I recently changed jobs and am deciding what to do with the funds in my 401(k) at my previous employer. As far as I can tell, I have the following options:
- Leave the funds where they are
- Roll the funds into:
- my new 401(k)
- a traditional IRA
- Withdraw the funds, pay the appropriate income tax, and then:
- invest them in a Roth IRA
- invest them somewhere other than a Roth IRA (e.g., savings account, mutual fund, etc.)
- spend like crazy
In planning for retirement, the critical comparison, it seems, is between 401(k)s and Roth IRAs – the main factor being the tax rate compared now to the tax rate when I retire. There are 35-40 years until that time, but it seems obvious (assuming a reasonable career progression) I’ll be in a higher tax bracket then as compared to now – giving a Roth IRA the edge.
Some have advised those in similar situations to mine (saving for retirement while young) to prioritize retirement savings in this manner:
- Take advantage of any 401(k) company-match (i.e., contribute enough to not miss out on any "free" money)
- Max out Roth IRA
- Max out 401(k)
- Invest in index funds and tax-managed funds
In my situation, there is no required 401(k) contribution to receive the company funds, so my first act should be to max out Roth IRAs. Then I contribute to my 401(k) until it is maxed, and then move on to the index/tax-managed funds.
See any holes in this strategy?
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