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FW Finance FAQ: IRA plans, 401(k) plans and rollovers to IRAs - 2014 UPDATE

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scripta;19780743 said:That $25K earning 6% over 15 years will still be exactly 25% of the account balance. So if you withdraw your balance at a 25% tax rate, all those gains will go to the government.

The advantage of pre-tax retirement savings is not the fact that they grow tax free, but that you will most likely be able to withdraw them at a lower tax rate than when you contribute. That's all. There's a huge discussion about this every time someone asks whether to put their money in pre-tax or after-tax accounts. If you are going to retire rich (not in terms of assets, but with high taxable income that puts you in a higher-than-your-current tax bracket, or you simply expect tax rates to go up on everyone and you'll end up in a higher tax bracket than now), then it may be advantageous to invest in after-tax accounts.

In 2000, I sell identical positions in a tax sheltered and non-sheltered account, both of which have gains of 100,000.  I have $100,000 in the tax sheltered account.
In 2001, I pay tax of 25,000 from the sale in the taxable account.  I have $75,000 in the taxable market account.
In 15 years, at 6%, the $100,000 grows to $239,655.82.  Pay 25% tax  ($59,913.95) leaving $178,741.86 from the tax sheltered account.
In 15 years, at 6%, the $75,000 grows to $179,741.86 from the taxable account (not sure why it isn't exact, probably a rounding error).  
So the issue is simply whether the capital gains rate (25% in the above hypothetical) will be greater (historically unlikely) or lesser (historically the case) than the income tax rate at the time of withdrawal?  

Of course, if this is done in a Roth IRA, then there is no 25% tax in the sheltered account and then you have a lot more money, no?

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DavidScubadiver said:   In 15 years, at 6%, the $100,000 grows to $239,655.82. Pay 25% tax ($59,913.95) leaving $178,741.86 from the tax sheltered account.
In 15 years, at 6%, the $75,000 grows to $179,741.86 from the taxable account (not sure why it isn't exact, probably a rounding error).
It is exact -- 239655.82 - 59913.95 = 179741.86.

DavidScubadiver said:   So the issue is simply whether the capital gains rate (25% in the above hypothetical) will be greater (historically unlikely) or lesser (historically the case) than the income tax rate at the time of withdrawal?Yes. If any interest paid on the 401k loan is treated as an after-tax contribution so that only gains are taxed at withdrawal, you'll pay income tax on those gains. And I'm not sure if it's treated that way or if it's treated as a pre-tax contribution, in which case you might pay income tax on the interest twice (once before you paid it to yourself, once at withdrawal).
In a taxable account you only owe capital gains taxes on the capital gains (not the original amount), and as you said, capital gains taxes are usually lower than income taxes.

DavidScubadiver said:   Of course, if this is done in a Roth IRA, then there is no 25% tax in the sheltered account and then you have a lot more money, no?Not with your example. This is actually what I had in mind in the first place. Assume you have $7333.33 in pre-tax income to contribute:

401k: contribute $7333.33. After 15 years at 6% the balance is 17574.75. Withdraw the whole balance, pay 25% income tax, keep $13181.06 (assumes total income puts you into the 25% bracket).
Roth: pay 25% tax on that $7333.33, contribute the rest ($5500) to Roth IRA. After 15 years at 6%, the balance is exactly the same as above $13181.07 and no tax is due (the $0.01 difference is due to rounding).

This illustrates that there's no advantage to "tax free growth" in a 401k when compared to a Roth IRA if your effective (attributed to the 401k withdrawals) tax rate at retirement equals your marginal tax rate at contribution.

However... if you could take a loan from a Roth IRA and pay yourself interest, then you'd have more money simply because you'd be contributing more after-tax money to an after-tax tax-advantaged account. So the lesson is instead of taking a 401k loan and paying yourself interest to inflate that balance, just backdoor and mega-backdoor Roth IRA!

