Conversion of 401K

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Topic Author
Newbienew
Posts: 16
Joined: Thu Sep 16, 2021 4:54 pm

Conversion of 401K

Post by Newbienew »

Dear members,
I am 34 and I had to take a break from work in February 2021. My old employer 401k account(Vanguard) is amounting to 50k. I recently joined back work and my new employer is providing 401k account with Fidelity. What would be the best course of action?
1. Transfer my old 401k money to new one?
2. Convert to traditional IRA?
3. Convert to Roth IRA?

I can see it comes under 22% tax bracket if I convert to ROTH. As of now I left the money in Vanguard funds itself and it is growing there but not sure if it's the best option.

Please tell me which option is better and why?
Also kindly guide me to any useful links I can look at to gain more knowledge in this. I am very new to personal finance and any help would be greatly appreciated. Thank you.
exodusNH
Posts: 10346
Joined: Wed Jan 06, 2021 7:21 pm

Re: Conversion of 401K

Post by exodusNH »

Newbienew wrote: Thu Sep 16, 2021 5:08 pm Dear members,
I am 34 and I had to take a break from work in February 2021. My old employer 401k account(Vanguard) is amounting to 50k. I recently joined back work and my new employer is providing 401k account with Fidelity. What would be the best course of action?
1. Transfer my old 401k money to new one?
2. Convert to traditional IRA?
3. Convert to Roth IRA?

I can see it comes under 22% tax bracket if I convert to ROTH. As of now I left the money in Vanguard funds itself and it is growing there but not sure if it's the best option.

Please tell me which option is better and why?
Also kindly guide me to any useful links I can look at to gain more knowledge in this. I am very new to personal finance and any help would be greatly appreciated. Thank you.
It depends on what the 401k fees are. There are usually quarterly/yearly fees. Look into that and the choice will probably be pretty clear. If they're close, I'd roll it into your new 401k just to make life simple.

I wouldn't roll it into a traditional IRA since that complicates the backdoor Roth process.

I'm not sure about converting the $50K to an Roth IRA. I'm not familiar with that process, but it will add $50K to your adjusted gross income. Depending on where you are in your current bracket, that could bump part of that into 24%.
Topic Author
Newbienew
Posts: 16
Joined: Thu Sep 16, 2021 4:54 pm

401K Contribution

Post by Newbienew »

[Thread merged into here --admin LadyGeek]

Hi,

1. I recently joined a new job. With my old employer I used to contribute 5% and the employer contribution was 7%(which I feel is very good) to my regular 401K. Coming to current scenario, new employer 401k contribution is only 1% no matter how much the employee contributes but the employee can contribute up to $19,500 if he/she wishes to. I am currently contributing 5%.
Is it a good idea to contribute 10% from my side so that I can match to what I used to get into my 401K account with my previous job?

2. My tax filing status is MFJ. Other than our 401Ks we started Roth IRA accounts for both of us this year only.
What are some of the best stocks/funds to buy in Roth accounts? Basically this is for our retirement.

3.Also we are buying some of the tech stocks in M1 account by depositing weekly $250 (Taxable account) so that we can get average price and also able to buy fractional shares.
Is M1 good idea? Is there any other better option?

Thank you in advance.
Last edited by Newbienew on Wed Sep 22, 2021 10:44 am, edited 1 time in total.
hotscot
Posts: 430
Joined: Wed Feb 01, 2012 10:05 am

Re: 401K Contribution

Post by hotscot »

1. How much money are you actually putting into your 401K? Your max is $19,500 I assume?
That's how much to put in and just take what you can get from employer.

2. Then max your Roth, you and wife, probably $6500 each?

3. Investments? We only buy low expense Vanguard mutual funds at the moment. Admiral shares. Everyone is different.

4. M1?
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: 401K Contribution

Post by FiveK »

1. Yes. See Prioritizing investments - Bogleheads for more details. If you make less than $195,000 it is too bad the employer limits you to less than the IRS maximum contribution.

2. See Tax-efficient fund placement - Bogleheads. In short, a total US market fund would probably be one good choice.

3. Index funds and/or ETFs purchased through Fidelity, Schwab, or Vanguard are the common suggestions. E.g., see Three-fund portfolio - Bogleheads.
tashnewbie
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Re: 401K Contribution

Post by tashnewbie »

1. FYI, the annual employee deferral limit to retirement plans (401k/403b) is $19,500 (+$6,500 catchup if you're over 50). It's not clear if you changed jobs during 2021, or if you've only been employed by 1 employer this year.

I would contribute as much as I could afford up to the $19.5k limit (taking into account the amount you contributed to first employer's plan, if done in 2021).

