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Bottom line, I have two ROTH IRAs. I'm 25yo and married. I started my first ROTH IRA in college before I started working full time. When I was 22, my employer opened and began matching up to 5% of my salary in a new ROTH IRA, but they did not allow me to roll my old ROTH IRA into the new one. Since starting employment, I have only deposited into the matching account. Currently I have around $8500 in my old, non-matching ROTH and about $20,000 in the matching ROTH. My taxable income is $60,000 and I don't live in a state with income taxes. I think I have a few options, but I need help deciding what benefits the most.

1. Take the tax penalty of 10% and increased income taxes on the old ROTH and reinvest in individual stocks (currently have about $22k in individual stocks). The way that I understand it, I will automatically pay $850, then the remaining $7650 would be added to my income and taxed (at 12%, so another $900 or so). This option makes more sense to me because I will have the opportunity to see more growth in individual stocks than in mutual funds.

2. Leave the money in my non-matching ROTH until I leave my current employer (4 years from now), where I I can rollover my matching ROTH into my non-matching ROTH. My non-matching ROTH won't grow that much, but I also won't take the hit for early withdrawals.

3. Or what else would you do?? I lean towards option 1 because I don't mind taking risks this early in my life.

Thanks!
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It is common for companies to offer 401K plans and Roth 401k for their employees and those plans can have strict rules.

It is rather uncommon to have company Roth IRA plans. If they are Roths, you should be able to transfer the balance tax free to the custodian of your choice. That custodian can be a discount broker allowing you to invest in stocks, bonds, etfs, or mutual funds of your choice.
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1. Take the tax penalty of 10% and increased income taxes on the old ROTH and reinvest in individual stocks (currently have about $22k in individual stocks). The way that I understand it, I will automatically pay $850, then the remaining $7650 would be added to my income and taxed (at 12%, so another $900 or so). This option makes more sense to me because I will have the opportunity to see more growth in individual stocks than in mutual funds.

Even if you would be moving this money into a Roth IRA, this would still be throwing money away. I wouldn't dream of taking an early distribution unless it was the very last option. BTW, it's not 22% that would be withheld, it would be 30% automatically (with a potential refund upon filing taxes).

Leave the money in my non-matching ROTH until I leave my current employer (4 years from now), where I I can rollover my matching ROTH into my non-matching ROTH. My non-matching ROTH won't grow that much, but I also won't take the hit for early withdrawals.

Four years from now you may not want to leave your current employer, or you might find yourself separated earlier than that. It's hard (and often fruitless) to predict the future. If and when you do separate from your employer, rolling over both your Traditional and Roth 401k savings to equivalent Traditional and Roth IRAs is what I did throughout my career.

3. Or what else would you do?? I lean towards option 1 because I don't mind taking risks this early in my life.

There is a fine line between reasonable and unreasonable risks, and my feeling is that Option #1 is an unnecessary risk.

You are young with many years ahead of you. I would encourage you to open a Roth IRA and make additional contributions, up to $6000 each for you and your spouse, which you could then invest as you wish. You can make your 2019 contribution up to April 15th, 2020 (tax day), and your 2020 contribution any time before the 2020 tax day in 2021.

And keep contributing enough to your Roth 401k to earn the full company matching contribution to your Traditional 401k.

Fuskie
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When I was 22, my employer opened and began matching up to 5% of my salary in a new ROTH IRA, but they did not allow me to roll my old ROTH IRA into the new one.

Are you sure it's a Roth IRA, and not a Roth 401(k)? The only type of IRA that an employer can offer is a SIMPLE IRA, and that is not allowed to be a Roth IRA. On the other hand, employers are allowed to offer 401(k)s that allow Roth accounts. So if your employer offers a retirement plan with a Roth option, it's likely to be a 401(k). Please note: All of the matching contributions by the employer are pre-tax contributions, so you will be paying taxes on any withdrawals of those matching contributions.

Since starting employment, I have only deposited into the matching account. Currently I have around $8500 in my old, non-matching ROTH and about $20,000 in the matching ROTH. My taxable income is $60,000 and I don't live in a state with income taxes. I think I have a few options, but I need help deciding what benefits the most.

Congratulations on putting yourself on a good path at such a young age!

That said - you need to be more clear when you are referring to the types of accounts that you have. Your "old non-matching Roth" is apparently a Roth IRA, although that's not totally clear. As discussed above, your "new matching Roth" is probably a 401(k) with both Roth and Traditional accounts - the Roth account for your contributions and any growth of those contributions, and the Traditional for your employer's matching contributions, plus any growth on those. The reason you need to be clear about what types of accounts they are is that there are different rules for each type of account, what you are proposing could have different impacts, or different options, depending on what type of account it really is. And some things that are allowable for one type of account can actually result in penalties in the other type of account.

1. Take the tax penalty of 10% and increased income taxes on the old ROTH and reinvest in individual stocks (currently have about $22k in individual stocks). The way that I understand it, I will automatically pay $850, then the remaining $7650 would be added to my income and taxed (at 12%, so another $900 or so). This option makes more sense to me because I will have the opportunity to see more growth in individual stocks than in mutual funds.

Presuming that this account really is a Roth IRA, why aren't you just buying individual stocks in the IRA? Individual stocks are allowable holdings for IRAs.

