kodokan

Under the age of 59.5:

- you can withdraw a direct contribution at any time, but not the earnings without paying the penalty. Some people use their Roth as their emergency fund.

- you can withdraw funds resulting from a Roth IRA rollover after 5 years, but again, not the earnings without penalty.

jmood

So if I transfer my 401K into a Roth IRA, I can withdraw my direct contributions to the 401K after 5 years without penalty?

AdobePinon

No idea, but I wouldn't be surprised if you have to pay taxes on the conversion (401k is tax deferred but taxable income when you withdraw it, Roth contributions are taxed at the front end so that withdrawals are tax-free).

kodokan

The steps are:

- leave job, and roll 401k into Traditional IRA. This is a non-taxable event, and no penalties due; the entire fund transfers.

- roll money from Trad IRA to Roth IRA. This is a taxable event, taxed at your marginal rate for that year, but still no penalties. Repeat the following year.

- 5 years after the rollover, withdraw that amount (but not the earnings until 59.5), with no extra tax to pay. Repeat the following year.

This is a popular move amongst the early retirement crowd. The trick is to have 5 years living expenses saved up, which you live on (as it takes 5 years to build the Roth IRA ladder). As you have no earnings, and just a bit of income from dividends/ capital gains, your marginal rate of tax during this time is very low. So you end up taking money that was tax deferred during your working life at perhaps 25%+, and paying somewhere between 0-15% tax on it, depending on how much you roll over, and your other sources of income.

nun

I would take the 401k and roll it over into an IRA with Vanguard. Then you have plenty of time to decide if you want to move it to a ROTH. Never withdraw money early from a retirement account unless you are doing a 72t withdrawal of substantially equal payments and so can avoid the 10% penalty, and only do that after some careful planning.

jmood

If I'm NOT going to make any early withdrawals, what is the benefit of keeping the money in the 401K as opposed to in an IRA?

Michael

Or if you have little or no income for the year, then rollover an amount equal to or less than your deductions plus exemptions minus other income to a Roth IRA and pay a 10% penalty and no income taxes.

Michael

There usually are none since you generally have less choices of investments plus higher expense ratios than you can get from Vanguard or brokerages that offer commission free low expense ratio ETFs.

jmood

Why Vanguard as opposed to any other IRA?

nun

Because Vanguard has some of the lowest fees on its funds. They will also help you with the rollover