Current graduate student: low income = smart time to roll over previous employer's 401(k)?

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sneaky_margot
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Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by sneaky_margot »

Hello all, I'm currently a STEM PhD student with some investment in a previous employer's 401(k) retirement plan. I have been mulling over whether to roll my 401(k) to my existing Roth IRA at Vanguard, since my income currently is way lower than I'd expect in the future (my stipend is less than half what I was making beforehand). It doesn't seem to me that there's a clear answer, so I thought I'd ask here. The extra $30K income would put most of those funds into the next tax bracket.

Relevant info
Roth IRA (VTTSX): $13.5K, $2.8K contributed in 2021
401(k) (Fidelity retirement 2060): $30K
Gross Income: $34K/year (previously $73K/year)
Age: 27 (female)

1. Given the above, should I rollover to the Roth IRA? Or just leave my future, retired self to deal with it?
2. Does it make more sense to do this while the market is low? I know we're not about timing investments here, but since I'm thinking about doing this now, at a market low point, doesn't hurt to ask.
3. Do I have to rollover the entire portion? Being able to move only part of it every year would keep me in the lower tax bracket, but that sounds like it would be illegal to play things like that.
4. While I'm at it, I'll ask---given my age, I think my retirement is in pretty good shape, but let me know if I should pick up the pace. I kinda slacked off on contributing in my first few years of grad school, but with some new funding this year I'm trying to make up for that.

Thanks, Bogleheads! Let me know what other information you need from me.
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CAsage
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by CAsage »

Wow, you don't want to miss this opportunity! Yes, you can convert any part of it any year to a Roth, and at your age this would be good. With your gross income, and a standard deduction of about $12K, you have room in the single bracket to convert at the 12% Federal tax rate (trust me, a bargain) up to a total income of $41775. So roughly convert about $19K this year, and the rest next year. A down market is good. One might also consider filling your Roth with all stocks and your 401k with bonds. Please check the numbers carefully yourself by doing a sample tax return. 34K income + 19K conversion - 12K standard deduction is about $41k. Note that there are some legal protections afforded 401k from creditors, and you would lose the opportunity to roll that old 401K into a new employer plan, but that Roth opportunity is sweet and I would recommend it to my kids.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
OhpBuddy
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by OhpBuddy »

sneaky_margot wrote: Wed Jan 26, 2022 3:45 pm Hello all, I'm currently a STEM PhD student with some investment in a previous employer's 401(k) retirement plan. I have been mulling over whether to roll my 401(k) to my existing Roth IRA at Vanguard, since my income currently is way lower than I'd expect in the future (my stipend is less than half what I was making beforehand). It doesn't seem to me that there's a clear answer, so I thought I'd ask here. The extra $30K income would put most of those funds into the next tax bracket.

Relevant info
Roth IRA (VTTSX): $13.5K, $2.8K contributed in 2021
401(k) (Fidelity retirement 2060): $30K
Gross Income: $34K/year (previously $73K/year)
Age: 27 (female)

1. Given the above, should I rollover to the Roth IRA? Or just leave my future, retired self to deal with it?
2. Does it make more sense to do this while the market is low? I know we're not about timing investments here, but since I'm thinking about doing this now, at a market low point, doesn't hurt to ask.
3. Do I have to rollover the entire portion? Being able to move only part of it every year would keep me in the lower tax bracket, but that sounds like it would be illegal to play things like that.
4. While I'm at it, I'll ask---given my age, I think my retirement is in pretty good shape, but let me know if I should pick up the pace. I kinda slacked off on contributing in my first few years of grad school, but with some new funding this year I'm trying to make up for that.

Thanks, Bogleheads! Let me know what other information you need from me.
I'm a relatively new Boglehead, so correct me if any of these are wrong.

