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Hello,
I'm 30y/o and have a traditional IRA at Vanguard. I was always told that having a Roth IRA is better when you're younger so when I started working at a new company, I told them I wanted it to be a roth. Well, I no longer work at that company and I thought I would combine the two accounts so I could get a higher interest.. especially since I contribute some money into it monthly.. I was going to rollover the roth but I was told I would get taxed on it again when I retire and take the money out... one option is to not touch it but I wouldn't be able to contribute anymore money into it... another option is to open a new roth IRA with Vanguard and keep them separate.... it just occurred to me that I could also change my current traditional IRA to a roth and pay the taxes now so I can combine the roth and contribute money into the combined amount. Would this be the best option? Are there any downsides to switching over from a traditional to a roth?
A Roth is definitely preferable to a traditional IRA but as to it making sense to combine them well you need to do some conjecture on whether your marginal tax rate now is less that what it would be at age 70.5 or whenever you decide to start taking the money out.
Personally, if the tax amount is not high I would be inclined to just move all the funds to a Roth.
Go to the broker that the ROTH is at and tell them you want to roll the IRA to the ROTH. They will take care of the paperwork for you. You will probably have the option to sell all in the IRA or to move the securities. Makes no different on taxes. Vanguard may withhold 20% for taxes. If they do you need to put in your 20% otherwise you will have a penality to pay on the 20%. Key is you never have the IRA money sent to you, it goes directly to the broker.
I do not think combining will get you more interest. You should be investing in equities and no bonds.
You could also have Vanguard open a ROTH for you and roll the IRA into it. Then have Vanguard roll the other ROTH into Vanguard.
It is easy to do so just ask the broker to make sure you have the steps down. You will probably do everything on line.
I do not think combining will get you more interest. You should be investing in equities and no bonds.
Why do you say that? Wouldn't I get more interest back on 40K combined than two accounts with 20K in them.. and one of them I can't even contribute to?
The difference is, of course, pre-tax versus after-tax dollars. In a traditional 401K, you invest what would otherwise be tax-dollars in your portfolio - hoping that the greater growth over the years, will more than compensate for your tax bill later. On the other hand, investing the same dollar-for-dollar after-tax amount in a Roth 401K, means you must invest more of your own money now.
For a young person, a Roth is often considered a better investment vehicle, since you have longer for the money to compound before taking it out (at retirement), plus have the flexibility to take-out funds earlier, without the penalties associated with a 401K. Since you have already paid taxes on your Roth 401K dollars, you are not required to pay taxes again later (except, perhaps, capital gains taxes).
The difference is, of course, pre-tax versus after-tax dollars. In a traditional 401K, you invest what would otherwise be tax-dollars in your portfolio - hoping that the greater growth over the years, will more than compensate for your tax bill later. On the other hand, investing the same dollar-for-dollar after-tax amount in a Roth 401K, means you must invest more of your own money now.
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you actually are not investing more of your own money in the roth 401k . you are actually investing the same. but you need more pretax dollars with the roth to pay the taxes up front .
6660 pretax dollars in the 25% bracket is 6660 in the traditional and 5k in the roth with rest paying the taxes up front
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