how to pick an IRA account?

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Wealth & Personal Finance

Long time no post!

winnie-retirement-goals
#goals: to be a rich little old lady that crochets cute amigurumi
I’ve been meaning to rollover my former employer’s 401(k) account for a while now… 1.5 years after I left the job. On Thursday, I went to an event at called “Investing Better” where I hoped to learn more about strategies and literally invest better (it didn’t happen) but it did spark me to take action to consolidate my multiple accounts.

For transparency, with my old employer I have both a traditional 401(k) and the Roth 401(k). I decided to contribute to both plans because I figured it doesn’t hurt to put more money into retirement. My thought process was that I was in my lowest tax bracket of my life, so I can do Roth. I put money into traditional since that was the default option :D. I also opened up a separate Roth IRA a few months later, because why not? I was 22 and with so many years to grow…

winnie-retirement-accounts
my little piggies are gonna grow to be big and strong *—–*

Which Broker to Use?

Thanks to Nerd Wallet, who put together a great summary table here. They compared the brokers, what it’s best for, cost of making trades, and current promotions.

I am looking for something that is low-cost, so I am deciding between Fidelity and Vanguard thanks to Nerd Wallet.

Fidelity has this amazing promotion going on to match 1-10% IRA contributions for current year + next 2 years depending on how much is deposited. To much sadness, I did not qualify since “direct rollovers from a 401(k) are not eligible.”

Vanguard was my next choice and the broker I had in mind already but needed some extra reassurance. It also helps that my current employer switched to Vanguard so I already have funds here.

Rollover or Convert?

The next hurdle is figuring out if I wanted to convert my Traditional 401(k) portion as well. Note that this is a very personal choice!

winnie-retirement-rollover-convert
go snowball go! up the hill

Rollover Traditional 401(k): Since I am with an employer that has a Traditional 401(k), I have the option to roll my account over as the same type.

  • This allows me to keep the money and growth tax-free until I withdraw.
  • My investment options would be limited to 16 funds and the Targeted Age fund.
  • The 17 options seems very limiting to me.
  • I think I will be in a higher tax bracket when I retire (goals of becoming super wealthy :P) so maybe it’s better to convert now.

Convert to Roth IRA: This will trigger a tax situation and 20% of the amount will be withheld from my conversion check so I could pay taxes in April.

  • This allows me more freedom of choices and I can pick individual stocks as well.
  • If I don’t feel like picking stocks, I have more options for funds outside of the 17, including ETFs and index funds

Conclusion

I am going to convert my Traditional 401(k) into a Roth IRA account vs rolling into my current employer’s plan. I’m going to combine my Roth IRA accounts together. I’m going to read up on different funds and look to invest in stocks as well.


Most importantly, I will then move all this Roth IRA money into Fidelity for that % match. Haha!

Bring on the moniesss 💰 !

[Edit Oct 19, 2016]

What ended up happening was I could not convert my old employer’s Traditional 401(k) into a Roth IRA off the bat. Why? Because it would require combing two steps into one. So, here are my brand-spanking new accounts:

  1. Old Employers Traditional 401(k) –> Rollover IRA (pre-tax)
  2. Old Employer’s Roth 401(k) –> Roth IRA (post-tax)

Step By Step

Step 1: Pick the broker and figure out the payee name

I picked Vanguard, so I went to their handy dandy 401k-rollover page to learn more. It was confusing. The first guy I called led me to a form that was to rollover my previous employer’s 401(k) into my current employer’s 401(k). No. That’s not what I wanted.

I did learn that the check needed to be paid out to Vanguard Fiduciary Trust Company, FBO [your name]. So… make sure you know where the check goes. This is your retirement money moving. Don’t be hasty.

Step 2: Initiate distribution from old employer

Go onto your previous employer’s page to initiate the transfer. Each retirement company handles it differently (JPMorgan uses RetireOnline). Do a search for “rollover,” or better yet, hop on the phone with someone to get that process started. They will ask who to write the check out to. That’s where step #1 comes in handy.

My check arrived and I stalled for 3 weeks… But then I was ready and focused to open up new accounts! (I still thought it was 1 account at the time).

