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by 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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I can remember something from way back when I worked for a place that had a 401k where they mentioned that if at all possible it is better to wait a few years after you retire (assuming you are younger than 70-1/2) to begin distributions on your 401k because by then you will be in a lower tax bracket.
I can remember something from way back when I worked for a place that had a 401k where they mentioned that if at all possible it is better to wait a few years after you retire (assuming you are younger than 70-1/2) to begin distributions on your 401k because by then you will be in a lower tax bracket.
As an update, I've decided to go the Roth IRA route. After talking to someone at Fidelity (1-800-FIDELITY), I found the way this is done is to rollover the old 401(k) into a "rollover IRA" - accounts setup for this very purpose. I then convert this into Roth IRA(s) - at which point the funds are counted as income and taxed.
Too bad your new employer doesn't offer a Roth 401(k)...then you'd REALLY be tax-free when you retire, except for the employer match. BUT..I'd rather be taxed on only about 1/3 of what I withdraw than on all of it..
Here's a blurb from www.401klookup.com that might help you out:
If the Roth IRA owner expects to be in a higher tax bracket upon retirement, it is advantageous for him to contribute maximum amounts of money towards a Roth IRA. Why? Because money being invested in a Roth IRA is taxed at the current lower tax bracket, and will not be taxed when it is withdrawn upon retirement (and when the Roth IRA owner is in a higher tax bracket). For example, consider an investor who contributes $2000 to a Roth IRA when he is in a tax bracket of 21%, and will be in a tax bracket of 33% upon retirement. This means that investor has already paid 21% x $2000 = $420 in taxes. Upon retirement if the investor wants to withdraw his funds, he would have had to pay 33% x $2000 = $660 under a Traditional IRA. However since the investor has already been taxed at his lower bracket of 21%, he would NOT have to pay taxes upon taking retirement distributions when he is in a 33% tax bracket.
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I didn't see ... by VnutZ :: NR8 :: on 13 September 2007
See any holes in this strategy?
... buying PowerBall tickets in there.