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Thanks, Scripta. If you take the loan from the 401(k), the "interest" you pay back is paid back after tax, and of course, is taxed again upon eventual withdrawal. That was the reason I never took the loan out (and because I had no need of it).

Because my math skills are not so great here, I will ask you a somewhat related question -- Every year I backdoor into my Roth IRA. This is a sound decision regardless of whether I am going to be in a higher or lower bracket when I withdraw, correct? (Assume I have maximized my tax sheltered contributions).

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DavidScubadiver said:   Thanks, Scripta. If you take the loan from the 401(k), the "interest" you pay back is paid back after tax, and of course, is taxed again upon eventual withdrawal. That was the reason I never took the loan out (and because I had no need of it).

Because my math skills are not so great here, I will ask you a somewhat related question -- Every year I backdoor into my Roth IRA. This is a sound decision regardless of whether I am going to be in a higher or lower bracket when I withdraw, correct? (Assume I have maximized my tax sheltered contributions).
With that assumption -- yes. Qualified distributions from a Roth IRA are not included in gross income. Assuming some idiots in government don't take away the benefits of Roth

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my 401k contribution selection is in percents. How do I enter the max of $18,000?

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rufflesinc said:   my 401k contribution selection is in percents. How do I enter the max of $18,000?
  Normally you won't be able to set a percentage to equal $18k. Your employer should stop it at 18k. Just need to make sure your percentage will be at or above it. 

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Your employer will/should automatically stop at $18K.

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rufflesinc said:   my 401k contribution selection is in percents. How do I enter the max of $18,000?

Be careful that you only hit the limit in the final month of the year. If your employer has a percentage match you want to make sure you are able to get that match every month, and not accidentally max out your 401k in October and miss the Nov and Dec matching.

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Some employers true up on matching contribution if you hit the max early. Others don't. Your plan summary would provide details as to which.

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I'm phased out of Roth IRA contributions. I'd like to do a back door Roth conversion, but can't seem to find a good answer to the following question: I don't have any other IRAs (except a small Roth), but I DO have an inherited IRA (all pre-tax dollars).

Does the inherited IRA get included as part of my "basis" when I'd try to do the conversion, or is that in it's own separate "bucket"?

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mrbob32 said:   I'm phased out of Roth IRA contributions. I'd like to do a back door Roth conversion, but can't seem to find a good answer to the following question: I don't have any other IRAs (except a small Roth), but I DO have an inherited IRA (all pre-tax dollars).

Does the inherited IRA get included as part of my "basis" when I'd try to do the conversion, or is that in it's own separate "bucket"?

If it is a non-spousal inherited IRA, titled correctly, it must not count in the Roth onversion calculation.
See this linky

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Anyone had experience with Wealthfront 529 Nevada plan? They charge 25bps annual.

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I have specific question regarding roll over my 401k. I might be joining back same company. Is it better to roll over my existing 401k to IRA. That will give me flexibility in terms of investments. If I join same company back, I can start new one. Please let me know.
Thanks

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rustum said:   I have specific question regarding roll over my 401k. I might be joining back same company. Is it better to roll over my existing 401k to IRA. That will give me flexibility in terms of investments. If I join same company back, I can start new one. Please let me know.
Thanks

  There are a couple of reasons to leave it in there.
If you have access to funds/investments that are great and otherwise difficult to find elsewhere. This does not happen often but some companies have great choice of funds or funds with super low expense ratios.

Is there any implication regarding employer match and vesting. Sometimes, when you join the company back within a period of time, you maybe able to get back the previously unvested matching dollars after you meet the vesting period. IOW, the vesting clock is not reset when you rejoin the company.

Absent these, I cannot see a reason to leave the funds in the 401k. As you said, you can usually get more flexibility with an IRA outside. Also, watch out for any plan/maintenance fees that might apply if you leave the funds in the 401k (now that you are not an active plan participant).