1) This obviously depends on your expected tax rate at retirement. I might roll-over just up to the 12% tax bracket (leaving you to roll over around 6k a year), because you will probably be paying more than 12% taxes in retirement. [EDIT: didn't read gross income here. Point still stands about the 12% tax bracket, like the above post].
2) Doesn't matter about market lows as long as your 401k is invested in stocks. You're selling stocks at a low price, then you're buying stocks at a low price, but if you do it on the same day, you should be getting the exact same amount of money.
3) As mentioned in 1, I might roll over around 6k a year. Since you have 30k, it would take you around 5 years to roll over your entire portfolio, which might be the entire length of your program depending on when you started (after which, you would be able to access your FIRST conversions, kind of as a modified Roth conversion ladder. Note that each roll-over would have a 5 year waiting period, but you weren't able to access them in the 401k anyways so this is probably better for you).
4) No idea. Depends on your expected income after your graduation from the PhD program and withdrawal rate.
Wildcat8888
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by Wildcat8888 »

Even better: the standard deduction is now $12,950 - almost $13,000. Converting at 12% might be the lowest rate you'll ever have.
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CAsage
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by CAsage »

OhpBuddy wrote: Wed Jan 26, 2022 4:51 pm
2) Doesn't matter about market lows as long as your 401k is invested in stocks. You're selling stocks at a low price, then you're buying stocks at a low price, but if you do it on the same day, you should be getting the exact same amount of money.
I will gently disagree with this one. If the stock market dips, then you can convert a larger number of shares for the same $$, and you pay taxes on the Roth conversion dollar value. An analogy is going to the market with $20, if an item is $5, you can buy 4, but if it's $4, you can buy (or convert, for the Roth) more shares! Work through an example for this one. And yes, when the stock market crashed March 2020, I converted well above my usual tax bracket because, in a sense, conversions were on sale!!! OhpBuddy is correct in that your net worth doesn't really change, but the tax hit does. Stocks go up and down in the short term, hopefully up in your long life!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
Lou354
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by Lou354 »

A couple of questions for OP:
1. Where will the money come from to pay the taxes on the conversion from traditional 401K to Roth IRA?
2. Are you planning to contribute (new money, not including the conversion) to the Roth IRA in 2022? If so, how much?
3. Does the answer to Q3 depend on whether you do a Roth conversion?

What I’m getting at is I wonder whether contributing to your Roth IRA is more or less advantageous than converting from a tax-deferred account to a Roth account. I’m not sure how to go about doing the calculation, but I think it’s worthwhile thinking about the trade off if you can’t both contribute the max to the Roth IRA and do some conversions. On the one hand the ability to do a Roth conversion at a low marginal rate is very valuable. On the other hand, new contributions that you could but don’t make to your Roth IRA in 2022 is tax-advantaged space that’s gone forever.
123
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by 123 »

sneaky_margot wrote: Wed Jan 26, 2022 3:45 pm ...3. Do I have to rollover the entire portion? Being able to move only part of it every year would keep me in the lower tax bracket, but that sounds like it would be illegal to play things like that...
Some former employers may restrict the number of disbursements from the 401k plan for former employees. If the former employer restricts it to a single disbursement you can do a direct rollover from the previous employer's 401(K) to a new traditional IRA account. You can take your time doing the Roth conversion, but I would aim to get it done while your other income is diminished. You don't have to do all the Roth conversion at once.
The closest helping hand is at the end of your own arm.
Topic Author
sneaky_margot
Posts: 4
Joined: Wed Jan 26, 2022 3:23 pm

Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by sneaky_margot »

Thanks all for the fantastic replies, you've given me a lot to think about! Mostly I've figured out (1) rolling over is definitely worth the look, and (2) I really need to sit down and parse the numbers out. I'll definitely check the number of disbursements that my employer allows (thanks for the tip, @123, and wow great username!)
On the other hand, new contributions that you could but don’t make to your Roth IRA in 2022 is tax-advantaged space that’s gone forever.
Great point on this one, @Lou354. I hadn't thought about it in that way, but you're right that I would probably be hesitant to max out my contributions given I know I'll be paying higher taxes to cover the rollover.
Topic Author
sneaky_margot
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by sneaky_margot »