2. Definitely check out the Prioritizing Investments wiki link provided by @FiveK. You didn't state what your tax brackets are and how much (in dollars) you can afford to invest each year.

I would contribute enough into the current employer's 401k to get the full match, then max Roth IRAs for you and your spouse ($6k/year if <50; $7k if >50). If you have more you can afford to invest after that, then I'd go back to the 401k.

I would invest in stuff like a Total US Stock Market index fund (VTSAX if at Vanguard or VTI if somewhere else, for example).

3. I would stop all taxable investing until after you're maxing 401k and both Roth IRAs, plus your spouse's workplace retirement plan, if one is available.
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mrpotatoheadsays
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Re: 401K Contribution

Post by mrpotatoheadsays »

I guess each 401k is different, but I put in 35%. I don't see how your employer can limit you to 10%.

When I hit the limit, then my contributions were after-tax. When I rolled that 401k to an IRA, those after-tax contributions rolled over to a Roth while the pre-tax rolled over to a Traditional.

Investing in individual stocks is for suckers. A HUGE majority will under-perform the factor.
exodusNH
Posts: 10346
Joined: Wed Jan 06, 2021 7:21 pm

Re: 401K Contribution

Post by exodusNH »

mrpotatoheadsays wrote: Wed Sep 22, 2021 10:10 am I guess each 401k is different, but I put in 35%. I don't see how your employer can limit you to 10%.

When I hit the limit, then my contributions were after-tax. When I rolled that 401k to an IRA, those after-tax contributions rolled over to a Roth while the pre-tax rolled over to a Traditional.

Investing in individual stocks is for suckers. A HUGE majority will under-perform the factor.
401k plans can be more restrictive than the IRS allows. They may do so to make compliance testing easier or just it was written under different rules and not updated.
Topic Author
Newbienew
Posts: 16
Joined: Thu Sep 16, 2021 4:54 pm

Re: 401K Contribution

Post by Newbienew »

Sorry for all the confusion. Yes, I can contribute up to $19,500. I updated my original post accordingly.

Thank you everyone for your valuable responses.
@tashnewbie. I did read through the link provided by @FiveK. It says we need to max out on 401Ks before any taxable brokerage accounts. I believe its because of the tax deferral advantage with 401K. But we can withdraw the amount from taxable brokerage account anytime we want to but we cant do that from 401Ks without penalties. Please let me know if I am missing any other advantage or disadvantage here.

We come under 22% tax bracket.

@hotscot- M1 is taxable brokerage account but it allows us to buy fractional shares and periodical contributions to our selected stocks purchase.

Thank you
Topic Author
Newbienew
Posts: 16
Joined: Thu Sep 16, 2021 4:54 pm

Re: Conversion of 401K

Post by Newbienew »

Thank you for your response.

I read somewhere converting to traditionalIRA would give me more options to choose from to invest in, is that correct?

If at all I choose the option to convert it to RothIRA, should I convert all of it at once or can I do that periodically so that I don't have to pay higher taxes? FYI: I am already contributing to my RothIRA separately from this year and planning to do so in future but can I convert 401K to RothIRA in addition to my regular annual contribution limit of 6000$.
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: 401K Contribution

Post by FiveK »

Newbienew wrote: Wed Sep 22, 2021 11:53 am ...the tax deferral advantage with 401K. But we can withdraw the amount from taxable brokerage account anytime we want to but we cant do that from 401Ks without penalties.
Implicit (perhaps it should be explicit...) in the "Prioritizing investments" wiki is the idea that one is "investing" instead of "saving" - with "investing" implying a long (e.g., >10) time before withdrawals will occur and "saving" implying a temporary accumulation of funds, e.g., for an upcoming house down payment, etc.
MrJedi
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Re: Conversion of 401K

Post by MrJedi »

Since you took a long break off work this year, there might be a decent opportunity to do some Roth conversion since your income will be less for this year.

A lot more information is needed to make recommendation on traditional vs Roth or Roth conversion. For your old 401k, I would first suggest look into fees and investment options for both the old 401k and new 401k. IMO the order of preference with everything being equal is: roll into current/active 401k, leave in old 401k, roll into IRA. The thing that will change this order is investment options and fees. IRA is the least desirable IMO since it can complicate other tax strategies (backdoor Roth) and also has less creditor protection than 401k in some states. What can influence this decision is if 401k has poor investments or excessive fees.
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LadyGeek
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Re: Conversion of 401K

Post by LadyGeek »

Newbienew, Welcome! In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your second thread back into the original thread. Although you are asking different questions, they are all about your portfolio. Also, you are asking how to invest your money.

The combined thread is now in the Personal Investments forum (portfolio help).

May I suggest you post your portfolio information in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

If you have any questions, ask them here.
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