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Need help with rollover and traditional vs roth 401k/ira

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rated:
I just started a new job and am in the process of setting up my retirement. My new employer offers a 401k and they match 233% up to 3% of my base pay. I'm able to contribute to that as pre-tax or roth. I will definitely contribute at least 3% to take advantage of the 233% matching, but should I use pre-tax or roth?

I also have 2 accounts that I want to rollover. Both are pre-tax accounts. One account has around 40k and the other has around 17k. Should I roll these into my employer's 401k?  Should I roll them into an ira?

Based on research I've done I'm thinking of having my 401k be a roth account and rolling the other accounts into a traditional ira. I thought about rolling them into a roth and making the 401k a traditional, but I don't have the funds to pay the taxes on the rollover conversion.  I could also just roll everything into the 401k and open a separate roth ira.

Some information that may be important:
I'm 31 years old
My salary is around 50k
My spouse makes around 57k
8 year old daughter
Own a house (appraised at 420k; owe around 285k)



Thanks in advance.

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rated:
Unless your employer has ultra low expense investment options within the 401(k), you should roll over the old accounts into an IRA at Scwab, Vanguard or Fidelity.  As for Roth vs Traditional, it depends on your ability to predict the future -- what will happen to tax rates in the future?  What will your tax rate be in retirement?  There are calculators available online, and likely through your employer's plan site that can help you run scenarios.  It's also worth noting that if you choose Roth contributions, the employer match will still be pre-tax (traditional), so the calculations you run shouldn't assume that all of that $ is Roth, only your employee deferrals.

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raringvt said:   Unless your employer has ultra low expense investment options within the 401(k), you should roll over the old accounts into an IRA at Scwab, Vanguard or Fidelity.  As for Roth vs Traditional, it depends on your ability to predict the future -- what will happen to tax rates in the future?  What will your tax rate be in retirement?  There are calculators available online, and likely through your employer's plan site that can help you run scenarios.  It's also worth noting that if you choose Roth contributions, the employer match will still be pre-tax (traditional), so the calculations you run shouldn't assume that all of that $ is Roth, only your employee deferrals.
  Thank you for your response.  I think my lifestyle around my retirement age will cost less to maintain- my house should be paid off and my daughter will be in her 30s.  Based on that I'll be able to draw from the retirement account for less each year, which means I'll have a lower marginal tax rate, right?  That makes the roth less appealing, I think.

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As for the 401k I will use a Target year 2050 through Fidelity.  I'm not sure how to analyze it but it does say it has a .28% expense ratio.  Is that good?

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y4rivera said:   As for the 401k I will use a Target year 2050 through Fidelity.  I'm not sure how to analyze it but it does say it has a .28% expense ratio.  Is that good?
  
It's very good, but it's not the best. Vanguard's equivalent has an expense ratio of 0.16%. On $57k, that's a difference of about $70/year. That also gives you extra flexibility and doesn't force you to stick with your employer plan in case they change the options for the worse.

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y4rivera said:   
raringvt said:   Unless your employer has ultra low expense investment options within the 401(k), you should roll over the old accounts into an IRA at Scwab, Vanguard or Fidelity.  As for Roth vs Traditional, it depends on your ability to predict the future -- what will happen to tax rates in the future?  What will your tax rate be in retirement?  There are calculators available online, and likely through your employer's plan site that can help you run scenarios.  It's also worth noting that if you choose Roth contributions, the employer match will still be pre-tax (traditional), so the calculations you run shouldn't assume that all of that $ is Roth, only your employee deferrals.
  Thank you for your response.  I think my lifestyle around my retirement age will cost less to maintain- my house should be paid off and my daughter will be in her 30s.  Based on that I'll be able to draw from the retirement account for less each year, which means I'll have a lower marginal tax rate, right?  That makes the roth less appealing, I think.

 Your spending may be lower, but you don't know what the government will do between now & then--some people believe there will be no choice but to tax at higher rates due to the national debt.  One good aspect of deferring Roth $ is that you cover both bases--your deferrals are Roth, your match is Traditional.  Think of it as tax diversification.  I don't personally make Roth contributions--similar situation to yours, marginally higher income--I like the immediate & known commodity of the reduction in current taxes.  If I take a sabbatical or otherwise have a year with low income, I can do a Roth conversion to get some $ into a Roth IRA.

rated:
Doing research I just found out about a 529 plan. From what I see if the money contributed to it is exempt from state taxes. The earnings are exempt from both state and federal as long as it's used towards college. Is that right? Considering I have an 8 year old would this be best for me right now instead of doing a Roth?

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Another thread here had some good 529 discussion about maxing out retirement accts first.  If you overestimate your 529 contributions you'll be stuck with a 10% penalty and taxes on the withdrawals.

Also finding a 529 with low fees can be tough. 