CAsage wrote: Wed Jan 26, 2022 6:42 pm
OhpBuddy wrote: Wed Jan 26, 2022 4:51 pm
2) Doesn't matter about market lows as long as your 401k is invested in stocks. You're selling stocks at a low price, then you're buying stocks at a low price, but if you do it on the same day, you should be getting the exact same amount of money.
If the stock market dips, then you can convert a larger number of shares for the same $$, and you pay taxes on the Roth conversion dollar value. ...And yes, when the stock market crashed March 2020, I converted well above my usual tax bracket because, in a sense, conversions were on sale!!! OhpBuddy is correct in that your net worth doesn't really change, but the tax hit does. Stocks go up and down in the short term, hopefully up in your long life!
Oh good that's what I was hoping to hear. The math made sense in my head that this would be a good time for it, but financial math can be more tricky than just straight arithmetic :happy
stayhydrated
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by stayhydrated »

Heya sneaky_margot,

I was contemplating the same thing last year (viewtopic.php?p=5846330#p5846330)!

A few notes:
- This calculator can help you think through various conversion scenarios: https://www.schwab.com/ira/understand-i ... conversion
- I think the amount that you convert every year (if you decide to do this) should be driven by how comfortably your budget can absorb any extra taxes while maintaining flexibility to live a happy-ish life and easily deal with emergencies that pop up along the way.
- Call your 401(k) and Roth IRA custodians (several times if needed) to get an overview of how the process goes. They should be able to walk you through all forms and answer questions about every bit of unfamiliar terminology.
- Consider waiting to do the conversion until late November / early December. During the year I applied to a few fellowships and scholarships that (if I received them) would have bumped my income higher for the year -- thus reducing how much I would convert.
- Don't do the conversion in the last week of December. If there are any processing delays or errors, the conversion may not count toward the current intended year!
Drinking water can prevent dehydration, a condition that can cause unclear thinking, result in mood change, cause your body to overheat, lead to constipation, and kidney stones.
Topic Author
sneaky_margot
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Joined: Wed Jan 26, 2022 3:23 pm

Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by sneaky_margot »

stayhydrated wrote: Wed Jan 26, 2022 11:46 pm Heya sneaky_margot,

I was contemplating the same thing last year (viewtopic.php?p=5846330#p5846330)!

A few notes:
- This calculator can help you think through various conversion scenarios: https://www.schwab.com/ira/understand-i ... conversion
- I think the amount that you convert every year (if you decide to do this) should be driven by how comfortably your budget can absorb any extra taxes while maintaining flexibility to live a happy-ish life and easily deal with emergencies that pop up along the way.
- Call your 401(k) and Roth IRA custodians (several times if needed) to get an overview of how the process goes. They should be able to walk you through all forms and answer questions about every bit of unfamiliar terminology.
- Consider waiting to do the conversion until late November / early December. During the year I applied to a few fellowships and scholarships that (if I received them) would have bumped my income higher for the year -- thus reducing how much I would convert.
- Don't do the conversion in the last week of December. If there are any processing delays or errors, the conversion may not count toward the current intended year!
Hi, thanks for the great advice. I hadn't even considered waiting until the end of the year, but that definitely makes sense given the unknowns of grant awarding. And thanks for linking your post from last year, there are some great resources there!
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ruralavalon
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by ruralavalon »

sneaky_margot wrote: Wed Jan 26, 2022 3:45 pm Hello all, I'm currently a STEM PhD student with some investment in a previous employer's 401(k) retirement plan. I have been mulling over whether to roll my 401(k) to my existing Roth IRA at Vanguard, since my income currently is way lower than I'd expect in the future (my stipend is less than half what I was making beforehand). It doesn't seem to me that there's a clear answer, so I thought I'd ask here. The extra $30K income would put most of those funds into the next tax bracket.

Relevant info
Roth IRA (VTTSX): $13.5K, $2.8K contributed in 2021
401(k) (Fidelity retirement 2060): $30K
Gross Income: $34K/year (previously $73K/year)
Age: 27 (female)

1. Given the above, should I rollover to the Roth IRA? Or just leave my future, retired self to deal with it?
2. Does it make more sense to do this while the market is low? I know we're not about timing investments here, but since I'm thinking about doing this now, at a market low point, doesn't hurt to ask.
3. Do I have to rollover the entire portion? Being able to move only part of it every year would keep me in the lower tax bracket, but that sounds like it would be illegal to play things like that.
4. While I'm at it, I'll ask---given my age, I think my retirement is in pretty good shape, but let me know if I should pick up the pace. I kinda slacked off on contributing in my first few years of grad school, but with some new funding this year I'm trying to make up for that.

