Where should someone in a low tax bracket move his 401(k) from a former employer?
I'm 23 years old. I have a 401(k) account with my old company, but I have since left the company. Now the money is just sitting there and I want to contribute to it. I want to hopefully open up my own account so I can continue contributing to it. I am thinking may a Roth IRA or something like that since I'm in a low tax bracket as a single, part-time employed, college student. How do I move it? Where do I open an account? Should it be an IRA?
One method is to transfer (not rollover!) your 401(k) money into two separate IRA accounts. Your pre-tax money (the money that was subtracted from your salary) can be transferred into a traditional IRA and your after-tax money (where you didn't get a salary reduction) can be transferred into a Roth IRA with the same institution as your traditional IRA. This will give you maximum flexibility.
Be sure to do two transfers, not rollovers. The IRS has become very picky about rollovers since 2016 and you should avoid them wherever possible. Once you decide which broker should hold the two IRA accounts, they will have a transfer form to have the funds moved from your 401(k) into your two new IRAs.
In addition to these transfers, you should contribute 5500 dollars each year to a Roth IRA--either the same one as above or a different one. If your salary for any given year is less than 5500 then you can contribute up to the total amount of the salary listed on your W-2 form.
Having IRA accounts from a young age allows you to grow your money tax-free for decades. Roth IRAs are best since you will never have to take required minimum distributions or to pay taxes on the money.
Yes, a Roth sounds like the best option for you.
But there are a couple of steps.
1) Open a Traditional IRA at Betterment.com
2) Get the Rollover/Distribution form from the old company 401k provider. This may be one online too.
3) Choose "Rollover" on the form and enter your new Trad IRA account # and address of Betterment
4) Once the money is in the Trad IRA, it may make sense to do a Roth Conversion (a fee-only adviser can help)
5) Now you have a Roth with money already in it. You can add to it also. Automate a monthly amount.
Hope that helps...
A 401(k) can be rolled over or moved to and an IRA account at any bank or financial institution. In order for it not to have a tax effect, the funds must be moved either to another 401(k) or to an IRA. If you contributed to your current 401(k) on an after-tax basis, the funds would already be a Roth 401(k). If your company matched, those funds are pre-tax. Opening either a Roth IRA or a traditional IRA is very easy, similar to opening up a checking or savings account at a financial company. As you research the companies to move to please be mindful of the investment selections they provide as some companies have relatively expensive mutual funds while other have a broad choice that includes exchange traded funds as well as institutional share class mutual funds.
Good for you that you want to move the money and not cash it in! The idea of going to a ROTH may be a good idea since you will pay the tax now, at the low bracket and at retirement withdraw tax-free. You could open an account at a brokerage house such as Scottrade, Vanguard or Etrade and select low low-cost mutual funds or ETFs. While not sexy, some of the target allocation funds can be appropriate for a young person.
Your old employer may have paperwork that you are required to use and your new custodian will have their paperwork. Speak with your old employer and they can send you the forms if they haven't already and the new custodian may process your application and the employer's forms for you.
If you want to have a closer access to your 401k assets, you can request a transfer to a Rollover IRA. This will give you the ability to chose your own investments and review your performance more frequently. Sometimes it's beneficial to leave your asset to a former employer if they have a really good and inexpensive fund lineup (you want to verify that before you make a final call).
For your future savings, I recommend that you open a Roth IRA. You can save there up tp $5,500 per year.