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fwuser12 said:   
rustum said:   I have specific question regarding roll over my 401k. I might be joining back same company. Is it better to roll over my existing 401k to IRA. That will give me flexibility in terms of investments. If I join same company back, I can start new one. Please let me know.
Thanks

  There are a couple of reasons to leave it in there.
If you have access to funds/investments that are great and otherwise difficult to find elsewhere. This does not happen often but some companies have great choice of funds or funds with super low expense ratios.

Is there any implication regarding employer match and vesting. Sometimes, when you join the company back within a period of time, you maybe able to get back the previously unvested matching dollars after you meet the vesting period. IOW, the vesting clock is not reset when you rejoin the company.

Absent these, I cannot see a reason to leave the funds in the 401k. As you said, you can usually get more flexibility with an IRA outside. Also, watch out for any plan/maintenance fees that might apply if you leave the funds in the 401k (now that you are not an active plan participant).

  Thanks for the feedback. My 401k is with vanguard. Company didn't allow us to invest in stocks directly. They have pre approved funds in the plan. I am thinking of moving to IRA where there is more flexibility. I am not sure about vesting period. I will check it out once they make any offer.  Are there any suggestions to roll over. Any promotions with good firm.
Thanks
 

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fwuser12 said:   
rustum said:   I have specific question regarding roll over my 401k. I might be joining back same company. Is it better to roll over my existing 401k to IRA. That will give me flexibility in terms of investments. If I join same company back, I can start new one. Please let me know.
Thanks

  There are a couple of reasons to leave it in there.
If you have access to funds/investments that are great and otherwise difficult to find elsewhere. This does not happen often but some companies have great choice of funds or funds with super low expense ratios.

Is there any implication regarding employer match and vesting. Sometimes, when you join the company back within a period of time, you maybe able to get back the previously unvested matching dollars after you meet the vesting period. IOW, the vesting clock is not reset when you rejoin the company.

Absent these, I cannot see a reason to leave the funds in the 401k. As you said, you can usually get more flexibility with an IRA outside. Also, watch out for any plan/maintenance fees that might apply if you leave the funds in the 401k (now that you are not an active plan participant).

  Hi,
I do not have any unvested matching amount. If I am going to rejoin, they are going to count it as new hire again. It is fully vested after 2 years of employment. I am assuming it is only applicable to their new matching contribution. Their plan is limited to funds selected by plan manager. It is not flexible. Is it good idea to roll over previous account and then start new one. That way, i will have my previous contribution with all the options. Please help.

Thanks

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rustum said:   
fwuser12 said:   
rustum said:   I have specific question regarding roll over my 401k. I might be joining back same company. Is it better to roll over my existing 401k to IRA. That will give me flexibility in terms of investments. If I join same company back, I can start new one. Please let me know.
Thanks

  There are a couple of reasons to leave it in there.
If you have access to funds/investments that are great and otherwise difficult to find elsewhere. This does not happen often but some companies have great choice of funds or funds with super low expense ratios.

Is there any implication regarding employer match and vesting. Sometimes, when you join the company back within a period of time, you maybe able to get back the previously unvested matching dollars after you meet the vesting period. IOW, the vesting clock is not reset when you rejoin the company.

Absent these, I cannot see a reason to leave the funds in the 401k. As you said, you can usually get more flexibility with an IRA outside. Also, watch out for any plan/maintenance fees that might apply if you leave the funds in the 401k (now that you are not an active plan participant).

  Hi,
I do not have any unvested matching amount. If I am going to rejoin, they are going to count it as new hire again. It is fully vested after 2 years of employment. I am assuming it is only applicable to their new matching contribution. Their plan is limited to funds selected by plan manager. It is not flexible. Is it good idea to roll over previous account and then start new one. That way, i will have my previous contribution with all the options. Please help.

Thanks

  Yes, I dont see any reason to not rollover. Moving it out of the 401k does give you more investment options. Go ahead.

