Investing 
9
comments

Rollover 401K into Traditional, Then Convert To Roth IRA?

I have a 401k from my former employment. My CPA says to turn into a traditional IRA and then over to a Roth IRA for tax benefits eventually. He suggest investing in a very low risk A bonds and 25% low risk stock.


His reasoning is we are only taxed now on the lower end of balance, but later as it grows will be beneficial to us then.


I am 52. I plan on using the funds after 59.5 yrs.


1. Is there always a fee connected with rolling over into an IRA — bank, cpa, etc.


2. Does this sound like a wise?


I am very conservative in my finances.

Your question has three parts actually:
Should you roll over a 401k to a Traditional IRA?
If you think that the Traditional IRA gives you access to better investment options, then yes you should roll it over. The tax rules are the same for a Traditional IRA (in this case it’s called a Rollover IRA) and a 401k. There is generally no fee associated with rolling over an account.

Should you convert a Traditional IRA into a Roth IRA?
When you convert, you pay taxes on the entire Traditional IRA balance because you didn’t pay income taxes on that amount before you contributed it. If you remember, your 401K contributions were deducted from your paycheck, thus making it tax-free; and since Roth IRA funds are post-tax, they extract the tax when you make the conversion. Will this be beneficial to you? Only if you think that your income tax rate will be higher that it is now when you’ll be withdrawing the funds in seven years. Only you know that so I can’t tell you what I’d do in your situation.

A subquestion to the “whether you should convert question” is how you’d pay for it. You can pay for the tax with funds outside of your IRA’s or you can pay using the principal within the IRA. If you need to tap into the principal to pay for the tax, I probably wouldn’t do the conversion because you’re sacrificing earning potential when you decrease that principal. If you can pay for the tax outside of the IRA, then you have a decision on your hands.

Does this sound wise?
It only sounds wise if you want to go through the trouble (or are willing to pay this CPA to do it for you, which has a lot to do with why he or she suggested it for you) and if you think your income tax rate will be higher in seven years. Luckily your conservative investment style has nothing to do with this, if you think you’ll be taxed more in 7 years and you can pay the tax with funds outside of the IRA, then you probably want to convert. If you don’t think you’ll be taxed more in 7 years, don’t do it. If you don’t think you can pay for the conversion (which will cost you your tax rate times whatever you convert), don’t do it.

Good luck!


 Retirement 
9
comments

Remember Dividends Before Rolling Over 401Ks

If you roll over your 401K into a rollover IRA as I have just recently done, be aware of any dividends that might be coming your way. I held a few shares of stock in a self-directed account associated with my 401K and I believe I rolled over my account after the ex-dividend date but before the actual dividend payout date. Now, if you hold shares of stock on the ex-dividend date then you will get the dividend payout, usually a couple weeks later, deposited into your account. This presents a unique problem for folks rolling funds over because now you have, essentially, orphaned funds sitting in your 401K that is likely under the rollover threshold.

This is exactly what happened to me and I had a little more than a dollar orphaned in my self-directed investment account, far less than the $1,000 threshold. What this means is that in order to get the money, I’ll have to take a lump-sum withdrawal which will be subject to income taxes and a 10% penalty; which is exactly what I did.

Now, this isn’t such a big deal for me because of how little that amount is, but if you’re talking about a 401K that you’ve had for thirty years, this dollar amount could be pretty sizable if you have some of it individual stocks. How can you avoid this? Since you can rollover at anytime after you leave your job, simply double check that you aren’t between the ex-dividend and the dividend date.

Now I have to figure out what I can spend my 99 cents on!


 Frugal Living, Investing, Retirement 
14
comments

When Frugality Is A Fault: Certified v. Regular Mail

So I recently started the 401k to IRA rollover process, moving my assets from my former employer’s 401k plan to a Rollover IRA at Vanguard, and just today I received the check for the value of my assets that I would be sending off to Vanguard. The check is easily the largest single legitimate check I’ve held in my hand (beating a check that was the down payment for my house a year and a half ago) and I kind of wondered why the plan administrator would mail something so important in regular first class mail.

Anyway, I was very very tempted to just slap a thirty-nine cent stamp on the letter and mail it off but I thought better of it. While I’m pretty sure that there was a 99% chance the letter would make it there without any problems (I have faith in the USPS, even if Nick doesn’t), do I really want to deal with the hassle in that 1% case?

Let’s compare…
99%: I save myself a few bucks.

1%: I’d have a headache. First, it would take me a little while to learn that the check was lost, then I would have to request that my 401k plan administrator void the original check and reissue a new check. That request would likely come with some sort of (unreasonable) fee. Then, after I lose about three or four weeks of appreciation on a pretty sizable sum (to me anyway), I’d send it via certified mail this time. So… I think certified the first time is the route to go.

So, frugality can be a fault and in this case, saving a few bucks could potentially cost me a lot in terms of time, hassle, and money.


 Retirement 
7
comments

Rolling Over My 401(k) To Vanguard

Today, I severed one of my last ties to my old job, my 401(k) plan. The process for rolling over my 401k to a Rollover IRA at Vanguard was fairly painless but there are several areas that you need to keep an eye out.

(Click to continue reading…)


 Retirement 
14
comments

Retirement Account Rollovers Liquidate Your Holdings

Ever since I left my job, I’ve been contemplating rolling over my 401k into an IRA (and then perhaps to a Roth IRA, or just leaving it in the IRA) and came to a realization that if you roll over your account, all of your 401k’s holdings will be liquidated. This isn’t a huge revelation, because you can reach it by realizing that your current brokerage will be sending your new brokerage a check, but it’s something I didn’t even really think about when I was researching the process.

This usually isn’t a big deal if you’re invested in mutual funds (and have no psychological attachment to them and their valuations), part of my 401k is locked up in stock positions that are currently in the red (about -4%). So, do I really want to rollover the 401k now or wait until the position improves?

I’m going to let it sit because I have no real pressing need to rollover my assets. The account is still performing well, the funds are up, and I’m happy with the fees and the services in general.


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