should I take out money from 401k during residency

[hantah]

Hey guys, I'm currently a PGY-II radiology resident (making ~65k). My intern program last year put ~$4000 into our 401k account. I'm considering taking this out now because I'm probably at the at the lowest possible tax bracket in my lifetime. Even with the 10% penalty, I still project that I'll pay more in taxes after retirement probably. What do you guys think?

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[bc65]

Your logic is good, but not the plan. You should keep funding the 401k, then when you leave residency, or sooner if possible, roll the money to a Roth IRA or else roll it to a traditional IRA and then convert that money into a Roth. Some 401ks might allow you to roll that money to a Roth now, but probably you can't do it until you leave that job. Some plans might allow you to have a Roth 401k directly. Check with HR.

There won't be a 10% penalty for converting that money to a Roth, and you will pay little or no taxes on the conversion because of your low tax bracket, as you noted. If you can, you should also contribute directly to a Roth IRA every year now if you can afford it. All that money will grow tax free forever.

 

[dpmd]

Your logic is good, but not the plan. You should keep funding the 401k, then when you leave residency, or sooner if possible, roll the money to a Roth IRA or else roll it to a traditional IRA and then convert that money into a Roth. Some 401ks might allow you to roll that money to a Roth now, but probably you can't do it until you leave that job. Some plans might allow you to have a Roth 401k directly. Check with HR.

There won't be a 10% penalty for converting that money to a Roth, and you will pay little or no taxes on the conversion because of your low tax bracket, as you noted. If you can, you should also contribute directly to a Roth IRA every year now if you can afford it. All that money will grow tax free forever.

The OP has already left the job that had the 401k

 

[bc65]

The OP has already left the job that had the 401k

Ah yes, thanks for pointing that out.

So if he did his internship in one institution and is now in residency elsewhere, he should just roll the 401k into a Roth IRA now. He might want to do this with Fidelity rather than Vanguard because if you want to roll your next 401k into it, Vanguard won't let you do it but Fidelity will. There may be some taxes due, but this will be a relatively small amount, and probably less than the 10% penalty he was contemplating.

OP, my choice would be to invest it all into the Total Market Index Fund. You should also be able to contribute directly to this Roth each year in addition to your 401k, if you have one. That contribution would be 5500 for you and another 5500 for a spouse, if any. The Fidelity Fund is FSTMX. Then you can do some research and see if you want to add other funds to the mix. In my opinion, the bulk of your money should be in that fund forever.

 

[QofQuimica]

Yeah, I agree with bc. OP, you should take advantage of your low income tax bracket now by rolling your 401k into an IRA, then converting it into a Roth. You will still have to pay income tax on the money, but not the early withdrawal penalty. Plus, the money will continue to grow tax-free for the rest of your life (and possibly your heir's life too, if you leave the IRA to them). If you don't already have an IRA, you can open one with any custodian, and they can walk you through the steps of doing the rollover and the conversion. Some of the popular custodians with good low-cost fund/ETF options include Vanguard, Schwab, or Fidelity.

 

[Stroganoff]

He might want to do this with Fidelity rather than Vanguard because if you want to roll your next 401k into it, Vanguard won't let you do it but Fidelity will.

Is this new? I've rolled multiple 401(x) plans into a Vanguard Roth IRA before (years ago).

 

[bc65]

Is this new? I've rolled multiple 401(x) plans into a Vanguard Roth IRA before (years ago).

I don't know. It's something that I keep reading, that Vanguard doesn't accept multiple IRA rollovers. Perhaps they changed or perhaps I misunderstood the circumstances under which that applies. I guess I'll need to look into it more closely.


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[QofQuimica]

I have my IRA with Schwab, so I didn't know the answer offhand either. Looking through Vanguard's FAQs about 401k rollovers did not provide any info regarding multiple 401k rollovers. It could be that you're both right, and they have a limit to how many 401k rollovers you can do in a certain period of time (say, one per quarter or one per year). But anyone who is interested will have to contact VG customer service to find out what their policy is for sure.

 

[Stroganoff]

I don't know. It's something that I keep reading, that Vanguard doesn't accept multiple IRA rollovers. Perhaps they changed or perhaps I misunderstood the circumstances under which that applies. I guess I'll need to look into it more closely.

What I've done more often was roll over 401(k) plans to a Rollover (Traditional) IRA, but it's been years since I rolled directly into a Roth IRA (with automatic Roth conversion).

If the question is 401(k) to Rollover/Traditional IRA (i.e., everything is still pre-tax), I've done that quite a few times with Vanguard with no limits.