Seeking Financial Advices-Converting 401k to IRA then to Roth IRA

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waiting2buylater_IHB

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I am in my mid-forties and hoping to retire at 55. After 20 years with a company, looks like I will be changing job at the start of next year. I have another big financial decision to make.





In my 401k I have about $500k spreading pretty evenly amongst company stocks, international fund, diversified fund and guaranteed fund. My questions are:





1. Should I just leave the money there or should I roll it over to an IRA? I am thinking that if I convert, I would put the majority of the money into international and emerging market funds.





2. Where would you put the money?





The current law does not allow for an IRA to Roth IRA conversion if the adjusted income is over $100k but there is a quirk in the law that allows for the conversion without an income cap in 2010.





3. Should I in 2010 convert the IRA to a Roth IRA? I understand that I would have to pay taxes when I convert (but not the 10% penalty).





My current thinking is that I would convert to IRA next year but not converting to Roth in 2010 because I don't think I will be in a higher bracket after retirement.





As a regular reader of this forum, I have found that the regular posters here are extremely knowledgeable, nice and for the most part without a hidden agenda. Lansner's blog has turned into an insult free-for-all so l have found myself diverting my time to IHB. Thanks for keeping this site educational and friendly and thanks for any advices to the subject above.



 
Thanks for asking this question, waiting2buylater. I, too, have the same question because I'm not sure what to do with my wife's 401k now that she's started with a new company this a few months ago. I thought I read something describing how the rules are changing in 2008 so that 401k funds can be converted directly to Roth IRA's and eliminating the middle step, but I haven't learned enough to understand what type of limits or restrictions are involved.



Would any Enrolled Agents or Tax Accountants be able to help answer this question? Thanks in advance.
 
First, no matter what the procedure, funds from a 401k, 457, or tax deferred funds from an IRA will initiate a taxable event if rolled into a Roth.<p>


Next, to determine any advantage to converting from a 401k to a regular IRA, you must determine <b>why</b> you might desire to do so. Most folks who do this, convert to a self-directed IRA, thus allowing themselves more flexiblity in their investment options. Or does your 401k allow all the options you are confortable with?<p>


If you do convert to an IRA, establish the IRA first and if possible have the director of the 401k transfer the assets into the IRA without you ever receiving a check or any other form of asset personally. It is so sad when I have to tell someone who has just received a CP2000 from the IRS for $260,000 in tax assessed and payable, that yes, they do have to pay it.
 
I converted my 401K to IRA was because my former company 401K had a huge maintenant fee (I think it was 1% or could be 2%). If you are happy with the return on your 401K and if it has a low maintenant fee, you might just want to leave it alone then.
 
<p>I converted mine to a regular IRA, its not huge, but taxable enough to make me flinch at the tough of paying big taxes. I say just stick with a regular IRA, but definitely switch over to a IRA instead of a account. Nothing says you can't get what you already have....</p>

<p>-bix</p>
 
I'd roll your 401(k) over to an IRA as quickly as possible. If you leave it there, somebody else is the administrator. If you roll it over, YOU are the administrator.



You need to consult a CPA on your IRA/Roth IRA conversion choice. As close as you are to retirement, I would be inclined to not roll it over given the information you have provided, but I'd call my accountant for his opinion before I made a decision one way or the other.



On another note, if you have $500K saved up, I don't think you have enough of a nest egg to retire at 55. You might want to discuss this with your CPA. I've had good luck when people ask me to refer them to a fee only Certified Financial Planer recomended by thier CPA.
 
<p>waiting2buylater:</p>

<p>I second no_vaseline opinion, roll your 401(k) into a rollover IRA ASAP, so you can be sure the money will be there when you request it. Companies can dilly dally and take months to get the money rolled over. </p>

<p>Keep this money in a separate rollover IRA account before rolling over to a Roth IRA. This way you can control how much to rollover, you can chose any amount. Also if your new company has a really good 401(k) you can rollover from your rollover IRA. But only if you can show the audit trail of where the money came from. </p>

<p>Only exception to getting your money out of 401(k) to IRA , is if you have company stock funds where you can elect an NUA. Or if your current company has the funds with a 401(k) custodian like Fidelity which has lots of fund choices and no transaction fees for you to switch in and out of them.</p>

<p>I'm hoping your 401(k) is not your only retirement savings because living on 4% (~ $20K) in California is not easy. </p>

<p>The only reason to have money in a Roth IRA is if you expect to be able to appreciate your assets significantly, either with lots of time or stock picking skills, or if your income in retirement puts you in the high 33%+ tax bracket. </p>

<p>So that means you need to manage your money in the Roth. Few people are successful doing that while working. At mid 40's, if you have been able to return 12.5% annualized for the past 10 years, then go ahead convert to a Roth IRA. Ideally you should be able to pay the taxes with money outside the 401(k) otherwise your $500K gets reduced up to 36% to $320K. Not worth taking the tax hit.</p>

<p>Keep it in traditional IRA. You can always invest outside of retirement accounts and pay the 15% capital gains tax when you sell a year later. </p>

<p>Oh one other thing, if you think it is likely for you to get sued in the future, the Roth IRA doesn't provide as much protection as a 401(k) against creditors.</p>

<p> </p>
 
<p>Thanks everyone for your insights. From your advices and from I own research, I think I will either keep the money where it is or roll it over to an IRA. It doesn't make sense for me to convert it to Roth since I think I would have to pay too much taxes up front and because my tax bracket at retirement would probably be lower than my current bracket.</p>