And there are financial aid considerations with a 529. 

rated:
y4rivera said:   Doing research I just found out about a 529 plan. From what I see if the money contributed to it is exempt from state taxes. The earnings are exempt from both state and federal as long as it's used towards college. Is that right? Considering I have an 8 year old would this be best for me right now instead of doing a Roth?
My thought on 529s is that they should only be used after you've fully funded your retirement goals.  You can borrow money for college, you can't borrow money for retirement.  Most states have limits on the amount you can contribute & receive a tax deduction.  Not all states' plans are created equal:  www.savingforcollege.com is a good source for comparing your state's 529 vs other states' plans.  Some states will allow you to take a deduction only if you contribute to their plan--while some states will allow you to contribute to any plan.

rated:
- you should look into your old emoployer 401K - see if there is any fund that you really like, and may be closed to new investor. I have few of those - some really good vanguard fund that are now closed to new investor. That's the reason i keep some of my old 401K

- if nothing is holding you back from the old 401K ... most people usually prefer to open something outside their own company - because then you have a lot more choices of funds/stocks etc. Basically your company will have say 10 set of choices (making up a number). That's all you have. But if you were to roll over your old 401K say to Vanguard or something else - for those money you can have more options.

rated:
y4rivera said:   
 
  Thank you for your response.  I think my lifestyle around my retirement age will cost less to maintain- my house should be paid off and my daughter will be in her 30s.  Based on that I'll be able to draw from the retirement account for less each year, which means I'll have a lower marginal tax rate, right?  That makes the roth less appealing, I think.

  
I would go for traditional 401k, assuming you have a fund(s) that you like. You get the immediate tax deferral benefit and retain the option to convert to Roth in the future. Basically, the same reasoning you had when you thought Roth IRA was less appealing. You just need to plan out the conversions  when approaching RMD stage.

rated:
raringvt said:   
y4rivera said:   
raringvt said:   Unless your employer has ultra low expense investment options within the 401(k), you should roll over the old accounts into an IRA at Scwab, Vanguard or Fidelity.  As for Roth vs Traditional, it depends on your ability to predict the future -- what will happen to tax rates in the future?  What will your tax rate be in retirement?  There are calculators available online, and likely through your employer's plan site that can help you run scenarios.  It's also worth noting that if you choose Roth contributions, the employer match will still be pre-tax (traditional), so the calculations you run shouldn't assume that all of that $ is Roth, only your employee deferrals.
  Thank you for your response.  I think my lifestyle around my retirement age will cost less to maintain- my house should be paid off and my daughter will be in her 30s.  Based on that I'll be able to draw from the retirement account for less each year, which means I'll have a lower marginal tax rate, right?  That makes the roth less appealing, I think.

 Your spending may be lower, but you don't know what the government will do between now & then--some people believe there will be no choice but to tax at higher rates due to the national debt.  One good aspect of deferring Roth $ is that you cover both bases--your deferrals are Roth, your match is Traditional.  Think of it as tax diversification.  I don't personally make Roth contributions--similar situation to yours, marginally higher income--I like the immediate & known commodity of the reduction in current taxes.  If I take a sabbatical or otherwise have a year with low income, I can do a Roth conversion to get some $ into a Roth IRA.

  
Never thought about this but that's a good idea. 

rated:
I will add my old thoughts ... in some states 401k may be protected against lawsuit while IRA may not ...

for this reason you may want to
- leave old 401k with old employer (if it is allowed and has better investment option than new employer)
or
- rollover to new employer's 401k (if old employer push you out or if new employer has better investment choices)

there are other dynamics as well ... as being discussed above

rated:
nm.  Brain fart.
 

rated:
You're mixing up percentage and dollar.  If they matched 100% that would mean every $1 I put, they also put $1.  Since they match 233%, that means every $1 I put, they put $2.33.

rated:
y4rivera said:   You're mixing up percentage and dollar.  If they matched 100% that would mean every $1 I put, they also put $1.  Since they match 233%, that means every $1 I put, they put $2.33.
You're right of course.  But it still seems like you'd only have to contribute about 1.3% to maximize employer match.  1.3% would be $650 * 2.33 = $1,514 which exceeds 3% of salary.  Not that contributing more wouldn't be a good idea.  Just trying to understand the math here.

BTW, to your original question, I would advise contributing to the Roth 401k at your employer.  I would also advise rolling over your old 401k into a traditional IRA at one of the low-cost providers mentioned above.  And I think you and spouse should contribute to Roth IRA's.  Your goal should be at least 15% of your income per year in retirement.

1. Max out employer contributions Roth 401k (looks like 1.3% to me)
2. Contribute fully (max $5,500 each) in Roth IRA's
3. Increase % at work to 12% or as much as you can stand.

Chris.

rated:
I see what you mean. That's something I need to ask them. I interpreted it as they would match the 3% I contribute with 233%. It could be how you said though, that they only contribute up to 3% total.

rated:
Slightly tangential question: is it difficult to roll 401(k)s with a mixture of Roth and Traditional funds into separate IRAs of the matching type? (Roth 401k funds to Roth IRA and Traditional 401k funds to a traditional IRA)

rated:
wpgabriel said:   Slightly tangential question: is it difficult to roll 401(k)s with a mixture of Roth and Traditional funds into separate IRAs of the matching type? (Roth 401k funds to Roth IRA and Traditional 401k funds to a traditional IRA)
 Not "difficult" per se, but if you aren't careful, it could get ugly.  You just have to be careful in giving separate instructions for Roth & "traditional" money.

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