Former employer 401k. Pick best option for this scenario!
Mar 28, 2020
23 Comments
I have ~20k in previous employer's fidelity 401k account. What are best action items considering current market, tax implications, etc.?
comments
Next you grow up and start your own company. In this case you run your own 401k or SEP-IRA and pump upwards to 50k tax free. When you done, rollover to the same nice and juicy IRA. Enjoy actual tax deferred growth.
That implies you are only contributing to your 401k and failing to take advantage of the ability to also contribute to your IRA. You are forgoing the ability to contribute additional tax protected savings.
It's you who loves paying taxes.
If you left that money in a 401k (including an individual 401k if you decide to start your own business) it will not interfere with your ability to make those backdoor Roth contributions in future years.
As long as it stays in any kind of 401k the option to do Roth IRA contributions is still there, whether you leave it where it is, move it to a new employer, or set up an individual 401k for your small business. It'll be tax protected in any of those alternatives.
But if you roll it into an IRA you are now prevented from ever making a tax free contribution to your IRA other than by rolling over from a 401k. The backdoor Roth method is closed to you, you can't do it anymore without paying taxes on the conversion due to the pro rata rule.
You have denied yourself a primary way of making tax free contributions and limited yourself to only the 401k contributions.
Look at what your fund options are between the various accounts and compare the fund fees. If you decide to convert from traditional to Roth, you will be paying your marginal tax rate on the entire balance. Can’t give you much more advice than that since we don’t know your plan details, income, future plans, etc.
Also, if he has a current 401k plan he can roll his traditional IRA into his new 401k at any time and avoid the pro-rata rule if and when he decides to do a backdoor Roth. The pro-rata rule is only an issue if he doesn’t have a current 401k, but he obviously has one as it’s one of the poll options.
I know that back door roth conversion is for roll over from traditional ira to Roth IRA.
Just curious that can we put money into the traditional ira account by ourself if we already maxed out 401k
So I don’t do backdoor at all,
Is this a good strategy?
There's an easy way to avoid this: just leave the 401k money in a 401k and don't roll out over to an IRA. It can stay there, tax protected, until you retire. Rolling it to an IRA just causes problems.
You can either keep it in the former employer 401k, roll it into a new employer 401k, or if you start a small business roll it into an individual 401k. Just don't roll it into an IRA.
(If your 401k is invested 100% in Roth there's no problem rolling it into a 401k, it's only rolling Traditional into an IRA that causes problems.)
Article date should be a hint ( great recession)
https://money.usnews.com/money/blogs/planning-to-retire/2010/11/22/7-signs-your-employer-is-looting-your-401k
1. Management fees
2. Investment choices
3. Safety. Your account currently is under _their_ plan. I had the nasty experience where my employer pulled out part of the matching from 2 years ago to pay for some mistakes on their end unrelated to my 401k.
Rollover from like 401k to like IRA and back is tax free. I rolled over from netbenefits to a Fidelity IRA through their wizard. Zero taxes, zero management fees, now zero trading costs & fractional shares in the IRA.