YA Wealth Management/IRA Question

[s0me0nesmind1]

Great points. Fortunately, my wife and I are in a good position right now. We're both gainfully employed and have no outstanding debts. Furthermore, she just finished her PhD so I don't think any more schooling is in her near future What IS in the near future (i.e. 6-24 months) is a house purchase and potentially a kid if we're up for it. I think my cash assets should be satisfactory for at least a down payment on the house and we'll figure out the kid when we cross that bridge.

::Fingers Crossed:: we shouldn't resort to pulling money out of our retirement accounts anytime soon.

With that said, I've been pretty terrible at investing the past 10 years so have had cash just sitting there doing next to nothing (actually nothing). Furthermore, my old 401k has been sitting appreciating for 3 years. I'm trying to get my finances in order and put myself in a good position for retirement in about 30 years.

I've actually heard great success from taking loans out of 401k's (again, as far as I know this advantage is only for 401k's).

Let me give you an example: You want to buy a house, let's say it's $300k in your area. In order to avoid paying PMI (Loan Insurance) on your home, you need at least a 20% down payment (some it's 22 or 25%?). Most people don't have $60k+ in liquid assets sitting around. So they have to suck it up and pay PMI to the bank for 5+ years of wasted money.

If you take a loan from your 401k, you're essentially borrowing from yourself. Any "fees" you pay is simply paying yourself back into your own account since that's what you are paying back. Your only net loss is any gains on the amount you loaned in possible gains from the stock market. Hell, the stock market could have gone down during your loan and you would get a net gain I believe...

Point simply being, there are situations where that can be very beneficial. If you have ever experienced having to pay PMI on a home loan, it sucks balls and should be avoided like the plague.

 

[Exterous]

Any thoughts on which route I should take? Is there any benefit to the IRA rollover (versus rolling over into my current 401k) especially if I don't get the tax benefits of contribution? This is, once again, coming from a very novice investor who'd prefer a "set it and forget it" approach.

If you are planning\hoping to retire before the 401k eligibility year (55 or 59.5 depending on circumstances) you can use the 72(t) rule to withdraw 'Substantially Equal Periodic Payments' as determined by the government based on a number of variables including your account balance. Having two pools of money and the option of applying a 72(t) to only one of them may be a consideration based on your circumstances.

 

[Connoisseur]

I've actually heard great success from taking loans out of 401k's (again, as far as I know this advantage is only for 401k's).


Point simply being, there are situations where that can be very beneficial. If you have ever experienced having to pay PMI on a home loan, it sucks balls and should be avoided like the plague.

Great advice. i'd definitely have to consider this for home buying. Sadly, where I'm looking (north Jersey), home prices are quite a bit more than 300k

other than the fees/expense ratio, is there any value into rolling over into an IRA vs my 401k just so I can contribute an additional $5,500 a year into the account? If I roll it over into my employer 401k, my understanding is that i'm restricted to the 18.5k 401k limit.

 

[s0me0nesmind1]

Great advice. i'd definitely have to consider this for home buying. Sadly, where I'm looking (north Jersey), home prices are quite a bit more than 300k

other than the fees/expense ratio, is there any value into rolling over into an IRA vs my 401k just so I can contribute an additional $5,500 a year into the account? If I roll it over into my employer 401k, my understanding is that i'm restricted to the 18.5k 401k limit.

You can open an IRA without having to roll anything over.

You are allowed $18k for a 401k (as of 2015)
You are allowed $5.5k for an IRA.

Total investment of $23.5 max for the year (under the presumption you do not qualify for "catch-up" contributions).

That said, there are limitations for if you are eligible to contribute to an IRA or not. Since you said you were married, the limit for a ROTH IRA is currently at $193,000 (begins to phase out at $183,000). See: http://www.rothira.com/roth-ira-limits

Rollovers do NOT qualify as contributions for the year. As in, if you rollover $200k, you can still contribute another $18k from your paycheck that year (or $5.5k in the case of an IRA).

 

[Connoisseur]

Thanks for all the advice. I think my plan is as follows based on the advice here and reading online:
1) Roll over my old 401k into my fidelity 401k. My current investments are with Vanguard 2045 Target Retirement which is the fund I would have used anyway had I rolled over into Vanguard IRA. However, the expense ratio at Fidelity is MUCH lower (0.18 vs 0.06) than directly investing with vanguard.
2) I'll open a new "back door" Roth IRA with Vanguard and start contributing to that as well on an annual basis.

This should help me invest as much money as possible in a "set it and forget it" mode and I can worry about investing any leftover money by myself (i.e. index funds/ETFs).

 

[Exterous]

2) I'll open a new "back door" Roth IRA with Vanguard and start contributing to that as well on an annual basis.

Their funds have various minimums to invest in that account. For example VTSMX requires $3,000 to invest and many of their target dates have $1,000 minimums. When I opened my account years ago they waived the minimums to the Investor Class funds as long as I setup recurring contributions. I do not know if that is still the case. If you are planning to contribute the max its not a big deal since, worst case you just save up for a bit, but something to be aware of

 

[Connoisseur]

Their funds have various minimums to invest in that account. For example VTSMX requires $3,000 to invest and many of their target dates have $1,000 minimums. When I opened my account years ago they waived the minimums to the Investor Class funds as long as I setup recurring contributions. I do not know if that is still the case. If you are planning to contribute the max its not a big deal since, worst case you just save up for a bit, but something to be aware of

Thanks. I plan on contributing the max so hopefully it shouldn't be an issue.

 

[s0me0nesmind1]

2) I'll open a new "back door" Roth IRA with Vanguard and start contributing to that as well on an annual basis.

Are you fully aware of how to do a backdoor ROTH?

