I was unemployed for 18 months and started a new job about a month ago. I have around 75k in my old employer’s 401k, split between Roth and traditional. Since I haven’t worked much this year, should I convert it to a Roth IRA now that I’m in a lower tax bracket? Would it be better to leave it in the old 401k? I plan to keep it in a similar S&P 500 ETF.
I would move it.
The only reason to leave it in your old 401k is if they offer better options than your new employer’s plan. Check your fees too to make sure they aren’t too high.
Ren said:
I would move it.
The only reason to leave it in your old 401k is if they offer better options than your new employer’s plan. Check your fees too to make sure they aren’t too high.
There are other reasons to keep it in the 401k, like stronger legal protections and the ability to borrow from it. But if those aren’t concerns for you, converting seems like the right choice.
Ren said:
I would move it.
The only reason to leave it in your old 401k is if they offer better options than your new employer’s plan. Check your fees too to make sure they aren’t too high.
FEES FEES FEES!!! Check your 401k for fees. I converted my 401k to a traditional IRA after being laid off and found out I was paying nearly $3K in fees just to have my funds automatically allocated every pay period. Converting to an IRA dropped my fees from $3K/year to $35/year.
Ren said:
I would move it.
The only reason to leave it in your old 401k is if they offer better options than your new employer’s plan. Check your fees too to make sure they aren’t too high.
Another reason to keep it as a 401k is divorce protection. But in most cases, leaving it in your old 401k is not a great idea.
For what it’s worth, I rolled mine over haha.
At the very least, you should probably convert enough to fill up the 10% and 12% tax brackets.
Hollis said:
At the very least, you should probably convert enough to fill up the 10% and 12% tax brackets.
What do you mean by that? By the end of the year, I’ll be in the 12% tax bracket.
@Akira
US Federal tax brackets are marginal, which means your income is taxed at different rates based on the bracket it falls into. Only the income that exceeds each tax bracket gets taxed at the higher rate.
@Noor
Also, 401ks usually have higher fees than IRAs, so it’s worth checking those. 401ks are attractive mainly because of company matching, which helps offset the higher fees.
Converting to an IRA can be helpful for several reasons.
Rolling over a traditional 401k to a traditional IRA or a Roth 401k to a Roth IRA usually doesn’t have tax consequences (except for any employer matching). It’s the conversion between traditional and Roth accounts that triggers taxes.
@Noor
It’s good to have some traditional retirement savings for tax reasons later. Having 100% Roth accounts means you won’t get any tax breaks when withdrawing in retirement, which may not be the best move unless there are other tax benefits.
Here’s a link to a Roth IRA conversion calculator: https://www.schwab.com/ira/ira-calculators/roth-ira-conversion
You’d need to mention your age. If you’re under 45, I’d say convert it because you’ll likely earn more in your own Roth IRA with more control.
Just keep in mind the tax hit at the end of the year.
Macon said:
You’d need to mention your age. If you’re under 45, I’d say convert it because you’ll likely earn more in your own Roth IRA with more control.
Just keep in mind the tax hit at the end of the year.
I’m 32.
@Akira
If you have extra cash and the tax hit won’t be a huge issue, this could be a good time to do it.
It makes a lot of sense to convert the pre-tax 401k money into a Roth IRA. I’d definitely do that.
But converting pre-tax 401k money to a traditional IRA doesn’t make much sense and could complicate future backdoor Roth conversions.
At 32 and in the 12% tax bracket, it’s definitely worth it. The earlier you start, the better. But remember, some brokers have deadlines for getting this done by the end of the tax year, so watch out for that.
Yes
I was going to suggest not converting, but reading the comments made me wonder about a few things. Isn’t your 401k like a traditional IRA? How can it have both Roth and traditional parts? And don’t Roth IRAs have a $7,000 yearly limit? So, how can you convert the whole 75k into a Roth IRA? Wouldn’t that count as a contribution?
Am I missing something?
Yep! 
Your 401k is like a traditional IRA?
Not quite. You can make Roth or traditional contributions to a 401k, so it can have both types of funds. When you roll it over, you’d move the Roth part into a Roth IRA and the traditional part into a traditional IRA.
So you can convert, but be aware that converting from traditional to Roth counts as income for tax purposes. Since your income is lower this year, it might be a good opportunity to do that without too much tax impact.
Roth IRAs have a yearly limit of $7,000?
Yes, but rollovers don’t count as contributions. So you can roll over all of the 75k without worrying about the contribution limit.
@Shan
Thanks for clearing that up! 