I'll turn 30 in a little over a month (single, no dependents), plan to start grad school (in journalism) this June for about a year, and know I'll need to roll over my 401(k) (a fed. govt. TSP) which has about 50K in it. Any advice on what kind of IRA I should roll it over into? Also I'm wondering whether I should convert it into a Roth. Any conversion fees would need to come out of the 401(k) amount because I want to preserve the emergency fund I have. Don't know if it would be better to keep the 50 K un-Rothed for the year, and then start a new separate Roth account later (wish I'd done that earlier), and then have the 50 K roll back into an employer's 401(k) (is that how it works?) at some point. Any advice on any of this would be GREATLY appreciated!!! Thanks!Pach25
>> I'll turn 30 in a little over a month (single, no dependents), plan to start grad school (in journalism) this June for about a year, and know I'll need to roll over my 401(k) (a fed. govt. TSP) which has about 50K in it. Any advice on what kind of IRA I should roll it over into? <<Do you *have* to roll it over? Most 401K plans can't force a rollover if you have at least $5,000 in the account. I don't know about TSP, though. If their rules are similar, you wouldn't HAVE to roll over $50,000...and given that you have a choice of several good index funds for diversification with very low fees, I wouldn't move it if I didn't have to. >> Also I'm wondering whether I should convert it into a Roth. <<In general, that's not a bad strategy *if* your income is low enough that the conversion amount would be taxed at a low bracket (15% or less) AND you have the money available to pay the taxes. That's a situation more common for early retirees with a lot of savings than for younger folks still getting established.In any event, you can't directly roll the 401K into a Roth. You have to roll it into a conventional IRA, then recharacterize it.>> Any conversion fees would need to come out of the 401(k) amount because I want to preserve the emergency fund I have. <<In order to do that, you'd have to pay taxes and penalties on the amount you withdraw to pay taxes. If you had the cash available to do it, it's not a bad strategy while in a low bracket. In fact, it's a good strategy for early retirees in low tax brackets who don't want to be faced with large RMDs kicking them into high brackets in the future.But in your case, no, it's not compelling enough that it's worth paying penalties to do.>> Don't know if it would be better to keep the 50 K un-Rothed for the year, and then start a new separate Roth account later (wish I'd done that earlier), and then have the 50 K roll back into an employer's 401(k) (is that how it works?) at some point. <<Probably so. Though you have several options with the 401K -- you can leave it in TSP and you can roll it over into an IRA, OR you can later roll it into another 401K if that plan permits it. Personally, given the very low fees in a TSP, I'd be inclined to leave it there (if I could) with something like 50% in C and 25% in both I and S funds. (If you're a little more conservative you could put 20-25% in the F fund, but at your age I'd let it all ride in equities. You won't find many index funds with lower expenses.#29
Read the specific rules in detail. As I read them you can leave funds in the TSP until 70 1/2 then you have to choose to roll them into an IRA or take distributions. This may only apply at retirement time but I believe you can leave them in. Since the TSP is a decent system you may want to leave your money in it.
You can only roll the 401k over into a traditional IRA. You can then convert all or part of that money into a Roth. I would strongly recommend that you pay the taxes on the converted amount out of pocket, and not out of the funds in the account. If you can't afford to convert all of it from traditional to Roth, then figure out how much you can afford to pay taxes on now and convert just that amount this year. Next year (or whenever) you can convert more. Or if you can't afford to pay any taxes on it right now, then just leave it in the traditional IRA until you can afford it. Just my .02.
I don't see any particular urgency to convert to a Roth. Roth IRAs are great, but let's face it, no one knows what the tax situation will in 30-35 years so maintaining investments in both pre-tax and post-tax investment accounts is probably the wisest move. Since you're just turning 30 you can contribute to a Roth later in life to balance the 50K you may leave in either the 401K or in a Rollover IRA.
Thanks to all of you for your great advice! I guess I'd read somewhere that you need to roll over your 401(k) when you leave a job, but maybe that was only if you have a new employer with a new 401(k) that matches, does that sound right? I think I'll probably keep it in the TSP, at least until I graduate. I do have about 50% in the C fund, 27% in the S, and nearly 6% in the I, and 9% each in the F & G funds. I might shift it around a little if I get a chance before I leave, but I'm not sure whether I'll have that option. Thanks so much!Pach25
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