A year ago, when I met with my accountant, we spent some time talking about our retirement, our goals, and how we were going to reach them. In looking at our retirement accounts, I saw that the vast majority of our savings were in tax-deferred accounts like 401(k)s and Rollover IRAs. We only had a very small percentage in tax-free Roth IRA accounts, which I’ve always said was probably the best retirement account in existence. Where else can you invest in the stock market and have your gains be entirely tax free? Nowhere.

Right now, you can convert a traditional IRA to a Roth IRA as long as your adjusted gross income is under $100,000. The $100,000 limit applies whether you are single or married, tax filing classification wise, which makes it one of the few limits that is the same for both. So if your AGI is under $100,000, then you can convert today and you don’t have to wait for 2010.

(Click to continue reading…)

A couple weeks ago I received a letter from my former employer’s 401(k) benefits company notifying me that I had $0.83 in my 401(k) account. Despite my best efforts avoid dividends and distributions on funds, I must have missed one in the process. I was told that since my vested account balance was less than $1,000, I’d have to roll it over or take a distribution, which would be taxed and penalized.

I was in a quandary. At such a small dollar amount, it certainly wasn’t worth the time to roll it over. If it appreciated at an average rate of 7% a year for forty years, it’s would be worth a mere $12.43. That’ll be enough to buy me a pack of bubble gum after taxes in 2049.

(Click to continue reading…)

My wife has a 401(k) with T. Rowe Price from when she used to work at L’Oreal. She never rolled it over before the economic crisis because it wasn’t a priority and there was never a huge incentive to move. The expense ratios were reasonable, there was no annual fee, and it was more important for her to focus on moving, finding a new job, and devoting her time towards that and not rolling over a 401(k), which she could do anytime.

With the stock market swinging so wildly these days, it’s risky to rollover a 401(k) because you might miss a big jump in the transition time. Since the 401(k) isn’t horrible expense-wise, we can do a little spring cleaning and wait for a better time to rollover.

(Click to continue reading…)

When you leave your job, one of the decisions you may have to make is whether or not you should rollover your 401(k) into a Rollover IRA. The process of rolling over your 401(k) is easy, so don’t let that be a deterrent, and the benefits of rolling over your 401(k) can be pretty substantial. However, it’s not always correct to rollover your 401(k). It was the subject of my Devil’s Advocate post on why you shouldn’t rollover your 401(k) but I thought of three more excellent reasons why you might want to avoid, or at least put off, rolling it over.

(Click to continue reading…)

Reader Jeff is switching jobs and wondering, given the market’s drop the last few months, if he should roll over his 401(k) to a Rollover IRA. His concern is that he’d be “selling low and buying high” in that situation and didn’t know what he should be doing.

I’m not a retirement nor an investing expert but I can say that your biggest concern shouldn’t be the performance of the market, it’s the volatility. With the various indicies gaining and losing large single-digit percentage points on a daily basis, it’s the volatility that is the big concern. A rollover takes time. Depending on how quickly or slowly you, your 401(k) administrator or your Rollover IRA administrator is, you could be left waiting for many days on the sideline as your 401(k) assets as liquidated, transfered to you, then transfered to the Rollover IRA. In that time, the market could go down big, go up big, or go sideways pretty erratically. My point is that the volatility is unpredictable, so on that basis alone, without any other compelling reason, I’d stand pat for now.

(Click to continue reading…)

July was a month of peace and it was wonderful. No roof to replace, plants are flourishing, and life was nice and relaxing. Net worth increased 7.7% this month despite retirement accounts falling 1.93% this last month (yesterday’s nearly 3% increase in the DJIA will help correct that), mostly because we didn’t have any major expenses to record for the first time in what feels like a long time.

The only significant expense of the month was a wonderful wedding up by the Finger Lakes region of New York where we had a wonderful time. It was a Friday wedding so we drove up early to stay with a college friend. Her family has a cabin on Lake Canandaigua and she graciously let us stay there the night before. We’ve been up there before for holidays and it’s absolutely beautiful. The weather was wonderful, the water looked refreshing, and we were so glad to be able to have a nights sleep after a six hour drive. The wedding the next day was on Lake Seneca and the weather cooperated wonderfully. Afterwards, we stopped by Cornell as one of our friends showed us around his old stomping ground.

All in all, it was a great little weekend mini-vacation.

(Click to continue reading…)

Ever have one of those days where you crank out a bunch of things on your to-do list? I had one of those last week and it had a retirement and investing theme to it (that’s why I’m writing about it!). It consisted of kicking off the 401(k) rollover process, and researching what we needed to do to change the name on a brokerage account and consolidate multiple accounts. These all had to deal with Vanguard and, naturally, they made it painless.

