Q. How should a person handle multiple 401(k)s from previous employers? Is it best to consolidate them into a single plan or maintain separate ones?
A. It really depends on the individual plans — some 401(k)s have high administrative fees or poor investment choices, while others have lower-cost funds than average. In general, the larger your plan, the less costly it is likely to be. So it’s important to look into the fees you’re paying and if you could do better elsewhere, or you want a larger investment selection, it makes sense to roll over to an IRA. Administratively, it can also be easier to have your money in one place.
Q. What’s a good time to convert a Traditional IRA to a Roth IRA? What criteria should you consider?
A. It makes sense to convert a traditional to a Roth when your income is down, as you’ll pay taxes on the conversion. So if you’ve decided this is the strategy for you and you’re having a low-earning year, it might be time to pursue it. You also want to consider whether a Roth IRA is right for you — generally, a Roth makes sense if you think your income and tax rate will be higher in the future. That’s often true for younger workers, but older workers may have less clarity. If you’re not sure, it makes sense to work with a tax advisor.
Keep in mind, too, that you don’t have to convert the whole account balance — you can convert a portion of it. You want to be able to afford to pay the taxes owed with money you have outside of the account.
Q. For people retiring with pension income, investments, a 401(k) and Social Security to draw from. Which sources should they turn to first to cover my expenses?
A. In retirement, you want to focus on minimizing taxes and allowing your investments to continue to grow. Many people will spend 20 or 30 years in retirement, so you need that growth so your money lasts as long as you do. It makes sense to work with a financial advisor to create a customized retirement income plan.
Depending on how old you are, you may be pushing up against required minimum distributions, which apply to employer plans like 401(k)s and traditional IRAs at 70 1/2. The IRS wants to start collecting on those taxes you’ve been deferring.
Beyond that, though, it’s often best to allow tax-deferred money to continue to be tax-deferred, so most people would want to take those RMDs and then pull any additional income needed from taxable accounts, which are subject to capital gains but not ordinary income taxes. Roth IRAs are not subject to RMDs, and most people want to use withdrawals from them to stay in a lower tax bracket, since qualified Roth distributions in retirement are tax-free. For example, if you’re bumping against the next tax bracket, but you need to draw more money, you may want to take that additional money from a Roth.
Finally, it’s generally best to delay Social Security until age 70, as you get a raise for each year you put it off.