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Small 401k advice

KentState

KentState

Diamond Member
I was looking over my 401k from my now previous employer. They could never get the contribution part right so it has been stuck at 1% for the past 4 months. Anyways, there is a pathetic amount in there since I've only been on the plan a total of 8 months. Is it really worth rolling over a couple thousand? Would rather put it towards a new work laptop which would be a write-off.

Already have money for hookers and blow in savings so that's not an option.
 
Yes it is worth it to roll it over. Use your savings for the new laptop instead.
 
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Look up compound interest and tell me if that laptop will be worth a couple grand when you retire in 30+ years.
 
Even if it went toward a tax-deductible item, you'd still surrender a 10% IRS penalty for early withdrawal. The downside of rolling it over is you'll (a) have to make sure you find an IRA that won't penalize you for having a small account, and (b) have more crap to keep up with. Early in my career I changed jobs a few times and rolled my 401Ks into separate IRAs, now I have like a half dozen accounts which kinda sucks.
 
KentState said:
I have a Rollover IRA with Vanguard that I could put it into. Wasn't aware of penalties for small rollovers however.
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If you are referring to the 10% thats the penalty for not keeping it in a retirement account - not for being a small rollover. Keep in mind you will also need to pay income taxes on this as well if you do not move it to a retirement account as it will then be considered income. If you move to an IRA there is no penalty or taxes. If you move to a Roth IRA you will need to pay taxes (as Roth IRA funds are contributed post tax but grow tax free) but still no penalty.
 
stlc8tr said:
Well, to be fair, from what I've read, there are 401K plans that prohibit a Traditional 401K to Roth IRA rollover.

http://www.goodfinancialcents.com/can-you-roth-ira-rollover-rules-from-401k/

"The state retirement plan is not the only one that I’ve encountered with this. Many 401k’s and 403b’s have had the same “No-Roth IRA Rollover” option. This option is supposed to be mandatory in 2010, but some still do it on a voluntary basis."
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I would imagine you could put it in a traditional then roll the traditional over to roth?
 
josh0099 said:
I would imagine you could put it in a traditional then roll the traditional over to roth?
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Yes. For a normal (non-Roth) 401k, you need to roll over to a trad IRA first. Then you can do a Roth conversion if you want to.

I might skip the Roth part, but in OP's shoes I'd definitely roll the money over to a trad IRA. The only reason I can think of not to do it is if it's so small that the admin fees would eat away at it.

Even then, I'd probably try to top it off with a tax-deductible contribution (since it's trad) to get it high enough to avoid the fees.

You can roll over multiple 410ks into the same rollover IRA as the years go by, making a retirement Voltron.
 
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Take your old employer's 401k and roll it over into a Traditional IRA.

Step 2. You convert it from a Traditional to a Roth IRA. You pay the taxes up front and the money and compounding you get is tax free when you take it out when you're old.

Paying taxes now is recommended by all wealth advisors since taxes will almost certainly be higher 20 years from now than today. Pay the cheaper tax today and profit.

The other advantage of rolling it over is that you'll be able to invest that money in much better products than what's available in your 401k list.

Once rolled over, you can put it into a cheap passively managed ETF S&P 500 Index fund like VOO with .05% management fee. Set it and forget it. BTW, don't touch mutual funds as they're less tax efficient than ETFs and have much higher expense ratios which'll cost you in the long run. Plus you can't trade a mutual fund until the trading day is finished....if the markets tank, you can get into your trading account and sell the ETF immediately, saving you from further down-slope losses.

For rollovers, you can get bonus $$$ for opening a new account. Etrade and Ameritrade has advisors that will hand hold you all the way through the conversion.

Check the latest bonus offers here (many are still valid despite what the old expiration dates on the site):
http://thefinancebuff.com/huge-bonu...schwab-td-ameritrade-etrade-merrill-edge.html
 
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ETF vs. mutual fund: it depends.

> don't touch mutual funds as they're less tax efficient than ETFs

This doesn't matter for an IRA, which is tax-sheltered, but is true for a regular brokerage account.

> and have much higher expense ratios which'll cost you in the long run.

This depends on the two funds. A brand-X ETF is not automatically going to have a lower ratio than a Vanguard index mutual fund.

Also look at the other costs, such as account fees, trading fees, and the cost to reinvest dividends and capital gains. With a mutual fund, reinvestment is automatic and free.

If you shop carefully you can probably get an ETF with a lower expense ratio, and I'm in the process of shifting funds from mutual funds to ETFs myself, but you do have to make the effort to shop, and to take into account the extra work of reinvesting gains.
 
ichy said:
Never mind, I was incorrect. Didn't realize that the rules changed several years ago.
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Only kind of. What people seem to be forgetting is that if you do it you have to pay a tax on the amount; 401k is pre-tax, roth is post. It can't be snuck in, so "yes you can" is only half the picture, really 🙂

OP, the argument you make can be made at any point in one's retirement saving. I could take a couple grand out of mine now because I won't notice it when I retire, and I won't. I could do it in 3 months, too, and eventually this behavior drains i. It's a poor mindset to be in.
 
Doppel said:
Only kind of.
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I don't understand this statement. You can roll a 401k into a Roth IRA - there is no 'kind of' about it for the OPs situation.

As for taxes - I think its been made pretty clear that a Roth IRA will involve taxes:

If you move to a Roth IRA you will need to pay taxes (as Roth IRA funds are contributed post tax but grow tax free) but still no penalty.
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You pay the taxes up front
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Pay the cheaper tax today and profit.
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DaveSimmons said:
I might skip the Roth part, but in OP's shoes I'd definitely roll the money over to a trad IRA. The only reason I can think of not to do it is if it's so small that the admin fees would eat away at it.
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There is one potential concern with sticking to a tIRA that I can think of. If he regularly contributes and grows his IRA he may eventually remove his ability to do a back door Roth contribution if his income were to ever exceed the contribution limits. I don't know if that would be a concern for him or not though.

ichy said:
Never mind, I was incorrect. Didn't realize that the rules changed several years ago.
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No worries. The government is quite fond of lots of little retirement plan changes here and there. It makes me wonder if they will ever change the fact that Roths grow tax free. Sure that may be the case now but that's some un-taxed growth I could see some politicians eyeing down the road
 
Exterous said:
I don't understand this statement. You can roll a 401k into a Roth IRA - there is no 'kind of' about it for the OPs situation.
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The OP should be able to but not all plans allow a direct rollover.

Exterous said:
There is one potential concern with sticking to a tIRA that I can think of. If he regularly contributes and grows his IRA he may eventually remove his ability to do a back door Roth contribution if his income were to ever exceed the contribution limits. I don't know if that would be a concern for him or not though.
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That ability won't go away but it will just cost more in term of taxes if he wants to do a backdoor conversion.

Personally, I'm all for tax diversification. I disagree with those who advocate having 100% in Roth vehicles as you can never predict what's going to happen with the tax code in the future. It's better to have both traditional and Roth vehicles so you can decide which to withdraw from depending on specific circumstances.
 
KentState said:
I was looking over my 401k from my now previous employer. They could never get the contribution part right so it has been stuck at 1% for the past 4 months. Anyways, there is a pathetic amount in there since I've only been on the plan a total of 8 months. Is it really worth rolling over a couple thousand? Would rather put it towards a new work laptop which would be a write-off.

Already have money for hookers and blow in savings so that's not an option.
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Absolutely roll it over. It may be only a few thousand, but it's still a few thousand. 401k should be set aside never to be touched, or only to be touched for something very major like house/medical.
 
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