<p>The reason I might keep it at the old company is that it's a great Fortune 100 Corporation and the plan is pretty diversified with very low maintenance fee (on average about 0.5%).</p>

<p>I know that $500k right now in 401k is not enough but by the time 59.5 rolls around (another 14 years), the amount should at least doubled or tripled. I also have read that most Americans my age don't have as much in their retirement plan yet. I am planning on continuing contributing the maximum amount into 401k going forward. I have a good pension that I can draw from when I hit 55. I will cash out my stock options when I leave at the end of the year and hopefully will be able to invest wisely to build up another source of fund.</p>

<p>Overall I feel pretty comfortable about my financial situation and retirement outlook. Thanks again everyone.</p>

<p> </p>

<p> </p>

<p> </p>
 
If you have half a mil to roll over, Schwab (and everybody else) will roll out the red carpet and you probablly won't have to pay a dime in fees. You are offically a "high net worth" client. Congrats.



If you have 14 years to retirement, you'll be OK. I'd seriously consider working till 65 because you have to retain medical insurance between the time you retire and the time you can file for medicare. The healthcare costs to retain your own insurance betweeen 59 1/2 and 65 are onerous. Plus, you'd have six and a half more years to pack up savings and not draw on them.
 
W2BL,



When you get settled, let us know what you did and why. I think a few users will be able to benefit from it, and I'm interested on how this turns out.



Good luck with your new career.
 
No-v, I sure will provide an update next year.





awgee, I read an article by Robert Kiyosaki (Rich Dad Poor Dad) recently and he was saying the same thing but I forgot the details. Please give me some good reasons to buy silver now. I do have a substantial amount of cash sitting in high yield CD's and Money Market (from selling my house a couple of years ago). Not planning on buying for another 18 to 24 months so I can afford to put $100k in silver if it's a worthy risk. Thanks!
 
<i>" With all thy getting, get understanding."</i> - Malcolm Forbes<p>


w2bl - I think that the best way to answer your question is to ask some questions. What do you think might be some good reasons to own gold? What do you think might be some good reasons to not own gold? If gold has value, why?<p>


I haven't forgotten that you asked about silver, but I think it may be more clear to start with gold.<p>


Sorry, I have heard of Kiyosaki but have not read him, so I do not have any intelligent or even ignorant comment.
 
awgee, I have never bought gold or silver and don't have any knowledge about investing in them. I only heard that if the dollars go down then we should buy gold. Gold has gone up so much that it might not be prudent to buy it now. Maybe silver would be the next metal to go up. I was just intrigued by your short comment above to "Buy silver".
 
<p>w2bl - You say you <em>"don't have any knowledge about investing in them",</em> but in my mind, you seem to have pretty much summed up why gold has, or doesn't have value, and why now is a good time or bad time to buy gold or silver.</p>

<p>Gold has been used as money for much of recorded history. It has been a store of value and a medium of exchange. That is about it. As far as I can tell, it is not much more complicated than that. For the last 90 or so years of US history, the fiat dollar has been money and gold has mostly fallen out of favor. Right now, at this juncture in monetary history, the dollar is becoming less favored. I know you know all this, but I want to spell it out step by step so as to answer any questions by others. As the fiat dollar becomes less favored, it appears that gold, ( and the step-sister silver ), become more favored or valuable. Gold does not pay a dividend or interest. It is inconvenient to store or transfer compared to federal reserve notes. And it is unable to be created by any government, central bank, member bank, or anyone else. It costs time, labor, and capital to get it out of the ground. It is relatively rare.</p>

<p>Enough history. Let's move to today, yesterday, and the last few weeks and months. You are right. Gold has moved up relative to the USD and has even moved up relative to every other currency lately. And that is worth pondering. Why, if the USD is the currency which is devalueing, is gold moving up relative to other currencies?</p>

<p>And very lately, it would appear by technical analysis that gold has moved into overbought territory. Normally, right now would be a fairly safe time to sell if you were a gold trader. I say normally, because in my mind, our financial system is on a precipice and I think gold is reflecting concern that the financial markets are having a very rough time and times may get rougher. So, <strong>normally</strong>, I would be selling some of my position right here, but I am not. I think it very possible that although gold is technically overbought, it may become more overbought.</p>

<p>On to the step-sister. You are absolutely correct. Even though silver has made some outstanding moves lately, it is only approaching a technically overbought condition, but has not yet attained that status. If I was going to buy gold or silver today, I would buy silver, only because odds are that it has a greater chance of increasing. These are just odds. They are not absolutes.</p>

<p>Wow! All that, to basically say what you did in five short sentences.</p>

<p>I have nothing against kitco. I watch their site way too much, but my preference for purchasing precious metals is <a href="http://www.tulving.com">www.tulving.com</a></p>
 
<p>Does anybody have a silver stock they can recommend?</p>

<p>Plus, Tulving looks pretty good, but their minimum buys are pretty extreme. Anyways good luck</p>

<p>-bix</p>
 
Silver Wheaton, Silver Standard Resources, Silverstone Resources, Pan American Silver, but owning silver stocks is not the same as owning silver. Bottom line, silver can go up, but if the general equities market is going down, silver stocks can go down with them. Yesterday was a perfect example. Check it out.
 
<p>Yep, I learned the difference a long time ago. I just like to have some sorta symmetry (yes, i know i'm weird).</p>

<p>I just put in my order with Tulving (my wimpy Christmas Bonus... )</p>

<p>anyway good luck and don't work too hard.</p>

<p>-bix</p>
 
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