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fwuser12 said:   
rustum said:   
fwuser12 said:   
rustum said:   I have specific question regarding roll over my 401k. I might be joining back same company. Is it better to roll over my existing 401k to IRA. That will give me flexibility in terms of investments. If I join same company back, I can start new one. Please let me know.
Thanks

  There are a couple of reasons to leave it in there.

Absent these, I cannot see a reason to leave the funds in the 401k. As you said, you can usually get more flexibility with an IRA outside. Also, watch out for any plan/maintenance fees that might apply if you leave the funds in the 401k (now that you are not an active plan participant).

  Hi,
I do not have any unvested matching amount. If 

  Yes, I dont see any reason to not rollover. Moving it out of the 401k does give you more investment options. Go ahead.

  Thanks for the information.  I am still waiting to get information about 401k  match. They have 25% match with 2 years vesting period. My clock is going to restart again but not sure about 401k match. I am going to roll over into IRA and sign up for new plan if they are going to restart clock for 401k match.  Are there any suggestions or promotions for roll over IRA.

Thanks

   

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Most major brokerages (TDA, ETrade , Fidelity etc.) usually have some promotion going on. Depends on the dollar amount of your transfer as to what is most beneficial to you.
Look at this thread for the latest offers: https://www.fatwallet.com/forums/finance/1252069

rated:
I was recently laid off. What should I do with my 401k?

Im a 31 year old, single male whos trying to set myself up for financial stability and success in the future. That being said I have a 401k with my previous employer and it has a balance of 35k USD. I have a Roth IRA already that I have been maxing out for two years and another 10k in the stock market and about 50k in liquid which Ill use in the next 12-24 months to purchase a home.

What should I do with that 35k in my 401k?

I am a chef and only make about 55-75k a year so diligent spending and investing is crucial for me. Thank you for any and all advice.

One thing to note my 401k returned 12.79% last year and had returned 14% the first 1/4 of 2017.

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digs85 said:   10k in the stock market and about 50k in liquid which Ill use in the next 12-24 months to purchase a home.If you'll need a mortgage, it may be difficult to get without a job.
digs85 said:   What should I do with that 35k in my 401k?Unless you have better investment choices in your 401k, do a direct rollover to a Traditional IRA at a low-cost brokerage like Vanguard or Fidelity, then read about and invest in a Lazy Portfolio.

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digs85 said:   I was recently laid off. What should I do with my 401k?

Im a 31 year old, single male whos trying to set myself up for financial stability and success in the future. That being said I have a 401k with my previous employer and it has a balance of 35k USD. I have a Roth IRA already that I have been maxing out for two years and another 10k in the stock market and about 50k in liquid which Ill use in the next 12-24 months to purchase a home.

What should I do with that 35k in my 401k?

I am a chef and only make about 55-75k a year so diligent spending and investing is crucial for me. Thank you for any and all advice.

One thing to note my 401k returned 12.79% last year and has returned 14% the first 1/4 of 2017.

Unless you have access to special funds and/or funds with super low expenses within your 401k, move the 401k assets to an IRA and invest in a portfolio of low cost index funds (MF or ETFs). Generally speaking, you will have access to more funds, perhaps with lower fees/expenses with an IRA opened at a discount brokerage or mutual fund. Vanguard, Fidelity have very low cost index funds that can be used to invest your retirement assets in.

14% return in the first quarter is very good. Among the major indexes, the NASDAQ did pretty well in that period and its returned ~12% in 2017 Q1. What funds was your 401k invested in? Are you sure you are calculating the return correctly by excluding contributions made during that period?

