My old 401K account

[GoLowDrew]

I have an old 401K (Fidelity) from my last employer. In the beginning, they called and sent me information about how I can roll it over into an IRA, etc, etc. That was a few years ago. Now they stopped calling.

My account is still there. I'm not making any contributions. And it goes up and down with the market.

My questions is, why not just leave it there? Is there any harm in leaving it there? The fund managers seem to be doing a good job, or a better job than I can, so let them manage it.

Or am I missing out on something by doing nothing to my old 401K?

[dunhamjr]

I have an old 401K (Fidelity) from my last employer. In the beginning, they called and sent me information about how I can roll it over into an IRA, etc, etc. That was a few years ago. Now they stopped calling.

My account is still there. I'm not making any contributions. And it goes up and down with the market.

My questions is, why not just leave it there? Is there any harm in leaving it there? The fund managers seem to be doing a good job, or a better job than I can, so let them manage it.

Or am I missing out on something by doing nothing to my old 401K?

sometimes companies you work for will cover some of the management fees, but once you leave they don't

as you said, you can no longer contribute... not an issue since you can save elsewhere.

typically you cannot change anything inside the account. all the investments stay put like they were the day you left.

i guess i dont see any harm in leaving it there, but i think most money minded people would prefer to at least have some control over what they could invest in. rolling over to a traditional ira, you could like still invest in all the funds you currently do... but you would have the flexibility to change things around as your risk tolerance or the economy changes.

my mom is about to retire. when she does, we will be rolling over her 401k and a smallish pension plan out to a trad. ira.

if i leave my current company before i retire (i am 36, so this is probable) then i will almost certainly rollover into trad and roth ira's (i have trad and roth 401k accounts at work)

[barry2952]

I don't get Roth's.

I've been putting away for 35 years. I did that with money that came off the top of my salary. It was allowed to grow tax-free. Those contributions served to lower my taxable income, saving me the percentage that is my tax rate.

Why would I whittle down the pile to be able to take the money out tax-free at some future date? If I understand it correctly, let's say you have $100,000 in retirement. Lets say you're in the 25% bracket. If you converted to a Roth you'd start with a smaller base. If your money is in the same kind of manage fund it will grow at nearly the same rate as someone who started off with a bigger pile. How does that make sense?

Hypothetically, if you and your wife die your children will simply inherit a smaller pile. I don't get it.

OP, check for fees that weren't there before. When I split my retirement off from the rest of my employees they got nailed for fees and ended up rolling into an IRA managed by the same fund managers.

[twilk]

Your money hasn't grown tax free. It is all taxable when you withdraw, so all of the compounded interest is taxable. On a Roth you are only taxed on the original contribution so if you get really good returns in the market, you will come out ahead n the Roth since none of the earnings are taxed.

It is also a gamble as to whether you will be in a higher or lower bracket when you withdraw. I maximize both vehicles but think the Roth has definite advantages.

[barry2952]

No, it's grown, free of taxes. I make capital gains all the time. No tax is paid on profits from investments within the retirement account. Yes, taxes are paid as it's withdrawn, at the rate at the time of withdrawal. If I withdraw a little I'll probably pay no taxes. If I withdraw a lot I'll pay more taxes. Meanwhile, I have a bigger base to grow from.

[dunhamjr]

i dont think strictly using one or the other is the best option.

just how you wouldn't put all of your money into a single investment... by having retirement accounts that were funded pre-tax and post-tax you are able to diversify your tax liability.

traditional ira's have a age that required distributions from the account are required. roth ira's do not.
>>>
Required Minimum Distributions
If you don't ever want to be required to start distributing your retirement assets at any time, you need to consider the IRA rules for required minimum distributions (RMD). With a traditional IRA, you must begin to take RMDs by April 1 of the year following the year you reach age 70.5. This means you must gradually reduce your IRA balance and add the distributed amount to your income, even if you are not in need of the funds.
Roth IRA owners are not subjected to RMD rules. (For more insight, see 6 Important Retirement Plan RMD Rules.)

