Author Topic: When should I convert my VTSMX to VTSAX?  (Read 1132 times)

CamaroNoir

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When should I convert my VTSMX to VTSAX?
« on: November 24, 2017, 02:15:10 PM »
TLDR: Should I take $5.5K from my emergency fund in January 2018 and put it in my Roth IRA so I can convert from VTSMX to VTSAX as soon as possible or should I continue to contribute $459.33 per month until I hit $10K and convert then?

Longer Story: I started reading MMM last year and it has changed my financial life for the better! I'm 42F with a steady job ($80K/year net) and no debt. I have $12K in an emergency fund (1.30% APY) and $5K in a Roth IRA invested in VTSMX. Next year will be the first year I'll maximize my contribution to my Roth IRA. I plan to maximize my Roth IRA contribution every year for the rest of my working life by putting my Roth IRA contribution on auto payment of $459.33/month. With that plan (assuming the economy stays the same or does better) I'll be able to convert to VTSAX by November 2018. If the economy takes a dip I understand it will take longer and I'll switch to VTSAX whenever I hit $10K.

My other option would be to take $5,500 from my emergency fund in January, deposit it into my Roth IRA, and covert to VTSAX. Then I'll route my $449.33/month auto payment to my emergency fund and have it fully funding again in November 2018.

Which option do you recommend? Why?

Thanks!

secondcor521

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Re: When should I convert my VTSMX to VTSAX?
« Reply #1 on: November 24, 2017, 03:22:43 PM »
I admire your efforts to optimize as much as you can - I do the same thing - but it really won't matter much.

The difference in expense ratios between the two funds is 11 basis points, so over 1 year with $10,000 in investments you're talking about a difference of $11.

It is important to maintain your emergency fund so you don't have to dip into investments in order to cover a cash flow problem that may arise.  Yes, you can pull contributions from your IRA without taxes or penalties if you lose your job or have an unplanned expense; the problem is once you've taken them out you can't replace them.

So if I were in your shoes, I would first figure out what a comfortable fully funded emergency fund would be.  If there is significant excess above that, I would move that money over to the Roth IRA on January 1st.

For example, if you're making $80K and have just started on MMM, you're probably spending about $60K per year.  If you want three months (usually considered the bare minimum) in your emergency fund, that would be $15K.  So you're below that now.  But if you're spending $40K, then a 3 month emergency fund would be $10K.  In that scenario, I'd take the extra $2K and move it over.

But remember, you're talking about less than $11 (because you're talking about a difference of about $5,000 over about 10 months, not $10,000 over a year).

If I were you, I'd try to add an additional $500 to your Roth for this year to max out the $5500 limit this year.  This will probably have more of an impact on your finances than VTSAX.  Of course, you can do both!

Also FYI, Vanguard will automatically convert you if you're above $10K for a few months and haven't done it yourself.

Good luck!