401k

Two weeks ago, I received forms from Scudder, my 401k manager, to rollover my 401k.  They were somewhat confusing.  After reading the pamphlets and some information online, I understood that I have a few options.

1. Cash out the 401k, but pay taxes and penalties.

2. Don't do anything, and continue investing the 401k.

3. Rollover to a Traditional IRA.

I was less confused about how to execute each option and more confused about the consequences of each choice.  I originally thought I ultimately want a Roth IRA, not a Traditional IRA, because I'm hoping Trevor will eventually make $300k/year!  Sounds crazy, but why not plan for it?  hehe.  Hoping that we would be in a higher tax bracket in the future, I would rather pay taxes on my retirement investments now rather than when we have to pay 50% tax (or whatever it is for $300k income).  But my research showed that you can't move a 401k to a Roth IRA, you have to move it to a Traditional IRA.  You can first move it to a Traditional IRA and then move it over to a Roth IRA, but I think there are penalties involved (not sure, was confused here), and you would definitely have to pay taxes.  I was also confused about some details in the rollover to a Traditional IRA: did I have to stay with Scudder?  Could I move over to Fidelity?  Would there be a penalty?  Is that like cashing out?

Lucky for me, my Daddy has a financial advisor who was happy to call me and help me with my questions.  He took me step by step through each of the options.  Door number 1 was quickly ruled out because I don't want to pay taxes and I don't want penalties.  Furthermore, I have no need for the money.  I originally thought door number 2 was not a good idea because there are not many options for me to invest if I keep it as a 401k.  I actually do not know the details of my limitations, but it sounded less flexible.  Turns out, this was the best choice for me!  Andy, the financial advisor asked me, what do you plan to do once Kira is in first grade?  Do you plan on going back to work?  I said I don't know.  I could be back in school, I could be back at work, I could still be doing the mom thing.  It depends on a lot of things!  How many kids will there be when Kira is in first grade?  How much will Trevor be making?  How much will our mortgage be?  So, seeing that I need more information about our future, Andy suggested that I keep the 401k as is.  That means, until I start working again, the 401k is frozen in terms of contributions.  I could open up a Roth IRA in the mean time to continue saving tax-free.  Once I start working again, if my new company accepts rollovers, then I can move the 401k to the new company.  Most large companies will accept a previous 401k.  Some smaller companies will not.  But when I cross that bridge, I can decide to do something with the old 401k.  The other reason why this is the best option is because once I move the 401k to a rollover Traditional IRA, I can't go back to having a 401k!  I did not know that!!!  That is a very important point.  Other benefits to keeping the 401k include the option to start cashing out at age 55 rather than age 59 with a Traditional IRA, and the option to take out loans on the 401k, which is not allowed with the Traditional IRA.

I'm really glad I had the chance to speak with Andy.  He listens and communicates well.  He's also obviously very smart.  I remember hanging out with him and his kids when I was little.  We spent a day on his boat.  It was fun...but cold!  I also remember hanging out in his hammock with my Dad.