What do you guys do with 401k with old employers? 1. Leave it as it is 2. Rollover to new 401k account 3. Rollover to traditional IRA. So if you rollover how do you take advantage of DCA as 5500 contribution has income limit If it's last option how do you take advantage of backdoor ROTH? Thanks!
You cant (shouldn’t) backsoor Roth if you do #3. That’s why I chose #2. Keep your money in the plan with the better investment choices
I have heard flexibility of investing on your own with traditional IRA is the reason folks go for #3
Yes. But you mentioned backdoor. So if that’s important to you then you shouldn’t open an IRA. IRS aggregation rule
Rolling traditional 401k into Roth IRA is possible, but you'll have a huge tax bill. Backdoor Roth involves rolling after tax money (not traditional) into Roth IRA (or Roth 401k). In that case you've paid the tax on the principal, so you only owe tax on the converted earnings, if any.
I am not planning to rollover to Roth IRA. Was just wondering if folks do backdoor IRA if they have traditional IRA account. It sounds complicated and looks like more tax prone
I do backdoor Roth in my 401k, which is super easy if your plan supports it. I haven't bothered with external backdoor Roth because the 401k lets me sock away $45K/year and that's enough for now.
So the conclusion is folks who have traditional IRA don't do backdoor Roth?
Shouldn’t. If they do and the IRS audits you, you’ll get fucked due to aggregation rule
I think you can still do it as long as you use pro rata rule and submit 8606
What ira do you think will give you better return than your company 401k?
Argument I HV heard is there are better instruments to invest in IRA accounts than the company 401k. Also depends on your risk appetite. But I don't HV personal experience. Planning to rollover my old 401k to an traditional IRA. Hence all these questions :)
It’s not hard to beat the performance of 401(k) mutual funds. Evidence-based/warren buffet investment philosophy’s don’t involve mutual funds!
Folks who have traditional IRA - Only way to put money in this account is through rollover as 5500 traditional IRA contribution has income limit? How do you take advantage of dollar cost averaging then? Or you just rollover and keep rebalancing?
I think I read a study recently showing historically you make more money front loading at the beginning of the year because the market has been on average more optimistic at the beginning of the year rather than end. DCA only works if volatility is properly modeled with Gaussian risk models....close but not exactly in real world. Point is I wouldn’t make a big deal about it :)
You can always put 5500 in to your traditional IRA as long as you have earned income. It’s just the deductibility of those contributions that has an income limit. In practice, that may not be worth it if you aren’t converting to Roth of course. The 401k is where you’ll be effectively DCA anyway, so why do you need to for your IRA?
If your new 401k is invests in Vanguard funds, roll it over to the new one. Otherwise leave it where it is and ask your HR why you have such a crappy 401k.
As someone who acts as a fiduciary in the 401(k) space for plenty of companies, I don’t always agree. Vanguard is great depending on how you invest. Target date funds still trail American Funds in performance net of fees. Vanguard wins in almost every other scenario tho.
So what do you recommend if you are not a fan of vanguard funds?
If you like the fees and investment options better in your old 401k then choose option 1. If the fees and investment options are better in your new 401k then choose option 2. If you need more control over your investments and don’t plan to do backdoor Roth (or plan to convert your entire old 401k to Roth and pay the potentially large tax bill) and you don’t like fees or investment options in either of your 401ks, only then choose option 3. I chose option 1. It is one more account to manage but I don’t mind that. Now I can choose the better funds from each 401k. At some point it may become unwieldy and I’ll look into option 2 or 3 at that time, but for now it works great. You will still be DCA into your new 401k as you contribute there.
Do your due diligence on the new 401(k) plan. If not American Funds or Vanguard roll it into an IRA and give yourself the opportunity to outperform.
What kind of due diligence are you talking about here? Any pointers? :)
I think mainly looking at expense ratios of the funds. But also need to account for your asset allocation goals and see if the funds there will help you towards that. For example I need both domestic stock and international stock to meet my asset allocation goals. One 401k has great options (as far as fees go) for domestic stock but nothing good for international stock. So I have to invest in international stocks outside of that 401k. If I ever didn’t have enough in that 401k to meet my asset allocation goals cheaply, I’d have to more seriously consider rolling it to an IRA and weigh that against the benefits of Roth conversion when my IRA balance is empty.
Just a few general comments about the discussion so far. 1) Saying that DCA is something to “take advantage of” is like suggesting that training wheels on a bicycle are something to take advantage of. DCA is a way to talk about investing in a way that makes it seem easier and less risky to people with cold feet. It’s not a strategy that you need to stick with once you’re comfortable with markets and risk. 2) if you’re worried about being in a higher tax bracket in retirement, you’re either most likely wrong, or you’re already crazy wealthy. Most high-TC workers see their retirement tax bracket drop like a stone. I know one reasonably wealthy retiree who is doing Roth conversions every year just to incur the taxes now in his low bracket, while he can convert cheap. He’s not protecting against possible higher tax bracket for himself, he’s planning to pass as much assets to his heirs free of taxes as he can.
I expect my taxes to rise in retirement because I'm planning to retire in a country with a higher tax rate than the US. I also suspect US taxes will eventually rise dramatically due to the extraordinary debt, and the recent years cut was paid for by borrowing against future tax revenue, which made worse what was an already bad deficit. So I expect tax rates in the US to be dramatically higher in 25 years than now. Tax treaty with my country recognizes 401k and IRA as tax protected so I can use those but the higher anticipated future rate, whether because I move or because US jacks up tax rates, biases me towards Roth vs traditional.
Depends if the old plan is hitting you with maintenance fees and whether you like your investment options. I rolled mine into Microsoft's plan because we have some killer low-expense funds. If/when I leave Microsoft, I'll probably keep the 401k here.
Well I feel ROI will drop if you can't contribute to that account anymore. You can't take advantage of DCA
You can DCA across your portfolio without doing so on each individual account. It's OK if the old account can't take any new contributions, just keep making new contributions to another account.