I have a 401k in an employer sponsored plan hosted at Vanguard. I am no longer employed at this company nor have been for a while now. Recently, I began doing some homework on how my money is invested within this plan and found that the 2 funds in which I'm invested: [VTIVX: Balanced asset target retirement | 1Yr = 15.52% 5Yr = 9.09% | Expense Ratio = 0.18%][VWIGX: International Growth Fund | 1Yr = 22.39% 5Yr = 8.34% | Expense Ratio = 0.48%] are not performing as well as other funds in the Vanguard line up with expense ratios similar to VWIGX.Unfortunately, the funds I'm interested in are not offered through my old employer's plan, leaving me with a few choices. Here are my choices:Do I:Do nothing... Nah...Roth ConversionPay taxes now on money going into Roth which is then tax free when withdrawn.Tax rate now is probably lower than later in lifeCan then invest in any Vanguard fundIRA ConversionPay no taxes now when funds are transferredPay tax upon withdraw, likely at a higher rateCan invest in any Vanguard fundVanguard Brokerage Option / Keep in 401k $40/year maintenance feeCan invest in any Vanguard fund w/ no transaction feeCan invest in any stock for a $7 commissionContributions treated as if in a 401kI currently have a brokerage account at Scottrade at the same commissionI'm leaning toward the Roth conversion, but wanted to see what you all think. As always, thanks for the knowledge. -K
Roth vs. tax deferred imho comes down to a simple question. What tax rate are you in now and what tax rate will you be in retirement? Of course, you don't know the answer to the second part of that question, but you should guess based upon your circumstances. If you are in the 25/28% tax bracket now and think you will be in the 15% tax bracket in retirement then you should definitely keep it in a tax deferred account. You also need to know that if you convert you need to come up with the cash to pay the taxes. If the amount in the 401(k) is large this can be pretty significant amount. For example, if you have $100,000 and you convert it to Roth, you are probably going to need to come up with $28,000 or more to pay the taxes. Whether you leave it at Vanguard or roll it over to ScottTrade is up to you. I like Vanguard a lot, but it comes down to expenses and what you are going to do with the money. To trade Vanguard at ScottTrade may cost you a transaction fee, but I don't know.
You also need to know that if you convert you need to come up with the cash to pay the taxes. If the amount in the 401(k) is large this can be pretty significant amount. For example, if you have $100,000 and you convert it to Roth, you are probably going to need to come up with $28,000 or more to pay the taxes. Thanks for the reply. When I was spoke to a rep at Vanguard (with whom I'd like to keep this money, I have no desire to move it out of Vanguard. I was pointing out Scottrade to show that I already have a brokerage account so that is not a benefit for me), he mentioned that I would not have to actually shell out the cash now since I'm not selling any holdings, I'm merely transferring them. Though, what you're saying makes more sense to me. I'll have to put in another call. -K
That is my point. You are not liquidating any of your 401(k), but you need to come up with the cash from other means to pay the taxes if you convert from tax deferred to Roth.
Ah yes... I either misheard the rep or interpreted it as there being no early disbursement fee rather than not having to pay tax. Many thanks for pointing that out.-K
The decision factor for me would be whether you are currently employed and earning any significant income. If not, if you will be in a low tax bracket and the value of the 401k will not push you into a high tax bracket, then it could be cost effective to do a Roth conversion now. But more likely I would roll over to a Traditional IRA and then self-manage. I wouldn't pay Vanguard $40 a year to self-manage a portfolio even with $7 trades. FuskieWho has a current Traditional and Roth 401k, a Traditional IRA Rollover, a Roth IRA, a SEP IRA, a Traditional IRA and a Retail account...
"FuskieWho has a current Traditional and Roth 401k, a Traditional IRA Rollover, a Roth IRA, a SEP IRA, a Traditional IRA and a Retail account..."me too!!! and a couple IRA's for my wife and a couple educational IRA's for my kids and... way too many friggin accounts, lol...
way too many friggin accountsOr way too many friggin wives and kids. :-)FuskieWho somehow manages to keep track of them all...
Jesus Fuskie... Though the need to manage all of those accounts does appeal to my more obsessive side. Self-manage is my course of choice and is what spawned all this in the first place. My VTIVX Target Retirement fund automatically adjusts asset allocation as you age, but being an active participant in my own finances, I can do that myself without sacrificing the lower yield that this fund has returned compared to others. I am self employed now, am on the cusp of the next tax bracket and this disbursement would put me into that next bracket. That being said, I'd like to think that come 62, I'll be in a higher bracket still. Why the choice of the traditional over the Roth?
The Traditional IRA was an extension of my Rollover TIRA. Originally, I rolled my Turner/Time Warner 401k to a Rollover IRA at Fidelity, then years later transferred a portion to ScottTrade for lower cost trade fees. I opened the Roth IRA and SEP IRA at Scottrade to be able to make original contributions during my contracting years. And the Roth and Traditional 401ks reflect my current employment options.FuskieWho notes the retail account is my original investment account and holds what's left of my former ESPP position in Time Warner, as well as my Pixar-turned-Disney position...
If you think you will be in a higher tax bracket in retirement, here is what I recommend, although I am a planner and kind of obsessive about paying taxes... Move the money to a traditional IRA. In December of each year, figure out what your AGI is going to be and convert assets from your traditional IRA to a Roth IRA. The amount should be just enough to not get you into the next tax bracket. For me, I am willing to pay 25% to uncle sam, but don't want to pay more. According to my own forecasts I will struggle to stay in this tax bracket when I reach 70 1/2 because of the required minimum distribution (RMD) rules. (I am in the 401(k)/retirement planning business and started saving right out of college...) So each year, I figure out what conversion I can do from tax deferred to Roth and not bump into the next bracket. The other benefit of a Roth is having "tax flexibility" in retirement. If you need $100,000/year to live on you can take some of it from a tax deferred account, some from a Roth and some from your after tax account. You can legally manipulate which tax bracket you are in each year (except for the damn RMD rules...) This could be really nice so that perhaps in certain years you don't have to pay taxes on Social Security etc... Just my 2 cents...
Rock on, Coachtom4...May I have a few more of your cents, please? -K
Follow his advice and you'll have plenty of cents.FuskieWho notes bad advice is a dime a dozen...
If you move it to Vanguard Brokerage Service (VBS), why keep it as a 401k as opposed to rolling it over (R/O) to an Traditional IRA? I believe if you elect electronic delivery of documents any maintenance fee is waived for an IRA (and maybe a their 401k - ask!) and cite link: https://investor.vanguard.com/mutual-funds/fees. At least that has been the case for myself and others I know who rolled 401k's to VG's VBS. The only fees I pay are stock commission trades (rarely).In addition to any Vanguard fund w/ no transaction fee, the same is true for their ETF's. Which most of their mutual funds have a corresponding, identical ETF. I am partial to ETF's for their ability to be traded during the day w/limit orders as opposed to getting a MF on the NAV for the day. ETF's are more tax advantaged than MF's (no yearly capital gains distributions), but given the account would be tax deferred or tax free, not an ETF "selling" point in this instance.So your steps would be to: 1. Transfer the 401k to a Rollover IRA2. Liquidate the existing funds (will go to a money market fund first - probably VMMXX - basically a sweep account for buys & sells.3. Have them establish an IRA Brokerage sub-account.4. Purchase Vanguard ETF's fee free, or stocks/ETF's of your choice @ $7 commission same as ST.Note this does not preclude you from buying VG MF's in your R/O IRA. It's just maintained separately from the brokerage IRA account. My 401k R/O IRA is setup this way with them. Easey-peasy.
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