Joined: 01 Feb 2017
Rollover IRA to Roth IRA?
I am 37 years old. I am a muncipal firefighter/paramedic. Through work I have a 401/k that my employer matches 16% of my yearly salary on top of my 5% contribution to the plan. (This is how they got the union to replace a normal pension plan well before my time.) On top of that, I have a 457 through my employer as well. They are my primary retirement plans and they are doing very well. So....the story goes:
I have 2 other 401k plans from previous employers that stupidly, I never payed attention to. After I left employment I never did anything with them and they ended up getting dumped into rollover IRA accounts. One account has about $10,500 and the other only has about $3000. I also just opened a regular cash brokerage account online as I am starting to learn about trading and finance management.
My question: Should I roll the 2 IRA's into one Roth IRA now while I'm semi-young, the accounts are not too expensive and pay the approximately $4000 in taxes now? Giving me the best of both worlds when I retire and have both taxed and non-taxed distributions. Or, do I roll the smaller IRA into the bigger IRA and gamble with how income tax will be in 25 years, thus having all of my retirement distributions taxed? All to save $4000 today.
I am new to personal finance and now want an active role in my retirement and personal finances. Thanks in advance for any advice. (I am eligible with my income level for roth IRA contribution.)
Wed Feb 01, 2017 1:44 am
oldguy Senior Member
Cash: $ 715.00
Joined: 21 May 2006
quote: they ended up getting dumped into rollover IRA accounts. One account has about $10,500 and the other only has about $3000. I also just opened a regular cash brokerage account online as I am starting to learn about trading and finance management.
I would roll the old IRAs into a single IRA fund at a no-load company (such as Vanguard or Fidelity). Eventually, whenever you change jobs or retire, you'll roll all of your money (new 401k and the 457) into that IRA. (You don't want old 401 accounts from 20 or 30 years ago scattered around, companies and municipalities revise their plans, get new managers, merge, go bk, etc - you don't want to be chasing them when you're 80 years old, wondering where that block of your money went.
As for the Roth vs TradIRA question - if you are a low income earner, you want to pay your taxes now and invest in Roth. If you are a higher earner, you want to invest in the TradIRA now and wait until after retirement to pay the taxes.
But the difference isn't very much - and it can not be predicted/estimated, the IRS changes the Tax Code often. (I was in a 60% bracket in the 1960's and 70s, in a 20% bracket in the 1980s, in about a 20% now in retirement - I was your age in 1967, I could never have predicted my 2017 20%. In fact, the IRA/401k was not yet invented, I could never have predicted that).
Prez Trump may fix alphabet soup the we have now - Roth, IRA, 401k, 403b, 457, Simple IRA, SEP IRA, yada, - there is need for that mess, it can be combined/simplified - and probably will be.
That 16% match is awesome,!
The key thing is the return that you select. The general market has a longterm average of 11%/yr. Eg - if you, or your company, puts $5000/yr into an 11%/y fund, that will be $1,100,000 in 30 yrs. It doesn
t matter much whether that million is in a Roth, a TradIRA, in a Taxable Fund - a million is still a million, only the tax-rate changes. (BTW, a Roth is not tax-free, you pay the tax up-front - so it doesn't matter if you keep your IRA or switch to a Roth).
Wed Feb 01, 2017 5:24 pm
GardenCat Full Member
Cash: $ 11.60
Joined: 07 Dec 2014
You seem to be in a good position.
You mention being income qualified for Roth IRA contribution. A contribution is different from a conversion. Contribution is money earned and put into a roth, i.e. new money. Conversion is money that is moved from an existing regular IRA into a roth and you pay the tax due in the year of the contribution, as the amount converted will increase your "income".
If you want to convert the old ira's, best to do a direct conversion = have the current companies holding the ira's send the funds directly to where you want the Roth ira to be held, and I agree with oldguy that Vanguard or Fidelity are good companies.
If you have offsetting losses, (medical expenses, mortgage interest, etc. from your schedule A income tax form) that would offset the income gain, it may be worth converting ira $ into roth $ as you would owe no taxes, or maybe very little.
We have done this over the years and now look forward to having a non-taxable income source.