Step 3: Open up new account(s)

This was such a confusing process that I called Vanguard to guide me. I waited 5 minutes or less on the line and the lady on the other end was so surprised I was excited vs disgruntled.

I explained to the Vanguard rep that I had two checks. One was pre-tax and one was post-tax and I was so confused because the check balances were so similar (about $600 difference). I read the checks out loud to her and we figured out something: there was one check that said “RTH” on it and we safely assumed this was my Roth 401(k) balance. Cool beans. Phew, hopefully an income tax audit dispute mitigated 🙏.

winnie-retirement-rep-call
oh hey Customer Service Rep, you da best
I opened one account at a time with the Vanguard team on the other end of my phone line because I didn’t want to mess up. So the Vanguard rep and I walk through the sign-up process together online. I get the Rollover IRA open, yes! I get the Roth IRA open, yes!

Step 4: Mail the checks to the new brokerage

Now I have my accounts set up and I entered in the balances Vanguard should be expecting. I get a blank envelope and write their address down and all that jazz. The Vanguard rep advises me to include a letter explaining the two accounts with the account numbers and the check numbers. Nobody wants to mess up when it comes to money. So I do that. I even put post-its on the checks with the information because why not? Let’s be organized.

Step 5: Wait for the money to be transferred and select funds

The cool part about Vanguard that I didn’t expect was after all that set up was done, the last question was like, do you want to pick your funds? I thought out loud, “No, I’ll just do that later after I read” and the Vanguard rep basically says, “Are you sure? We can help direct you and provide our thoughts.” Nice. I tell her I was thinking of XYZ but then I decided not to because the risk was high (4/5) and she basically said, “Girl, you’re 25, those are what all your funds should be like since it has time to grow.”

But seriously, do some reading, look at the return %, the expense %, and risk factors.

Transferring Roth IRAs

Alright! So outside of these 2 Vanguard accounts I have, I also have an E-Trade account that I opened when I was 22 or so when I started my first job out of college (the one I mentioned in my intro). A friend said she had an account and I thought, I should have one too! Literally.

Since I was reading up about the retirement accounts and saw Fidelity’s promotion, I thought: heck, yeah! I gotta take advantage of that match!

I called them today and they confirmed that the TOTAL money in the account needs to be at least $10,000 to get the 1% match. Refer to Fidelity’s site for their match table. These funds can be made up of:

  1. Transfer Roth IRA from another brokerage
  2. Checking account contribution

So now I am ready to move more monies around and contribute up to the IRS limit this year ($5,500) while I still qualify.

Step 1: Call your current institution

I was trying to find information on the ETrade site but it was awkward to navigate and find the information I was looking for:

  1. Is there an account closure fee?
  2. What do I need to do on the ETrade site to make this happen?

So, there is a $60 account closure fee, but I called Fidelity and they said they would credit that balance to me (yay!) and there’s nothing else but to have Fidelity initiate the transfer.

Step 2: Call your new institution

I was on the phone with Fidelity to “Open a New Account” –> Roth IRA. The rep was there to guide me to make sure I was clicking all the right bubbles. When it came to “how are you funding your account?”, he said to click “go back to my accounts.”

On his end, he entered my ETrade account number in. I searched for “transfer tracker” and saw on that page that my ETrade account was linked. I pressed “continue” and viola–complete! Now it’s just a waiting game of 5 business days before the money moves.

January 2017 is when the 1% match should appear. Whoohoo free money 💰.

Edit: March 25, 2017

With the Fidelity retirement account, the commission on trades (equities/stocks) dropped to $4.95, which is much lower than ETrade and Vanguard. However, I was not planning to select anything outside of mutual funds (mostly the age target because studies have shown the age target always beats self managed, unless you’re super good at following trends). The Fidelity expense ratio for my age was 0.77% vs Vanguard of 0.16%. So I moved it into Vanguard. I lost $50 in account closure fees (which nets out higher since the expense from the Vanguard fund is less). Always double check! I thought I was getting a good deal with the match of 1% but the Fidelity expense would’ve ate it up.

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