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robmandu's avatar

Financial idea: crazy enough to work? or just crazy?

Asked by robmandu (21215 points ) March 9th, 2009

It was recently suggested to me to pull my money out of my 401(k) and place it in a regular IRA.

Then, from there, move it to a Roth IRA.

I didn’t have time to learn about all the details. But it was explained to me that it’s important to be meticulously careful and perform both transfers in order.

The idea is that I’d have more control/latitude over my money and yet would not remove it from the market. But if I wanted to, I could pull it out almost immediately.

The biggest drawback would be the tax deduction when moving funds into the Roth IRA. But, if you were to go back 6 months ago and do this knowing what you know now, it would’ve likely been an easy decision to make.

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10 Answers

RandomMrdan's avatar

yeah, I don’t deposit money into my ROTH IRA anymore, it was getting tanked with losses, so now I’ve just been putting my money into savings, and mutual funds that have a track record for slow and steady growth.

shilolo's avatar

Well, now is a good time for this conversion, if you believe that the market will eventually rebound. The big tax burden is that you will have to pay income taxes on what you convert, since the 401K was pretax, the regular IRA is pretax, but the Roth is not. Since you, like everyone else, have probably taken heavy losses, the dollar amount you convert now will be a lot less than it was 2 years ago if you had done the same thing, and thus your tax bill will be much lower now. Whether or not you decide to do this is obviously personal preference, but, if you were thinking about doing this before, now is as good a time as ever (if not better).

Actually, going back to your last point about 6 months ago, I would say that it is even a better time now than before, since the market is even worse off. So, assuming you make a share-for-share transfer, you will save a lot of money in the long run this way.

Bri_L's avatar

I think there is a limit as to how much you can put into a Roth IRA in any given year isn’t there?

shilolo's avatar

@Bri_L Yes, there is a limit to direct contributions depending on your filing status. There are also limits on who can convert traditional to Roth IRAs. However, those limits disappear in 2010 (supposedly).

robmandu's avatar

Per @shilolo‘s second link and a couple of other places I’ve looked, it appears my biggest hurdle right now is that I’m not allowed to move out of the 401(k) until I leave the company.

Huh.

miasmom's avatar

@RandomMrdan You can have a Roth that is a money market fund, so you should still contribute, just don’t put it in stocks right now.

shilolo's avatar

Well, respectfully, I would disagree. Again, if you believe the markets will recover eventually, and if your time horizon is long (i.e. you don’t need the money next year), then I would say that lots of stocks/mutual funds are undervalued at the moment. It requires an iron will, but, these are the types of opportunities to make money in the long run.

miasmom's avatar

@shilolo I was just commenting that @RandomMrdan wasn’t contributing to his Roth at all because he was scared of the market, he can still contribute and make a Roth a money market account…personally I agree, now is the time to buy stocks while they are so undervalued.

Mamradpivo's avatar

I think now is a bad time to ump your 401k. You still own shares, but their monetary value is quite low right now. Selling at a huge loss to open another account that will likely take immediate losses might not be too bright.

There’s no reason you can’t open an IRA on your own. Maybe you could decrease your 401k contribution and open an IRA with the difference, if you think you want an IRA.

laureth's avatar

If you expect to be in a higher tax bracket when you retire, a Roth is probably the best choice. However, from what I understand, you don’t have any more control over a Roth than over a regular IRA, and it’s not any easier to pull out. So my vote goes for “crazy” – unless that tax bracket bit is true for you.

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