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What to do with 401k with former employer?

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  • What to do with 401k with former employer?

    I know this is a common topic, but I am a bit lost at what is the best option for our situation.

    I recently left my job to care for our 3 children. My husband is a resident and will be finished in 4 more years. I have a ~$50k 401k that I need to figure out what to do with. We have no need to borrow from it and I would like to keep using the money as a long term retirement investment vehicle. I do not have any plans to return to work in the next 5 years (if that matters).

    I know I could leave it where it is, but I seem to remember the management company's fees (Financial Engines) being pretty high. I've left it alone while I was employed but I would prefer to take a more active role in its management now and put it in a place that will make the most financial (and tax) sense for us.

    I've started looking into Vanguard IRAs but I'm not sure if Traditional or Roth makes more sense. I know we will be over the limits for a Roth contribution once my husband has a full year of attending salary.

    The other piece of (maybe) relevant info is I cashed out on a large RSU shortly before I left, so our income is going to be pretty high this year (compared to the remaining years of residency), especially given I worked 7 months of 2016.

    Any suggestions on where to start?

  • #2
    Recommend you wait until 2017 and roll your 401k into a Roth, given that your family income will be drastically lower if I understand your fact pattern correctly. In the meantime, you could roll the 401k out to a TIRA in 2016. There will be no tax due. Your decision depends on whether you believe you can do better with a TIRA on your own or if you would do better by waiting a few months in the 401k.

    Another thought is to go ahead and roll the 401k over to a TIRA and convert over a period of time (given that your DH has another 4 years as a resident). With careful tax planning, given that you have 3 children, you should be able to remain in the 15% tax bracket by rolling over to Roth just enough to top out that bracket annually. Remember, you can recharacterize until the due date of your income tax return, including extensions, so if you r/o too much, you can then adjust downward (recharacterize) if it throws you into the 25% bracket.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      If you want to be able to do "clean" backdoor Roth conversions in 4 years when you no longer qualify for straight ROTH contributions, you want to zero out any rollover IRA.

      You could do what's suggested and do a 401K to IRA rollover and then slowly convert the IRA rollover to Roth IRA over the 4 years to zero it out. Keep in mind you'll be paying tax but it should be the lowest tax before it really jumps later when the attending salary kicks in.

      If you rather not pay any tax right now, then just leave it where it's at.