Read more: http://www.investopedia.com/articles...#ixzz1puaatQGd
>>>

actually you can continue to fund money into a roth ira indefinitely. this basically means that you can be in retirement and socking away money into a Roth that will grow with no further tax liability.
>>>
Contribution Age Limitations
If you want to be able to contribute to your IRA for as long as you like, you need to consider the age limits placed on IRA contributions. You may not make a participant contribution to a traditional IRA for the year you reach age 70.5 and after. For Roth IRAs, there is no age limit.

Read more: http://www.investopedia.com/articles...#ixzz1puaypI6m
>>>

[twilk]

No, it's grown, free of taxes. I make capital gains all the time. No tax is paid on profits from investments within the retirement account. Yes, taxes are paid as it's withdrawn, at the rate at the time of withdrawal. If I withdraw a little I'll probably pay no taxes. If I withdraw a lot I'll pay more taxes. Meanwhile, I have a bigger base to grow from.

The fact that you haven't paid taxes yet doesn't mean it has grown tax free. The earnings are all taxable. Roth earnings are truly tax free.

[barry2952]

No, you're wrong. They've grown tax-free. I've paid no taxes on the gains and they won't be taxed until I take money out. They have contributed to the growth.

[ab8349]

No, you're wrong. They've grown tax-free. I've paid no taxes on the gains and they won't be taxed until I take money out. They have contributed to the growth.

Right, you'll be taxed when you take the money out. In a Roth, you paid taxes before you contributed, so you won't be taxed when you withdraw from it.

[barry2952]

Right. You start with a smaller pile. I think that's dumb. It's all about the size of the pile.

Simplified rules of 72. If you start with $100,000 and take away 25% you have $75,000, right?

My $100,000 will grow to $300,000 in 30 years at 7%. Your $75,000 pile will only be worth $225,000, right? How does that make sense?

Now, If I have $1,000,000 and end up with $3,000,000 and you end up with $2,250,000 that not exactly chump change in the difference. If you start taking money out you still have a bigger pile that still has growth potential, no?

[ab8349]

It's different for everyone. One has to consider current/future tax rates and brackets. As has been said here before, the best thing for most people is to contribute to their company 401K to the point they get the maximum match, then max out a Roth, then if there is still some left, go back and max out the 401K to the yearly limits.

One added benefit with a Roth is that it can be used as a back-up emergency fund, you can withdraw your contributions (not earnings) at any time penalty and tax-free.

[jnm2.0t]

Right. You start with a smaller pile. I think that's dumb. It's all about the size of the pile.

If your tax brackets are the same during contributions and during retirement it is a wash, they each have the same amount of usable money in the end.

[barry2952]

No, you're wrong. Did you not read my example?

[ab8349]

Barry, what % taxes are you anticipating paying on that hypothetical $300,000? 25%?

[barry2952]

About that.

In my case, I'm 60, I can start dipping into my retirement savings without the 10% penalty. However, I don't have a need for the income now as I have current income from my business. If I do take some now it will just push me into a higher bracket.

Funny story. My financial adviser told me in a meeting that most of his clients need only 70% of their normal income in retirement. He looked at me and said, "I know your spending habits, you'll need 150%."

[dunhamjr]

About that.

In my case, I'm 60, I can start dipping into my retirement savings without the 10% penalty. However, I don't have a need for the income now as I have current income from my business. If I do take some now it will just push me into a higher bracket.

Funny story. My financial adviser told me in a meeting that most of his clients need only 70% of their normal income in retirement. He looked at me and said, "I know your spending habits, you'll need 150%."

we have all seen your hobbies... i think his advice might be low 20-30%.

[ab8349]

Funny story. My financial adviser told me in a meeting that most of his clients need only 70% of their normal income in retirement. He looked at me and said, "I know your spending habits, you'll need 150%."

