70K 401K - convert to traditional or ROTH IRA

[netternator]

Hi Early Retirement Community,

In my 2nd week of early retirement. Woo-hoo! I have a little less than 70K in my former company's retirement plan. This is a traditional pre-tax account. My rate of return since inception (4/23/21) has been 13.54% annualized. I have this in a mix of low cost i-shares funds which I rebalance quarterly. This is with Empower and the plan fee if 0.15% annually.

Now that I've left the company, I'd like to transfer this to Vanguard. And have a few questions:

1) Any reason to leave this money in the Empower account?
2) After transferring to Vanguard, should I set up a traditional IRA or does it make sense to do a ROTH conversion?
3) Any other options for this money that I am not currently thinking about?

A little more background:

• My husband and I are both 51 yrs.
• He is still working and we anticipate an income between 160-170K in 2025
• All of our other retirement accounts are pre-tax (1M in his employer 401K, 580K in a SEP IRA, 1.7M in ESOP, 280K taxable account)

Any assistance is appreciated!

Thanks!

 

[pb4uski]

The only reason to leave it with the employer is if the employer pan offers a good stable value fund... few do.

I would transfer to a traditional IRA at Vanguard so the transfer is not a taxable event given that your DH is still working and you are in a high income tax bracket.

Once your DH retires and you are in a low income tax bracket then consider Roth conversions.

 

[PaunchyPirate]

It's a personal decision, for the most part, but I would move the holdings out of Empower to Vanguard. I don't see a real strong reason to leave an account of that size behind. Move it to the broker you anticipate using for your future needs.

To move it, I think you will need to create a Traditional Rollover IRA at Vanguard. That is the equivalent account type and it will be needed to do a proper rollover from your employer to your broker. Do that first and let it all get settled and verify its accuracy.

Then you can decide if and when it is time to do a Roth conversion. You'll owe taxes on the conversion amount, so the timing largely depends on your current tax situation. You could even do 1/2 this year and 1/2 next year. My own personal style would be to do the rollover this year and then start converting it next year -- if the taxes were acceptable to me given other income. But that's just my OCD habits kicking in.

 

[MarieIG]

Hi Early Retirement Community,

In my 2nd week of early retirement. Woo-hoo! I have a little less than 70K in my former company's retirement plan. This is a traditional pre-tax account. My rate of return since inception (4/23/21) has been 13.54% annualized. I have this in a mix of low cost i-shares funds which I rebalance quarterly. This is with Empower and the plan fee if 0.15% annually.

Now that I've left the company, I'd like to transfer this to Vanguard. And have a few questions:

1) Any reason to leave this money in the Empower account?
2) After transferring to Vanguard, should I set up a traditional IRA or does it make sense to do a ROTH conversion?
3) Any other options for this money that I am not currently thinking about?

A little more background:

• My husband and I are both 51 yrs.
• He is still working and we anticipate an income between 160-170K in 2025
• All of our other retirement accounts are pre-tax (1M in his employer 401K, 580K in a SEP IRA, 1.7M in ESOP, 280K taxable account)

Any assistance is appreciated!

Thanks!

Additional questions. Do you or DH already have a traditional IRA set up?

 

[netternator]

The only reason to leave it with the employer is if the employer pan offers a good stable value fund... few do.

I would transfer to a traditional IRA at Vanguard so the transfer is not a taxable event given that your DH is still working and you are in a high income tax bracket.

Once your DH retires and you are in a low income tax bracket then consider Roth conversions.

Thank you @pb4uski! I agree that one needs to pee before they start to ski! (had to think about that one for a bit ) Yep, the Roth conversation probably won't make sense for us yet.

 

[netternator]

Additional questions. Do you or DH already have a traditional IRA set up?

I have a managed SEP IRA currently with Morgan Stanley but thinking of moving that to Vanguard to reduce my fees and gain autonomy. I'm not liking having to go through a middleman to get to my money. DH also has a pre-tax employer 401K with Empower.

 

[netternator]

It's a personal decision, for the most part, but I would move the holdings out of Empower to Vanguard. I don't see a real strong reason to leave an account of that size behind. Move it to the broker you anticipate using for your future needs.

To move it, I think you will need to create a Traditional Rollover IRA at Vanguard. That is the equivalent account type and it will be needed to do a proper rollover from your employer to your broker. Do that first and let it all get settled and verify its accuracy.

Then you can decide if and when it is time to do a Roth conversion. You'll owe taxes on the conversion amount, so the timing largely depends on your current tax situation. You could even do 1/2 this year and 1/2 next year. My own personal style would be to do the rollover this year and then start converting it next year -- if the taxes were acceptable to me given other income. But that's just my OCD habits kicking in.

Thank you @PaunchyPirate! Strong advice. I'm really liking the Vanguard Traditional IRA approach.

 

[MarieIG]

I have a managed SEP IRA currently with Morgan Stanley but thinking of moving that to Vanguard to reduce my fees and gain autonomy. I'm not liking having to go through a middleman to get to my money. DH also has a pre-tax employer 401K with Empower.

I had been asking about a traditional IRA as I was interested in whether you would be able to do a back-door type of conversions of post tax money only - if you were just setting up an IRA. Money in a 401k would not effect being about to effectuate a post tax contribution into a traditional IRA and then a quick conversion (to avoid or drastically minimize any tax on growth) however the entire value of SEP might might be factored into any conversion on a pro rata basis with post tax funds.

 

[Koolau]

I have heard of a theoretical advantage of leaving funds in a 401(k). The theory (not sure if ever fully tested - and attested to): Upon being sued, supposedly, a 401(k) is least likely to be at risk when it comes to your assets.

I wouldn't just assume that you're getting a "bad deal" within your 401(k). Likely, it won't compete with the funds at, for instance Vanguard when it comes to fees. BUT, I would find out the fee structure AND the available funds at your 401(k) custodian. You just might have reason to leave all or part there. As pb4uski mentioned, a stable value fund might be another reason to leave funds in a 401(k).

I have a stable value at my old 401(k) AND my original company stock is also held there (matching funds were in company stock). I have just a little added comfort knowing I not only have Vanguard to draw from, but in the unlikely event that Vanguard is ever compromised/on hold (I think that has happened) I have my 401(k) to draw from.

Very personal decisions and I agree with the other folks here that it's likely best to wait until you transfer to a tIRA at Vanguard and THEN decide when to Roth convert. That is basically what I did with a good chunk of my 401(k) money back in the day. Good luck and never forget that YMMV. I (we) am/(are) not an( ) expert(s). Heh, heh, even the experts are not experts if they aren't charging you money!

 

[SnowballCamper]

I kept money in the employer plan, but only because the employer was the govmt, and the plan is the TSP which has the G-fund holding non-marketable bonds, and rebalancing is free, and the other index funds are low cost. I'd say it depends on how well the 401k caters to your investment plan. For most of us here, a self directed IRA is preferred, but sometimes the employer plan has some nice options.