Thanks, Bogleheads! Let me know what other information you need from me.
Roth conversions look like a good idea in my opinion. This does not depend on whether the market is up or down, it is because of the lower level of earnings. You do not need to do it all at once. You can do a series Roth conversions, each year your income is lower.

Wiki article, Roth IRA conversion.

Yes, reestablish a high rate of contributions. Establishing a higher rate of contributions is the most important investing decision you can make, forum discussion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Navillus1968
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Re: Current graduate student: low income = smart time to roll over previous employer's 401(k)?

Post by Navillus1968 »

sneaky_margot wrote: Wed Jan 26, 2022 3:45 pm Hello all, I'm currently a STEM PhD student with some investment in a previous employer's 401(k) retirement plan. I have been mulling over whether to roll my 401(k) to my existing Roth IRA at Vanguard, since my income currently is way lower than I'd expect in the future (my stipend is less than half what I was making beforehand). It doesn't seem to me that there's a clear answer, so I thought I'd ask here. The extra $30K income would put most of those funds into the next tax bracket.

Relevant info
Roth IRA (VTTSX): $13.5K, $2.8K contributed in 2021
401(k) (Fidelity retirement 2060): $30K
Gross Income: $34K/year (previously $73K/year)
Age: 27 (female)

1. Given the above, should I rollover to the Roth IRA? Or just leave my future, retired self to deal with it?
I apologize, but my pedantic/OCD side forces me to say that what you are contemplating is a CONVERSION, not a rollover. Rollovers are not taxable events, conversions are potentially taxable. For example, moving your 401k to a Trad IRA would be a rollover (non-taxable), since they are both tax-deferred accounts. Roth is after-tax/tax-free, so you need to pay taxes to execute a conversion of pre-tax 401k money to a Roth.

OK, rant over.
Yes, you should convert.
2. Does it make more sense to do this while the market is low? I know we're not about timing investments here, but since I'm thinking about doing this now, at a market low point, doesn't hurt to ask.
As others have pointed out, you save in taxes by converting when the shares are down in value.
3. Do I have to rollover the entire portion? Being able to move only part of it every year would keep me in the lower tax bracket, but that sounds like it would be illegal to play things like that.
Partial conversions are 100% kosher & legal. It makes total sense to convert to the top of your 12% marginal tax rate each year, but not go over.
Single 12% bracket tops out at $41,775 for 2022. Your $34,000 stipend minus the Single standard deduction of $12,950= $21,050 taxable income.
$41,775 minus $21,050 taxable income = $20,725 room for partial Roth conversion.
Do you have money set aside to pay the extra taxes the Roth conversion will incur? Each $10,000 that you convert costs you $1,200 in extra taxes (not counting state income tax- what state tax rate do you pay?).
Paying taxes with money from the 401k opens a giant can of worms because you'd be making an early withdrawal once the 401k money is in your bank account for >60 days- that means a 10% penalty plus the taxes you would normally owe.
You *really* need to pay the taxes from your checking account, not from the 401k.
Depending on funds available & how long you expect to be in the 12% marginal rate, I'd would convert a sum each year that is both affordable but also large enough to exhaust the 401k by 31 DEC of the year prior to graduation year, when your new salary will vault you out of the 12% rate like a grasshopper on steroids.
4. While I'm at it, I'll ask---given my age, I think my retirement is in pretty good shape, but let me know if I should pick up the pace. I kinda slacked off on contributing in my first few years of grad school, but with some new funding this year I'm trying to make up for that.
According to this calculator, with $44k saved, you're in the 80th percentile for age 25-29 cohort. https://dqydj.com/net-worth-by-age-calc ... ed-states/ Not bad, but consider that a ton of young people have ZERO savings, so it's a low bar.

I wouldn't sweat it too much, save what you can right now & commit to saving 15-20-25% once you get a high-priced job with your shiny new STEM PhD down the road.
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