free.  In the case of the OP, age 44 to retirement is a significant amount of time for investments to grow.  And if by some chance rates do turn out to be lower in 5 years, then the money converted now has still had time to grow tax free for 5 years versus converting a larger balance in 5 years at a lower marginal tax rate.  In my case, our largest pot of retirement money is pre-tax because I didn't take enough advantage of the Roth option when I was younger.  At age 55 I have a harder time justifying conversion.  And I also don't have enough extra cash lying around to pay the taxes.

      Like 1
      • nolesrule
      • Been waiting 5 years for the Stealing From the Future fix...
      • nolesrule
      • 5 mths ago
      • 3
      • Reported - view

      Budget_NC It's hard to speculate on future tax rates. Yeah, the current rates will revert in a few years, but generally speaking tax rates have come down despite everyone thinking they should go up. The rates could change on the top brackets without need to change the lower ones and that could result in more Federal revenues than raising all rates. Or they governments could look at other ways to raise revenues outside of income taxes. The math is tricky and there's no way to predict which way things will go.

      Like 3
  • Lots of good insight and opinion here. Thank you all for weighing in. I'm going to discuss with my tax advisor, as well, but the majority here seem to think moving the 401(k) over to Vanguard is wise. Still need to decide wether to convert to the Roth or not. After reading all these responses, now I'm leaning towards just leaving  it in a regular IRA. Thank you for your help! :)

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 5 mths ago
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      Violet General Just an FYI, if you put it into a new traditional IRA, it will make it tougher to contribute to your Roth IRA in the future if you surpass the Roth income limits and want to do a backdoor Roth contribution due to pro rata rules. Your tax advisor can go over that with you.

      Like 1
      • nolesrule
      • Been waiting 5 years for the Stealing From the Future fix...
      • nolesrule
      • 5 mths ago
      • 2
      • Reported - view

      Superbone 

      Superbone said:
      Your tax advisor can go over that with you.

       Only if it's a competent tax advisor who understands the concept correctly. Can't tell you how many times I've read about tax advisors have screwed up advice on this particular subject. Most are an expert in reducing taxes in a given year rather than making financial planning decision for the long-run.

      Like 2
    • Superbone Thank you for the head's up!

      Like 1
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