I have an old 401K from my old employer. Right now I am keeping it with my banks old 401K provider, JH Pensions.
I am trying to figure out what the best move would be. Should I move my 401K and roll it into a Traditional IRA or a Roth IRA? Should I leave it alone?
Also, I am using Schwab for all my banking needs, ING for my savings, and Fidelity has my investment accounts right now. I am the type of person who likes shit simplistic and not all over the place. Having so many accounts open at different places can make my head spin sometimes trying to keep whats coming in and out straight. So, ideally I would like to move all of my investments to Schwab and close out my Fidelity accounts.
I am not sure if this is the best option though. Anyone have an IRA / Brokerage with Schwab? How do you like it? How are the investment options? etc.
Do you guys suggest I close out my Fidelity and move all my accounts to Schwab? I expect to come into some good money this year, so I need to get my shit in order.
Thanks
Definitely roll it over into an IRA. In the 401k, you are limited to the investment options they provide for you (and they are usually fairly expensive funds). In your IRA, you have the freedom to invest the money in whatever you want. Trad or Roth depends on your personal circumstances.
I'm partial to Vanguard - they have some of the best performing funds, and they are dirt cheap. We have our IRA's there, as well as individual investment account. Anytime we leave a job, the 401k gets rolled immediately into the IRA. There are additional benefits of having everything with one provider - obviously the simplicity is one benefit, but beyond that, you can get discounts on some things if your combined balances exceed some threshold. Like for us, at Vanguard we are in "Admiral" class funds, which have lower management fees than the normal version of those funds because of our high balances.
Regardless, whether you opt for Vanguard or stick with Schwab, rolling the 401k over is the way to go.
Cash the whole thing out and throw it all down on the field. Shit never fails.
This is not a recommendation, just a suggestion so you're aware of it, but you can now roll a 401k into a Lending Club IRA if you want to get into P2P lending.
https://www.lendingclub.com/sdIRA/registerSDIRA.action
Transferring your 401k into a pre-tax IRA makes a lot of sense. Vanguard and Schwab, IMHO, are better choices than Fidelity since they offer better low-management-fee ETFs and roughly the same commissions. Most 401k plans have investment options with management fees between 100 and 200 basis points, so with a $50K IRA, we're talking about $1000/year in savings by switching to low-cost ETFs.
Where it gets a little trickier is in converting to a Roth IRA. A few things you may want to consider:
1.) Do you plan on going back to school? You can pull money out penalty free and usually at a lower tax rate for tuition.
2.) What is your risk tolerance? It makes sense to always keep at least some money in your 401k to fill up your lower tax brackets. Even if taxes go up, your first dollar of ordinary income in retirement probably won't be taxed at 33%, and if you DON'T get 6% + CPI returns, you'll be glad you didn't convert as much.
3.) How close are you to sliding into the next tax bracket? Best not to pay more than you have to on your conversion if all you have to do is spread it out over two years to avoid slipping into a higher tax bracket.
Could you please elaborate on point #2?
Thanks everyone.
I think I am going to be opening a Vanguard and rolling my 401K over there to an IRA and bringing my investment accounts over as well.
Sure.
We live under a progressive tax system where there's a lot of negative convexity in our income. Taxpayers who have wild swings in ordinary income tend to get punished. If I have $0 of ordinary income in 2011 and $700K in 2012, my average tax rate is a lot higher than if I just have $350K of income in each year. Someone who earns $350K pays an average tax rate of ~30%, but when they earn an additional $350K on top of that in one year, they pay 35% instead- an extra ~$17K of taxes over just having spread the $700K over two years instead of condensing it into one.
The same deal goes with your retirement income.
Right now, we are being taxed at 28, 33, or 35% on our income. When I sock $1000 away for retirement, it only costs me $720 if I'm in the 28% tax bracket. But when I retire and take that money out, and ALL of my other income is from Roth IRAs and dividend stocks, my marginal tax rate is only about 10% (ok, maybe 15% if I have a lot of nonretirement dividend and capital gains income). Even if I plan on being a multimillionaire in retirement and have a fairly low tax rate right now, I still derive some level of tax benefit from saving money now to create ordinary income in retirement.
Yes, it's absolutely true that tax rates will probably go up. But they can't go up that much on the "poor". Also, there is no guarantee that Congress will honor the provisos of the implicit Roth contract. Especially if you have a huge portfolio compared to everyone else. Even under the oppressive 1980 tax code, you had to be earning $30K (inflation adjusted) of taxable income before you hit 20% marginal taxes. If we back out what it takes to get to a 401k portfolio that can provide $30K of income based on 4% withdrawal rates and (conservatively invested) 4% + CPI returns, we're talking about a ~$150K portfolio in your mid 20s to retire by your mid 60s.
The second part of point #2 is that under a progressive tax system, you suffer from negative convexity. Say your portfolio is set up to provide you with just enough income to hit the corner between the 15% and 25% tax brackets When your portfolio, pre-tax, goes down $1000, you lose $850. But when it goes up $1000, you only gain $750. So as you can see, you'd much rather have the investment just sit where it is than take a 50% chance it goes up and a 50% chance it goes down. So generally, you want to invest in boring lower-risk stuff in your pre-tax 401k than in your Roth. Treat your pre-tax 401k as your safety net. It's designed to supplement social security and help make sure you can live a middle-class lifestyle. The non-retirement and especially the Roth IRA investments are where you should be taking your risk. In a Roth IRA, when your portfolio goes up $1000, Congress currently says you get to keep the same gain as your loss would be. So therefore you are at less of a disadvantage than in a 401k for taking risk.
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