My friend Josh had an interesting piece of advice for me: take this opportunity to roll my old employer’s 401(k) into a traditional IRA, then switch that into a Roth IRA. The rationale:
1) 401(k)s have taken a beating as the economy has tanked; if I convert to a Roth now, the taxes would be less than they would be in a bull market.
2) I’m only working 5 months this year, so presumably, I’m in a lower taxer bracket than I would be next year.
3) Roth IRAs are usually better investments than 401(k)s and traditional IRAs.
4) Hmmm…the IRS only let’s you contribute $5K a year to a Roth…to be able to roll over my whole 401(k) would be the equivalent of maxing out my Roth starting at age 23…that’s huge.
Other considerations:
a) I think I’m firmly planted in the 25% tax bracket this year, but if I were to do this, I have to make sure it doesn’t land me in a higher bracket (whatever you rollover counts as income);
b) This is ideal if you think your tax rate now will be less than where you’ll be at when you retire;
c) You have to pay taxes when you roll the IRA into a Roth.
I’m going to think about this some more. Anyone have any thoughts? I might be overlooking some critical details here.
But if any of you are in school, and have some money in your savings to pay the taxes, this would be a great move because you’re essentially in the lowest tax bracket.