So $300k * .75 = $225k. I definitely get your argument about starting with a bigger pile. However, I'm 37, and I am fairly confident that taxes are going to be quite a bit higher in 30 years or so. I'm happy to pay the rate now, max out my Roth, and not pay taxes on that portion later. Mind you, I'm also dumping into my company 401k to get the match, and repairing my emergency fund from a period of unemployment.

[barry2952]

So $300k * .75 = $225k. I definitely get your argument about starting with a bigger pile. However, I'm 37, and I am fairly confident that taxes are going to be quite a bit higher in 30 years or so. I'm happy to pay the rate now, max out my Roth, and not pay taxes on that portion later. Mind you, I'm also dumping into my company 401k to get the match, and repairing my emergency fund from a period of unemployment.

The difference is that I still have the $300K and will only be taking it as I need it, allowing the pile to grow larger for future use.

[dunhamjr]

another way to look at the traditional vs roth thing.

traditional
you pay no taxes as the money goes in.
the money grows 'tax free' in the account.
but its now taxed when you pull the money out.

so as an example. lets say you put $5k in the account each your for 20yrs.
that is $100k in contribution that you put in tax free... assuming a lot of stuff, let's say that the end balance is $220k.

so now when it is time to take distributions, you have to pay taxes on the whole $220k, one distribution at a time of course... not all in one lump.

roth
this time you pay taxes as the money goes in.
the money grows 'tax free' in the account.
you pay no further taxes against this money... not the contributions, not the gains... none.

so as an example. lets say you put $5k in the account each your for 20yrs.
that is $100k in contribution that you put in and had to pay taxes on... assuming a lot of stuff, let's say that the end balance is $220k.

so now when it is time to take distributions, you pay no additional taxes. you have already paid taxes on the $100k as the money went into the account, so now that $120k gain is yours tax free.

so now.
with a trad ira, you end up paying taxes against $220k where as with a roth ira you pay taxes only on the $100k you contributed.

so. pay taxes against $220k or pay taxes against $100k?

[dunhamjr]

The difference is that I still have the $300K and will only be taking it as I need it, allowing the pile to grow larger for future use.

to a point.

once you reach 70.5 the trad ira has a required minimum distribution that you MUST take out each year.

[jnm2.0t]

another way to look at the traditional vs roth thing.

traditional
you pay no taxes as the money goes in.
the money grows 'tax free' in the account.
but its now taxed when you pull the money out.

so as an example. lets say you put $5k in the account each your for 20yrs.
that is $100k in contribution that you put in tax free... assuming a lot of stuff, let's say that the end balance is $220k.

so now when it is time to take distributions, you have to pay taxes on the whole $220k, one distribution at a time of course... not all in one lump.

roth
this time you pay taxes as the money goes in.
the money grows 'tax free' in the account.
you pay no further taxes against this money... not the contributions, not the gains... none.

so as an example. lets say you put $5k in the account each your for 20yrs.
that is $100k in contribution that you put in and had to pay taxes on... assuming a lot of stuff, let's say that the end balance is $220k.

so now when it is time to take distributions, you pay no additional taxes. you have already paid taxes on the $100k as the money went into the account, so now that $120k gain is yours tax free.

so now.
with a trad ira, you end up paying taxes against $220k where as with a roth ira you pay taxes only on the $100k you contributed.

so. pay taxes against $220k or pay taxes against $100k?

It doesn't matter. Conceptually I know what you are saying but you really shouldn't care what about the dollars of tax you pay, that is a sunk cost that is going to happen. What you care about is the amount of money you have leftover.

For arguments sake lets assume everything is lump sum, things grow at 5%, and an easy to use 10% tax rate.

On your traditional example you put in $100k. At 5% it grows to a huge $432k. Now at 10% taxes you pay a ridiculous amount of $43.2k in tax. $432 - $43.2 = $388k

On your roth example you pay the 10% up front so on the $100k it is only $10k in taxes but you now have $90k to grow. The thing is that $90k growing at 5% for 30 years equals..... $388k.

Now the real issue is marginal tax rates and thats what throws the whole thing off.

