Author Topic: Case Study: What to do with Retirement Accounts (IRA,Roth IRA and 401k)?  (Read 4425 times)

kakapo

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« Last Edit: June 10, 2014, 01:45:44 PM by kakapo »

garrettld

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This reply is so long it needed subsections. I hope I covered everything and that this helps, let me know if you have any questions.

Let me make sure I have this straight. You have $66k in cash in IRAs and a "savings plan", as well as $190k in cash elsewhere, as well as $110k in "stocks" (is this individual stocks? a fund somewhere?). You're INCREDIBLY cash-rich and you need to invest the majority of that cash ASAP. With that being said, you're almost at the 500k mark. Without knowing your age I don't know how "good" or "bad" this actually is, though.

I would put all of this money in a low-cost index fund like VTSAX and a low-cost bond fund like VBTLX, according to your desired asset allocation. You can add other funds for more diversification if you desire. Check out Bogleheads' "Lazy Portfolios" page. It's perfect for you!

Fidelity v. Vanguard

You will likely incur a cost for closing your Fidelity accounts (you'd have to check with them to be sure). Fidelity does offer index funds that have decently low expense ratios, but Vanguard is king. For example, Fidelity's total market index has an expense ratio of 0.06% for their admiral shares, but Vanguard's is even better at 0.05%.

I think you'd be okay with Fidelity or Vanguard as long as you STOP letting your workers lounge around on the beach and put them to work in an index fund. Personally I'd eat the transaction costs and go to Vanguard. Even 0.01% is worth it if you're investing long-term. It might also help you to roll them over as a symbol of your fresh start as a new Mustachian! Welcome, by the way.

Roth v. Traditional:

Have you been maxing a Roth or a Traditional? From this point on you should be using only Traditional IRAs. You can recharacterize last year's (2013) Roth IRA contribution to a Traditional contribution (if you made one) as long as you do it by October of 2014. If you've contributed to a Roth for 2014, re-characterize it as well.

For the rest of the Roth stuff, you'll have to leave it as a Roth. I would not roll over any Traditional IRA funds to a Roth since you'll pay very high taxes on these rollovers. Therefore you'll need to open both a Roth IRA and a Traditional IRA with Vanguard and roll your accounts over appropriately. You may be able to do this first, then deal with the recharacterization, but you could probably knock them both out at once if you did indeed have a Roth contribution last year or this year. I'd call Fidelity and/or Vanguard and ask them what's easiest.

Also, yes open your wife an IRA and max it every year. She doesn't have to have income at all, you can fund it, but it has to be in her name.

Lastly, I'm not sure what a "Savings PLAN" is. Is this a 529 plan? Just a savings account?

401(k)

As for the 401(k)...shame on you! Let me break this down for you. Here are the expense ratios for the funds you're investing in:

  • PTRRX - 1.10%
  • FSGRX - 1.35%
  • RITCX - 1.01%
  • OIGNX - 1.40%
  • NYVRX - 1.18%
  • JGRTX - 1.18%

Weighted by the %s you provided, you're paying a total of 1.178% of your $132k in expenses each year. That's $1,554.96. If you maintained your 401(k)'s asset allocation (50/50) using VTSAX and VBTLX instead then you'd pay only $132 in expenses each year, or 0.075%.

So being a lazy procrastinator is costing you $1422.96 EVERY YEAR! You really do need a punch to the face.

Now...it may be that your 401(k) options are bad. Do you have access to Vanguard funds or any other low-cost index funds via your 401(k)? If not, go to your HR representative and give THEM a punch in a face (metaphorically, of course. Please don't get yourself fired). Talk to them seriously and see if they can help you. If not, call your 401(k) provider and talk to them about it. Or do that anyway. If neither can help you, talk to your colleagues and get everyone to STRIKE until they offer a 401(k) plan with better options! Or something. Part of HR's job is to review their options for benefits each year. Companies will literally hound HR people to try and get them to switch to using them as the *insert service here* provider. And if you don't ask them about the 401(k) they'll just stay with what they've got.

If you do have access to Vanguard funds, convert them immediately. Right now. Literally stop reading and go do it. It will take you 5 minutes online or on the phone.

Asset Allocation

A 50/50 stock/bond mix (your current 401(k) setup) is very conservative. Including your $110k in "stocks" you're at a 73/27 mix. How old are you? How close to retirement are you? I'm personally shooting for a 90/10 mix, which is highly aggressive, but I'm 25 so I have lots of time to handle large variation in the market. I will probably never go down to 50/50 even once retired, but this is a personal decision that you'll need to make on your own.

Taxable accounts, 529s, HSAs

Once you roll over your IRAs into fancy new Vanguard IRAs, once you max your 401(k) out for the year, once you max your IRA and your wife's new IRA, then you will want to consider other investment vehicles. At 120k/yr you should have PLENTY of money left over even after two IRAs, a 401(k), and your expenses.