One thing, above almost all else, I love about Vanguard is the fact that I can call their phone number and talk to someone in minutes. I don’t have to play the “hit 0 until the menu system gives up”-game, I just call and wait a few moments until someone picks up. Today, I spoke with a representative named Fred who was very helpful. After figuring out the exact name of the check for the rollover, I asked about changing names on accounts and consolidating them. Since I had called the rollover phone line, these questions were a bit of a curveball but he was able to help me out by linking up with Brian in brokerage services to figure out what we needed to do. That’s service. Oh, and it wasn’t outsourced to someone in a foreign country reading off a script (and they still only charge relative-pennies for their index funds!).

(Click to continue reading…)

It’s been over a year since my last Monthly Review and I believe it’s time to bring them back. While other bloggers have continued their monthly income statements and balance sheets, I stopped a year ago because I felt it had become counter-productive. The reality is that the numbers themselves are irrelevant because they don’t apply to anyone else and they don’t help people make better decisions or learn from my mistakes. In fact, I felt that the numbers may be a distraction from the ultimate purpose of my monthly reviews, which was the explain both the good choices I’ve made as well as the bad choices.

So, in this return of monthly reviews, I’m going to simply outline the good, the bad, and the ugly of the decisions thus far. From here we’ll see how the month to months go.

(Click to continue reading…)

I have a 401k from my former employment. My CPA says to turn into a traditional IRA and then over to a Roth IRA for tax benefits eventually. He suggest investing in a very low risk A bonds and 25% low risk stock.

His reasoning is we are only taxed now on the lower end of balance, but later as it grows will be beneficial to us then.

I am 52. I plan on using the funds after 59.5 yrs.

1. Is there always a fee connected with rolling over into an IRA — bank, cpa, etc.

2. Does this sound like a wise?

I am very conservative in my finances.

Your question has three parts actually:
Should you roll over a 401k to a Traditional IRA?
If you think that the Traditional IRA gives you access to better investment options, then yes you should roll it over. The tax rules are the same for a Traditional IRA (in this case it’s called a Rollover IRA) and a 401k. There is generally no fee associated with rolling over an account.

Should you convert a Traditional IRA into a Roth IRA?
When you convert, you pay taxes on the entire Traditional IRA balance because you didn’t pay income taxes on that amount before you contributed it. If you remember, your 401K contributions were deducted from your paycheck, thus making it tax-free; and since Roth IRA funds are post-tax, they extract the tax when you make the conversion. Will this be beneficial to you? Only if you think that your income tax rate will be higher that it is now when you’ll be withdrawing the funds in seven years. Only you know that so I can’t tell you what I’d do in your situation.

A subquestion to the “whether you should convert question” is how you’d pay for it. You can pay for the tax with funds outside of your IRA’s or you can pay using the principal within the IRA. If you need to tap into the principal to pay for the tax, I probably wouldn’t do the conversion because you’re sacrificing earning potential when you decrease that principal. If you can pay for the tax outside of the IRA, then you have a decision on your hands.

Does this sound wise?
It only sounds wise if you want to go through the trouble (or are willing to pay this CPA to do it for you, which has a lot to do with why he or she suggested it for you) and if you think your income tax rate will be higher in seven years. Luckily your conservative investment style has nothing to do with this, if you think you’ll be taxed more in 7 years and you can pay the tax with funds outside of the IRA, then you probably want to convert. If you don’t think you’ll be taxed more in 7 years, don’t do it. If you don’t think you can pay for the conversion (which will cost you your tax rate times whatever you convert), don’t do it.

Good luck!

If you roll over your 401K into a rollover IRA as I have just recently done, be aware of any dividends that might be coming your way. I held a few shares of stock in a self-directed account associated with my 401K and I believe I rolled over my account after the ex-dividend date but before the actual dividend payout date. Now, if you hold shares of stock on the ex-dividend date then you will get the dividend payout, usually a couple weeks later, deposited into your account. This presents a unique problem for folks rolling funds over because now you have, essentially, orphaned funds sitting in your 401K that is likely under the rollover threshold.

This is exactly what happened to me and I had a little more than a dollar orphaned in my self-directed investment account, far less than the $1,000 threshold. What this means is that in order to get the money, I’ll have to take a lump-sum withdrawal which will be subject to income taxes and a 10% penalty; which is exactly what I did.

Now, this isn’t such a big deal for me because of how little that amount is, but if you’re talking about a 401K that you’ve had for thirty years, this dollar amount could be pretty sizable if you have some of it individual stocks. How can you avoid this? Since you can rollover at anytime after you leave your job, simply double check that you aren’t between the ex-dividend and the dividend date.

Now I have to figure out what I can spend my 99 cents on!