! Long time reader, first time poster (haven't yet filled out the "Hi I Am..." anyways...
About Me (please consider this the as the "Hi I am..."):
35 years old, wife is 30. 1 son <2 yr old, with a 2nd son anticipated 1 month from now. Diagnosed with cancer September 2019, had radiation then told cancer was gone Jan 2020 and feel more or less fully recovered. Lost my job a month ago (Engineer), DW (Financial Analyst/Accountant) salary cut 30% recently - both oil and gas. We have Net Worth $1.65M that is ~20x annual expenses with about 1/3 easily accessible via brokerage accounts or cash. The rest is mostly in retirements which are mostly Roth or After-Tax converted to Roth, with company matches as pre-tax and 2 small pensions. Also have HSAs. We live in Texas, which has no state income tax - this as well as a higher "effective contribution limit" has contributed to our desire to invest in Roth despite somewhat high tax during working years. We have been taking advantage of backdoor Roth IRA. At a prior but not recent employer, I was able to employ a strategy similar to the Mega Backdoor Roth but keeping the conversion in the 401k instead of moving to IRA. We are renting right now at $1300/month for a 2 bed apartment and will soon need more space - will likely buy a 4-5 bed house for $350-$450k once I become employed - meaning invested NW likely to decrease while annual expenses likely to increase (a double whammy to the ratio of Annual Expenses/invested NW). Currently keeping expenses low to live within cash flows.
Where should I move my 401k funds to?
After losing my job, this account will start charging about $50/yr in fees. The account has $70k in it. $13k (60%) unvested of of $23k employer match & related gains will be lost - this portion is traditional/pre-tax. The other ~$50k is my contributions which are all Roth & related gains.
I have a Vanguard Traditional IRA (I like to keep this emptied out every year to enable backdoor Roth), Vanguard Roth IRA, Fidelity 401k from earlier employer (I called and verified they will accept incoming $ despite no longer working there).
-Option 0: Leave as is
and pay $50/yr in fees forever and have another account to track with NW forever. This will annoy me forever so I'd rather move it now.
Move all to IRAs, then convert traditional to Roth
(this would cause tax on the converted amount. I don't believe there would be a penalty - can someone confirm no penalty?) This causes a tax burden that takes away from my liquidity, therefore not my favorite option. But open to thoughts if you believe I should consider this.
: Move traditional to Fidelity 401k
and Roth to Vanguard Roth IRA
. Very clean move, no taxes. Extra paperwork.
Move all to Fidelity 401k
. Simple on paperwork and no immediate taxes. There is a form Fidelity would have me fill out to track contribution amount (not including gains) on Roth portion.
Let me know
I heard there are legal protections
that are different for 401k and IRAs that vary by state. IRAs seem strong in TX but I know very little. I doubt this comes in to play every but might be a tie breaker in decision.
I'd like to have some retirement funds available before Age 55/72(t) rule comes into play to enable a possible earlier retirement.
Originally contributed amounts in Roth IRAs can be accessed after the account has been around 5 yrs. Does this include contributed amounts moved to Roth IRA from Roth 401k? I presume so but am not certain. Does the tracking get muddied if I move to another 401k in the middle of this?
This pretty much has to move to the older 401k unless if I want to pay taxes on an IRA conversion to keep that account clear. When I move it eventually to the IRA, I believe I can do an "IRA conversion ladder" for traditional amounts to convert them to Roth, enabling the converted amounts to be touched 5 years later by then taking them out of the Roth IRA penalty free even before age 55 (can someone confirm this?). Detailed clarification needed - it seems that the later you do this conversion, the more time for growth and thus the larger amount will be available to withdraw from the Roth in the conversion ladder - seems like a benefit to delaying this - is this right or am I missing anything?
I am a passive ETF investor with low fees so the minimal options I have in the Fidelity 401k are just fine for me (S&P 500 for 0.01% expense ratio). Currently we have no bonds but might want to at some point. I've heard of people investing in real estate with rental homes through IRAs so that could be an interest at some point, but we aren't into real estate currently. If that becomes a topic, I suppose I could move the money to an IRA later. It has also occurred to me that I can move to a 401k then to an IRA but cannot move to an IRA then to 401k (with my plan), so moving the the 401k first keeps all options open.
Thank you for your help! There are a few questions scattered throughout that I really need help with ensuring my understanding of. Just as important though, I am sure I left out important considerations that I haven't even thought of. What would you do and why?
As always, this is fun to think about! Looking forward to your responses!