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fwuser12 said:   Most major brokerages (TDA, ETrade  , Fidelity etc.) usually have some promotion going on. Depends on the dollar amount of your transfer as to what is most beneficial to you.
Look at this thread for the latest offers: https://www.fatwallet.com/forums/finance/1252069

  Thanks for the information. I checked with HR. They are going to bridge my employment gap. So, there is no vesting period for me. They suggested me to talk about roll over with vanguard. 
  I am going to check with vanguard about roll over. I want to roll over existing funds and register again with vanguard for new 401k account. 
I have another question about contributing to spouse IRA for 2016. Monday is last date. I am not sure if we can qualify for contrition. we do not have some tax documents from daycare to
file tax returns this week. I would like to postphone my tax returns. Is it ok to contribute $5500 to spouse IRA. If we are not qualiy for this, we would like to withdraw this amount. 
Is it possible to withdraw if we can not take tax advantage when we file tax returns.

THanks

rated:
rustum said:   
fwuser12 said:   Most major brokerages (TDA, ETrade  , Fidelity etc.) usually have some promotion going on. Depends on the dollar amount of your transfer as to what is most beneficial to you.
Look at this thread for the latest offers: https://www.fatwallet.com/forums/finance/1252069

  Thanks for the information. I checked with HR. They are going to bridge my employment gap. So, there is no vesting period for me. They suggested me to talk about roll over with vanguard. 
  I am going to check with vanguard about roll over. I want to roll over existing funds and register again with vanguard for new 401k account. 
I have another question about contributing to spouse IRA for 2016. Monday is last date. I am not sure if we can qualify for contrition. we do not have some tax documents from daycare to
file tax returns this week. I would like to postphone my tax returns. Is it ok to contribute $5500 to spouse IRA. If we are not qualiy for this, we would like to withdraw this amount. 
Is it possible to withdraw if we can not take tax advantage when we file tax returns.

THanks

  As long as you have earned income, your spouse can contribute to an traditional IRA (you are filing MFJ, right). The question really is about whether you can deduct her contribution on your taxes.

Use the appropriate link from this page depending on whether spouse is covered by a retirement plan (e.g., 401k, 403b, etc.) at work. If a deduction cannot be taken, you could consider a backdoor Roth IRA (unless you qualify for a direct Roth IRA contribution).

You are cutting it close; be sure your contribution is recorded correctly as a 2016 contribution by the custodian.

rated:
fwuser12 said:   
rustum said:   
fwuser12 said:   Most major brokerages (TDA, ETrade  , Fidelity etc.) usually have some promotion going on. Depends on the dollar amount of your transfer as to what is most beneficial to you.
Look at this thread for the latest offers: https://www.fatwallet.com/forums/finance/1252069

  Thanks for the information. I checked with HR. They are going to bridge my employment gap. So, there is no vesting period for me. They suggested me to talk about roll over with vanguard. 
  I am going to check with vanguard about roll over. I want to roll over existing funds and register again with vanguard for new 401k account. 
I have another question about contributing to spouse IRA for 2016. Monday is last date. I am not sure if we can qualify for contrition. we do not have some tax documents from daycare to
file tax returns this week. I would like to postphone my tax returns. Is it ok to contribute $5500 to spouse IRA. If we are not qualiy for this, we would like to withdraw this amount. 
Is it possible to withdraw if we can not take tax advantage when we file tax returns.

THanks

  As long as you have earned income, your spouse can contribute to an traditional IRA (you are filing MFJ, right). The question really is about whether you can deduct her contribution on your taxes.

Use the appropriate link from this page depending on whether spouse is covered by a retirement plan (e.g., 401k, 403b, etc.) at work. If a deduction cannot be taken, you could consider a backdoor Roth IRA (unless you qualify for a direct Roth IRA contribution).

You are cutting it close; be sure your contribution is recorded correctly as a 2016 contribution by the custodian.

  Thanks for the link. i have created roll over IRA account with Charles Schwab. I will be qualified for $500 promotion. Vanguard rep also told me to do it quickly before they get notified from my employer. Once my employer notifies, it is not possible to roll over. 

 

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You reminded me of a very good point about the tax and i would love to read it more if you share more information regarding revenue to acknowledge the general public about internal revenue service. 

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