[dunhamjr]

No, you're wrong. Did you not read my example?

Simplified rules of 72. If you start with $100,000 and take away 25% you have $75,000, right?

My $100,000 will grow to $300,000 in 30 years at 7%. Your $75,000 pile will only be worth $225,000, right? How does that make sense?

yes we read the example.

you still have to pay taxes on that $300k. so while your pile might currently show $300k, you still have a tax liability every time you take money from that account. fyi, if you happen to pay 25% tax, then your $300k is essentially worth $225k. the same amount.

with the $225k in the roth, all taxes have been paid, so you have the full $225k to count on.

the benefit though comes from a couple things people have already mentioned.

tax code changes. roth ira allows you to contribute money now, when you know what the taxes you are going to pay will be. most people think taxes will have to increase. so they are betting that the pay taxes now, will end up saving paying a higher rate later.

income will affect how much you pay in taxes. so you mentioned that your adviser said you would need 150% of your current income ... well that traditional ira money is going to be taxed at whatever rate applies on distribution. if in retirement you still have reportable salary income, then adding in trad ira income could be the straw that pushes you into the next higher tax bracket. not a good thing. distributions from the roth have already been taxed, so when you take them in retirement they will not contribute to your overall taxable income. meaning maybe with a roth ira you are not pushed into the next higher tax bracket.

[barry2952]

to a point.

once you reach 70.5 the trad ira has a required minimum distribution that you MUST take out each year.

By then I won't have the business income.

[dunhamjr]

It doesn't matter. Conceptually I know what you are saying but you really shouldn't care what about the dollars of tax you pay, that is a sunk cost that is going to happen. What you care about is the amount of money you have leftover.

For arguments sake lets assume everything is lump sum, things grow at 5%, and an easy to use 10% tax rate.

On your traditional example you put in $100k. At 5% it grows to a huge $432k. Now at 10% taxes you pay a ridiculous amount of $43.2k in tax. $432 - $43.2 = $388.8k

On your roth example you pay the 10% up front so on the $100k it is only $10k in taxes but you now have $90k to grow. The thing is that $90k growing at 5% for 30 years equals..... $388k.

Now the real issue is marginal tax rates and thats what throws the whole thing off. But just thinking about it in terms of taxes paid on lump sums is not the right way to do it.

ok. things might work out that nice and tidy. but its possible they will not.

there is the potential that you pay 10% tax now, but in retirement you may have to pay 15%. so then the advantage is shifted to the roth.

the main thing is that everyone should be saving. some savings methods do not appeal to everyone. so we have choices. i prefer to contribute to both traditional and roth accounts. just like i prefer to own safe, moderate and risky investments.... stocks, bonds and mutual funds. not keeping all my eggs in a single basket, so to speak.

[dunhamjr]

By then I won't have the business income.

in your case true.
but your case is not the only situation.

as an example.
once my mom retires from her 'career'. she will have SS income, 401k/ira income, pension income and also income from me for being our 'nanny'.

there are a myriad of things that people do to earn income in retirement while drawing from SS and various other accounts, some retirement some not.

[jnm2.0t]

ok. things might work out that nice and tidy. but its possible they will not.

there is the potential that you pay 10% tax now, but in retirement you may have to pay 15%. so then the advantage is shifted to the roth.

the main thing is that everyone should be saving. some savings methods do not appeal to everyone. so we have choices. i prefer to contribute to both traditional and roth accounts. just like i prefer to own safe, moderate and risky investments.... stocks, bonds and mutual funds. not keeping all my eggs in a single basket, so to speak.

Well thats absolutely true and I think people do rush into Roths that should probably avoid them. The idea behind a Roth isn't to fully fund your retirement with it but it is to give you an option to control your tax brackets.