If the problem is that your IRA custodian only offers mutual funds, I would suggest moving the IRA to a different custodian that offers commission-free stock trades, like Fidelity, Schwab, Merrill Edge or TD Ameritrade, as examples. (Vanguard, while it has some great mutual funds and ETFs, hasn't jumped on the 'no commission' bandwagon. Since you can generally buy Vanguard ETFs commission free at other brokerages, you can still get Vanguard products without having a Vanguard account.)

If the issue is that it's not really a Roth IRA (maybe because it's actually your prior employer's plan) then I would suggest actually rolling the account over into a Roth IRA. You should look for a commission free broker, and you may even be able to find one that will give you a bonus for opening an account.

If the issue that is preventing you from buying individual stocks is something else, please explain what the issue is.

Additionally, you should be aware that you can always take out your original contributions to a Roth IRA without paying any taxes or penalties. (Please note: Because of this option, some people choose to use part of their Roth IRA as their emergency fund.) You are only charged taxes and penalties when you prematurely withdraw earnings from a Roth, and don't meet an exception. You can get more information on the exceptions from IRS Pub 590-B https://www.irs.gov/pub/irs-pdf/p560.pdf

2. Leave the money in my non-matching ROTH until I leave my current employer (4 years from now), where I I can rollover my matching ROTH into my non-matching ROTH. My non-matching ROTH won't grow that much, but I also won't take the hit for early withdrawals.

It's perfectly reasonable to roll money from a prior employer's retirement plan into an IRA. But, as previously mentioned, the employer's matching contributions, and earnings/growth on those matches, are pre-tax (Traditional) funds. So if you roll that money into your Roth IRA, you will have to pay taxes at your marginal rate on that money. If you don't want to pay that tax, then you will need to roll those funds into a Traditional IRA, not a Roth IRA.

AJ
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Take the tax penalty of 10% and increased income taxes on the old ROTH and reinvest in individual stocks

aj has already pointed out that you've wrongly some terms that mean specific things, so I'll skip that.

However, does your 401k have any stock funds that you can invest in? Although I much prefer (low cost) funds to individual stocks, there is a strategy called "core and explore," which involves putting most of your stock money into a US index fund (like SP500 or total US market), and adding satellite investments like international fund or individual stocks. If your 401k has a US large cap index fund or total market index fund, that makes a much better investment than paying taxes now (vs. *never* in a Roth) plus 10% penalty. Also, any gains and dividends in your new outside account would incur taxes, whereas the Roth money is tax free.

Other advantages to a Roth:
-No RMD for original owner (or spouse who inherits it)
-Does not create taxable income that drives social security from untaxed to 85% taxed
These are a couple reasons why you see people converting IRAs to Roths in their 60s.


This option makes more sense to me because I will have the opportunity to see more growth in individual stocks than in mutual funds.

When someone makes this claim, I ask: What advantages do you have over people who invest professionally with enormous research resources and organizations? I can think of some that might be the case, but owning individual stocks means some will be above some index you're using as a benchmark and others will be below. It's easy to let the few outperormers stick out in your mind and forget that overall you're underperforming.
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You should not have to pay any tax on a Roth contribution, since you already paid taxes on that money. If you withdraw prior to 59 1/2, you must have held the Roth for 5 years, or you will pay tax on the earnings. Their are exceptions for college expenses and first time home buying, I believe. Taking a distribution and paying a 10% penalty means you'll have to do at least 11% on your stock investment just to get back to even. Look at rolling over your money into a Roth at a brokerage account (TD Ameritrade, Schwab, etc.). Then you can invest it in stocks and not pay an early withdrawal penalty.
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You should not have to pay any tax on a Roth contribution, since you already paid taxes on that money.

Yes, that's correct. The amount that you contributed can be withdrawn without paying taxes or penalties. If you have done conversions, you can withdraw the amount that was converted without paying taxes or penalties after 5 years. See IRS Pub 590-B for ordering rules on contributions and conversions https://www.irs.gov/pub/irs-pdf/p590b.pdf

If you withdraw prior to 59 1/2, you must have held the Roth for 5 years, or you will pay tax on the earnings. Their are exceptions for college expenses and first time home buying, I believe.

Sorry, that's not right. Even if you have had a Roth IRA for at least 5 years, you will pay taxes AND a 10% penalty when withdrawing earnings unless you are over 59 1/2, disabled, it's your beneficiary withdrawing the money after your death, or you meet another exception. See IRS Pub 590-B for exceptions.

Taking a distribution and paying a 10% penalty means you'll have to do at least 11% on your stock investment just to get back to even.

It's not quite that simple. Contributions would be withdrawn tax and penalty free, but earnings would have both taxes and a 10% penalty imposed. So the amount of gain required to 'break even' would depend both on marginal tax rate and how much of the account was earnings vs. contributions. That said, since you can buy individual stocks within a Roth IRA, it makes no sense to take a distribution just to be able to buy individual stocks. Thus Look at rolling over your money into a Roth at a brokerage account (TD Ameritrade, Schwab, etc.). Then you can invest it in stocks and not pay an early withdrawal penalty. is the correct answer.

AJ
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Vanguard, while it has some great mutual funds and ETFs, hasn't jumped on the 'no commission' bandwagon.

Sorry, I was apparently going on old information. As of 1/2/20, Vanguard has jumped on the 'no commission' bandwagon, as long as you make the trade online. Trades done over the phone will still result in commissions, unless you are a Flagship customer (basically more than $1MM in Vanguard products in your account).
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