First thing: do you have an HSA? The HSA is a terrific retirement vehicle and you should max this every year if it's available to you.

After that, do you have kids? If so, a 529 plan may be beneficial to you, especially if you happen to live in a state where the 529 plan is tax-free for state taxes.

Lastly, yes, a taxable account with Vanguard is a fine investment option, but it should only be considered once all other tax-advantaged accounts are either eliminated or maxed out. Since you've got so much cash lying around you'll be unable to use it all up even if you do have an HSA and a 529 plan (which is limited to $14k/year before the gift tax kicks in). So I'd put whatever is left over (minus your emergency fund) into a taxable account.

If you made it this far then you're not as lazy as you say you are. Good job! Just being here and posting is an accomplishment, but don't stop now! Let me know if you have any questions.

edit: I forgot to mention the home-buying thing. A 300-400k home is around the median price in Boston, according to Trulia, so it's good that you're not buying a ridiculous house, but living in a smallish home at 280k instead will save you so much money. Homes are terrible financial investments, but worth it if you want a family, kids, yard, etc. This decision is too personal for some guy on the internet to appropriately advise you, so just keep in mind why you're buying the home and don't let yourself get trapped with a huge mortgage payment. Best of luck.

edit2: bonus! If you get over $50k or over $500k invested in Vanguard then you'll gain access to some sweet benefits.
« Last Edit: April 16, 2014, 12:38:16 AM by garrettld »

Frankies Girl

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Fidelity is perfectly fine to use if you like them. I happen to think their customer service, their website interface, and their low (and sometimes lower than Vanguard) cost funds are just as good as Vanguard. The key is to not get into the higher expense fund ratio funds they offer, and to avoid paying any "professional management" with them, which they do not high pressure you to do at all in my experience. Their Spartan series is the same or within .01% of most of Vanguard's index funds... and I prefer the superior service/website access.
http://www.bogleheads.org/wiki/Fidelity
You can pretty much recreate the Bogleheads' lazy portfolios with Fid using the above link.

My 401k actually had the Spartan total market index fund in their offerings... so that was a no-brainer for me, but there are bound to be some much better funds (lower cost) in your fund, as Fid generally does encourage a large assortment of choices.

I'd also say you've got too many funds considering. Simple is best. Why do you need more than 3-4? And yes, all of your current line-up are high expense ratios that are taking your money now, and eroding your growth over the long term.  I went through the same thing around a year ago - figured out how all of this works, was horrified at my (brainless) choices, dumped them and got my sleek low-cost index fund portfolio set up.

You need to read Jim Collins' stock series to understand how this generally works, figure out your Asset Allocation (based off of your risk/comfort level and your goals) and then figure out how that applies to ALL of your accounts across the board - like you think you're moderately comfortable with risk, so 70% stocks, 15% bonds... and then figure out what you have available to invest in your "locked" account (limited choices in the 401K) and get 2-4 funds that fit your AA.

http://jlcollinsnh.com/stock-series/

http://www.bogleheads.org/wiki/Asset_allocation

And once you do all of that, then you can dump your loser funds (sell off to buy the good stuff) to set up your AA, and put in the cash you've got just sitting around doing nothing. You can put the cash into a taxable account with either Vanguard or Fid. It really doesn't make a difference, other than remembering to treat your accounts (all of them - no matter where they are) as a whole when figuring out your AA.


kakapo

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Hi Garrettld,
Thanks for taking the time for the very detailed response. I really appreciate it very much

- I'm 38 and yes, thats $66k cash in IRA and additional $190k Cash in hand with $110k in 'stocks' as in individual stocks through a n online brokerage.

Fidelity v. Vanguard
- Good point. I'll check to see if there is a fee

Roth v. Traditional:
- I have been doing Roth however I had to re-characterize for 2012 tax year because income went over $185k
- I'll convert them to Traditional IRAs and start contributing to Traditional IRAs going forward.

Saving's Plan
- When I left the company I used to work for, I had a 401k plan, I didn't take the money out so they converted it to just Cash and called it a Cash Savings.

401(k)
- Those are what's offered at my company's 401(k) plan. I'll check the online options I have and post them here.

No plans on having kids (now or in the future).

Thanks again for the input!


kakapo

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Frankies Girl,
- Thanks for the input and links!
- For me, Fidelity's site seems overly complicated (at least to me)
- Good thing is I've not bought into any professionally managed accounts with them at this point.