For the average person in the 25% federal bracket their 401(k) contributions avoid this rate. When using it in retirement you need to go through whatever the prevailing marginal rates are at the time. As you do this you likely reap a benefit, I just don't see the lower levels of income being taxed at 25% or higher. The issue becomes what happens if the next bracket you're about to enter isn't 25% anymore. What if it is 30%, or 35%. Then you would like the flexibility to halt your 401(k) usage right at the marginal rate and start using the Roth instead.

It makes sense for a lot of people to have some Roth, retirement is likely to be a very long time and you could see many different tax regimes in place over the course.

[twilk]

You have a funny definition of tax free growth. Earnings that are taxed when withdrawn most certainly are not tax free. If you want to look at it like that be my guest.

I have never seen anyone refer to trad Ira earnings as tax free growth.

Roth earning are truly tax fee. Ant the size of the doesn't matter if tax rates are equal. I anticipate higher rates in the future, especially on larger distributions which you may be forced to make with a trad Ira.

[barry2952]

Duh, I never said it wan't ever taxed.

[dunhamjr]

Duh, I never said it wan't ever taxed.

no you didn't but saying that a trad ira account grows tax free is an odd way to say it.

because yes, you are not taxed to put the money in... or to grow it. but you are taxed on the end amount.

with that logic. the roth ira grows tax free as well. its taxed when it goes in. but then grows tax free. and it stays tax free when you withdraw.

no one way is right.

wasn't this topic about whether or not there were any pro's/con's to leaving an old 401k with a company you no longer work for?

[barry2952]

no you didn't but saying that a trad ira account grows tax free is an odd way to say it.

because yes, you are not taxed to put the money in... or to grow it. but you are taxed on the end amount.

with that logic. the roth ira grows tax free as well. its taxed when it goes in. but then grows tax free. and it stays tax free when you withdraw.

no one way is right.

wasn't this topic about whether or not there were any pro's/con's to leaving an old 401k with a company you no longer work for?

None of you have factored in that a non-Roth lowers your taxable income NOW because you are reducing your taxable income by that amount. A Roth is funded with after-tax dollars, making it a bad deal.

[dunhamjr]

None of you have factored in that a non-Roth lowers your taxable income NOW because you are reducing your taxable income by that amount. A Roth is funded with after-tax dollars, making it a bad deal.

i didnt factor it in to this discussion. but i do absolutely consider it in my own tax planning.

and actually because of this i have increased my 401k contribution, instead of my Roth... because i am missing out on writing off the maximum amount for my rental property losses. doh!

need to get my MAGI a little lower, and the easiest way to do that is to have lower taxable income.

[barry2952]

i didnt factor it in to this discussion. but i do absolutely consider it in my own tax planning.

and actually because of this i have increased my 401k contribution, instead of my Roth... because i am missing out on writing off the maximum amount for my rental property losses. doh!

need to get my MAGI a little lower, and the easiest way to do that is to have lower taxable income.

Now people should understand my position. This NEEDS to be factored into the discussion. Any way you look at it you end up with higher taxes now and a smaller pile later on with a Roth. See my point?

[jnm2.0t]

You have a funny definition of tax free growth. Earnings that are taxed when withdrawn most certainly are not tax free. If you want to look at it like that be my guest.

I have never seen anyone refer to trad Ira earnings as tax free growth.

Thats the pretty well accepted. The term tax free growth is usually used in reference to the fact you do not pay taxes each year on gains as you would in a standard brokerage account.

[ab8349]

A Roth is funded with after-tax dollars, making it a bad deal.

Can't make broad statements like that, sorry. A bad deal for some people/situations? Maybe. But you cannot decry them as an all-around bad investment vehicle. Maybe if you had started a Roth when you were a teenager + a qualified pre-tax plan you would feel better?

[twilk]

None of you have factored in that a non-Roth lowers your taxable income NOW because you are reducing your taxable income by that amount. A Roth is funded with after-tax dollars, making it a bad deal.

Only makes it a bad deal if your tax rates are lower in retirement. What makes you think it hasn't been factored in?

The roth distributions lower your taxable income later, did you factor that in?

I use both, at the maximum level I can. I don't see tax rates going lower in the future though.