I ask, because I am not 100% sure since I haven't actually done it. It seems rather simple if I am understanding it correctly.

1. Open a normal TAXABLE investment account with Vanguard.
2. Open a ROTH IRA Tax-advantage investment account with Vanguard.
3. Contribute Money ($5500) to the Taxable account.
4. By the end of the year, do a rollover from the taxable account to the ROTH IRA Account. Keep in mind, you only get 1-rollover per year if I recall correctly...
5. Profit? Since no contribution was made to the ROTH IRA (technically, since it's a rollover and not a contribution), the entire Income Bracket clause of the ROTH IRA is negated.

 

[Connoisseur]

Are you fully aware of how to do a backdoor ROTH?

I ask, because I am not 100% sure since I haven't actually done it. It seems rather simple if I am understanding it correctly.

1. Open a normal TAXABLE investment account with Vanguard.
2. Open a ROTH IRA Tax-advantage investment account with Vanguard.
3. Contribute Money ($5500) to the Taxable account.
4. By the end of the year, do a rollover from the taxable account to the ROTH IRA Account. Keep in mind, you only get 1-rollover per year if I recall correctly...
5. Profit? Since no contribution was made to the ROTH IRA (technically, since it's a rollover and not a contribution), the entire Income Bracket clause of the ROTH IRA is negated.

That's my understanding with one key difference; you have to immediately roll over your standard IRA contributions to the Roth. Any realized gains made while the funds are in standard are taxable. Considering that Vanguard actively advertises the backdoor Roth IRA and provides instructions on their website, I'm fairly certain they'll walk me through the process. I want to try and get it done before the calendar year so i can make contributions this year and next.

 

[dullard]

Are you fully aware of how to do a backdoor ROTH?

I ask, because I am not 100% sure since I haven't actually done it. It seems rather simple if I am understanding it correctly.

1. Open a normal TAXABLE investment account with Vanguard.
2. Open a ROTH IRA Tax-advantage investment account with Vanguard.
3. Contribute Money ($5500) to the Taxable account.
4. By the end of the year, do a rollover from the taxable account to the ROTH IRA Account. Keep in mind, you only get 1-rollover per year if I recall correctly...
5. Profit? Since no contribution was made to the ROTH IRA (technically, since it's a rollover and not a contribution), the entire Income Bracket clause of the ROTH IRA is negated.

I've done this once when I didn't qualify for a Roth IRA.

I've underlined the incorrect parts. You need to have a non-deductible contribution to a standard IRA, not a taxable account. The two may look similar at first glance, but they are quite different. (A) you are limited to how much you can put into a standard IRA, (B) there are no capital gain taxes in the IRA until you withdraw the money.

But you were correct about the profit section. It basically lets you ignore the income limit on Roth IRA contributions. The big gotcha is if you already have an IRA. Then you can't easily do the backdoor Roth IRA contribution, and if you do you probably will have to pay a lot of taxes in the conversion year (it may still be a good idea though).

There is no time limit to this (other than if you want it to occur in a certain tax year). But, it is easier if you do it in the same day, because then you don't have to worry about tax complications during the conversion year.

 

[jlee]

OP - one option could be a fee only adviser that you meet with to setup a plan and then meet occasionally to make sure you are on track and don't need to make any major changes. They are usually only a couple hundred dollars per meeting (so 0.2-0.4% ER on $100k) and have no vested financial interest in you going with certain funds over others.

Sure you can do it yourself for even less but if you are uncomfortable doing this on your own (or at least to start) this would give you a professional to keep you on course. This can be really important in periods of economic downturn. In 2007 far too many people thought they could take the risk of stocks only to flee the market in droves when it went down and then proceeded to miss out in one of the best bull markets in history. Paying that advisor a couple hundred to tell you to stay in the market would have made you a lot of money in the long run



As an aside this is going to vary based on the WM firm. I am also a trustee on a trust that uses a WM firm and they take 0.9% and do far more than have some low level staffer make binders. They offer tax advice, situational modeling, personal (and automated) bill management service and assistance in dealing with various government agencies (ORS, SS etc) - to the point that, if they have to, they'll send someone to go with the person to the SS office to help sort things out. I am a replacement trustee and going over the last 25 years of statements (and comparing them to the appropriate benchmarks that I choose instead of the ones they gave me) showed that they did actually outperform the market along with various portfolios I backtested against (3 fund, 4 fund, coffee house, 60/40, etc)

That said I don't use one for my own money and, unless you have a high net worth and\or a complicated situation, I don't think they would be the best option for a lot of people. Even then it will be a bit of a search to find a good WM firm

You should always stay in the market. There's no need to pay someone a few hundred dollars to tell you that.

 

[Exterous]

You should always stay in the market. There's no need to pay someone a few hundred dollars to tell you that.

I'm not going to disagree with you but some people have a harder time than others watching 50% of their retirement disappear. Its more important to estimate your reactions correctly and pay someone some money if need be than to say 'nah I'll be fine' and then withdraw money at the bottom.

Besides that there are some other benefits like advising you on when to increase bonds, should you delay SS, how to tax loss harvest etc that you can get from them as those situations arise

For someone who doesn't want to spend a lot of time learning all the ins and outs a fee only could be a good choice esp compared to many of the WM\Investor companies out there. If you do want to learn yourself there are a ton of great resources. https://www.bogleheads.org/ is one and has a link to a lot of great books. "The Millionaire Next Door", while not an investing book per se, is another great resource and really made an impression on me.

 

[Connoisseur]

Thanks to everyone's advice, I initiated the process of transferring my old 401k to my current employer 401k and opened a Vanguard IRA and Roth to go the "back door" route. I should have everything set by next week. Should've done this a few years ago but better late than never I guess.