Quote
I'd also say you've got too many funds considering. Simple is best. Why do you need more than 3-4? And yes, all of your current line-up are high expense ratios that are taking your money now, and eroding your growth over the long term.  I went through the same thing around a year ago - figured out how all of this works, was horrified at my (brainless) choices, dumped them and got my sleek low-cost index fund portfolio set up.
- Honestly, I've always went with whatever my co-workers chose in the past. I've never really understood how these things work (and still don't) - not because I'm lazy but because its overwhelming. IT seems overly complicated - factor in the penalties, the tax and the rules, limits, Every time I start looking at this, I get distracted easily and 'put it off'.

As for the asset allocation, I was aiming for the 70% stocks and 30% bond ratio (i think).

I'll have more questions going forward and I'll post them on this thread (once I look at my 401k options).

kakapo

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Here is what I have as options in my 401k.
Employer does not match any at all.

1.50 AllianceBern Global Thematic Gr A (ALTFX)   
1.01 American Funds Amercn High Inc TrstR3 (RITCX)  (B)
0.96 American Funds Fndmtl InvR3 (RFNCX)  (B)
0.98 American Funds Growth Fund of America R3 (RGACX)  (B)
1.18 Davis New York Venture R (NYVRX)  (B)
1.39 Franklin Small Cap Value R (FVFRX)
1.17 Janus Enterprise Fund S (JGRTX)   
1.44 Oppenheimer Active Allc N (OAANX)
0.25 Oppenheimer Cash Reserves N (CSNXX)
1.23 Oppenheimer Conservative Inv N (ONCIX)
1.76 Oppenheimer Discovery Mid Cap Growth N (OEGNX)
1.44 Oppenheimer Equity Inv N (ONAIX)
1.31 Oppenheimer Global Strategic Inc N (OSINX)
1.52 Oppenheimer Gold And Spec Minerals N (OGMNX)   
1.44 Oppenheimer International Growth N (OIGNX)
1.49 Oppenheimer Main Street Sm- & Mid-Cap N (OPMNX)
1.29 Oppenheimer Moderate Inv N (ONMIX)   
1.39 Oppenheimer Rising Dividends N (ONRDX)
1.53 Oppenheimer Small & Mid Cap Value N (QSCNX)
1.24 Oppenheimer Value N (CGRNX)
1.10 PIMCO Total Return R (PTRRX) 
1.45 Thornburg International Value R3 (TGVRX)
1.59 Victory Special Value R (VSVGX)

(B) Denotes fund has established blocking criteria. Blocking prevents you from making specific transactions and is designed to discourage frequent   trading. Blocking is determined by each fund family. Click on the "B" indicator for details

- I went to some stock site to get the expense ratios on all of these.
Doesn't look promising at all .
« Last Edit: April 16, 2014, 07:21:32 AM by kakapo »

ZiziPB

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Quote
0.25 Oppenheimer Cash Reserves N (CSNXX)

Wow - they are charging .25% to keep your money in cash?!?!

You should check the expense ratios for these funds under your plan - they may be different than what is offered retail.

ZiziPB

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BTW, I agree with Frankies Girl re Fidelity.  I use them and like them a lot.  Their Spartan funds are as inexpensive as Vanguard and I have always had excellent service from Fidelity.

kakapo

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Quote
0.25 Oppenheimer Cash Reserves N (CSNXX)

Wow - they are charging .25% to keep your money in cash?!?!

You should check the expense ratios for these funds under your plan - they may be different than what is offered retail.

I just checked the plan from the internal employee link and unfortunately those are the actual numbers. Bleeding cash with no way out

ZiziPB

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I will let others chime in as to your 401k investment options but even with these choices I would continue to max it out every year because of the tax benefit.

As to your IRAs and rollover accounts at Fidelity, keep it simple.  Call them up and ask what retirement accounts can be consolidated and then just put your retirement money into a target retirement fund selected based on your age.  Then just leave it be since it automatically rebalances.  You can even buy Vanguard Target Retirement Date funds if you want through Fidelity for a one time trading fee.

As to your $190K in cash, decide how much of an emergency fund you want (I have a conservative 6 month of expenses invested in liquid CDs), then put the rest into a  brokerage account (I would do Fidelity because you already have your IRAs there but if you move your IRAs to Vanguard, then Vanguard), decide on whatever allocation you want and buy appropriate Fidelity Spartan or Vanguard index funds (no trading fees at Fidelity for their own funds, and I am assuming same applies to Vanguard funds through Vanguard)).  The bogleheads link provided by Frankies Girl gives very good info if you keep your accounts at Fidelity.

madage

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Roth v. Traditional:
- I have been doing Roth however I had to re-characterize for 2012 tax year because income went over $185k
- I'll convert them to Traditional IRAs and start contributing to Traditional IRAs going forward.


You need to do some more checking on this. Given your income and the fact you have a 401(k) through work, your Traditional IRA may not be fully deductible. Honestly, it depends on how many other deductions you have. The deduction phase-out range is AGI of $96,00 - $116,000 for 2014.