Converting to Roth IRA

[FrugalFreddyFingers]

Before I joined the Navy, I worked for a company for 2 years and, unbeknownst to me, was part of their 401k (which I actually forgot about because I barely contributed).  Anyways, about 6 months after I left them for the Navy, I found out that the $2,400 was put into a traditional wells fargo IRA. So I started to contribute to it, not really knowing anything about it (like the APY, which was a measly .05%). So, after setting up automatic deductions and getting the value up to $10,100 I realized that this is a glorified savings account.  My question is, based on the Wells Fargo calculator, I should convert it to a Roth IRA. However, the conversion fee (based on the calculator) is almost $1,500.
But, I could just withdraw all the money from the IRA and be taxed on 10% of it, which would be $1,100.

Am I looking at this wrong? Because that is my first option, I do my primary checking/savings with Wells Fargo, but all of my investing with USAA and would prefer to use them for this as well.

Assuming no contributions and withdrawal 30 years from now:
If I don't convert:  Value today = $10,100        After-tax value = $76,224.63
If you convert your current IRA to a Roth IRA and pay taxes from your existing IRA balance: value today: $8,585.00       After-tax value = $86,387.91

I determined the fee by taking my current value of $10,100 minus the $8,585 = $1515

Besides the 10% withdrawal penalty, is there a reason I shouldn't just close my wells fargo IRA and open a USAA one?

[Murr]

I'd call USAA and tell them what you want to do. The fee from Wells sounds a little high unless I'm missing something. I used to have two IRAs with Wells and transferred them to Vanguard last year without issue. Only fee was a $95 closing fee or something. I called and complained about it and they credited it back.

[FrugalSpendthrift]

If you just withdraw the money from a traditional IRA, before it is qualified, then you have a 10% penalty and you pay income taxes on it.

If you have USAA transfer it from wells fargo, directly to USAA, then there shouldn't be any fees or penalties.

If you plan to convert it to a ROTH, then it is better to try and pay the tax out of your cash flow, instead of the existing balance.

[bluebell]

I would definitely NOT withdraw the money entirely.

If you are unhappy with Wells Fargo (or the specific fund where you have the money), you can just transfer the IRA to USAA or another financial institution. The new place should be able to help and provide you with forms to send into Wells Fargo to move the money.

As to whether converting to a Roth makes sense, that depends...what is your tax bracket now? Do you expect your income to be higher in retirement? Are you eligible to contribute to a Roth IRA right now and would you like to do so? It really depends on your situation.

[teen persuasion]

I think you are looking at this wrong.  You have lots of options here, but cashing out is not a good one.  An IRA is a bucket for investments, and WF and USAA are just places to keep the IRA. 

If you want a different investment in your IRA, you can sell it (within the IRA, not cashing it out) and purchase different investments, like mutual funds.

If you want to change the place you keep your IRA, you can transfer your IRA to USAA.  Once there, you can change the investments if you wish.

If you also wish to convert your IRA to a Roth IRA, you will need to include the value converted as income on your tax return, so you will pay taxes on that at your marginal rate.  THAT is what they were calling a conversion fee, but it is not guaranteed to be that $1515 they stated.  If you have room in the  0% range, converting would be a better idea than if your marginal rate is 25%.

[FrugalFreddyFingers]

Something I should have clarified, when my 401k was rolled over it was put in a Wells Fargo Way2Save traditional IRA, meaning it is on the banking side of the institution; a savings account, basically. It is not something on the investment side, there is nothing for me to buy or sell.

Based on my tax bracket and expected tax bracket in the future, converting to a roth is what I intend to do. I was just confused as to the fee. From what I understand (please correct me if needed):

- If I early withdraw the whole amount, I am taxed on 10% of that, or $1,110. 
- If I convert I would be taxed on the total value (income) in my tax bracket (15%) which is that $1,515 the calculator stated.

So, I don't know if I am missing something here, but the way I see it is that it's better to eat the 10% and just open a new ROTH IRA instead of eating 15% to convert to a Roth.

I know I am arguing over $405 here, but I am a man of principles, after all.

Thank you for the replies,

ML

[Frankies Girl]

Something I should have clarified, when my 401k was rolled over it was put in a Wells Fargo Way2Save traditional IRA, meaning it is on the banking side of the institution; a savings account, basically. It is not something on the investment side, there is nothing for me to buy or sell.

Based on my tax bracket and expected tax bracket in the future, converting to a roth is what I intend to do. I was just confused as to the fee. From what I understand (please correct me if needed):

- If I early withdraw the whole amount, I am taxed on 10% of that, or $1,110. 
- If I convert I would be taxed on the total value (income) in my tax bracket (15%) which is that $1,515 the calculator stated.

So, I don't know if I am missing something here, but the way I see it is that it's better to eat the 10% and just open a new ROTH IRA instead of eating 15% to convert to a Roth.

I know I am arguing over $405 here, but I am a man of principles, after all.

Thank you for the replies,

ML

But you don't have to convert it to a Roth IRA and pay anything if you just move it  as is - a traditional IRA - to someplace like Vanguard or USAA. You can invest in anything you'd like, at worst have to pay a transfer/account close fee to WellsFargo, and then it's free and clear to invest in anything you'd like. Rolling it to a Roth right now means you'd have to pay taxes on the conversion... which you absolutely do not have to do at all. Withdrawing the money or converting it to a Roth means you have to pay taxes on it (and in the case of withdrawing the money, a penalty)... neither of which are the best moves for you. If you just want to lose hundreds of dollars, then sure, but again, not a good move.

Seriously, just call up Vanguard or USAA if that's where you want it to go, and ask them about how to transfer the account as is - traditional IRA at WellsFargo to a traditional IRA with them. It's really simple - fill out some paperwork, send it in, and they handle the rest. Once the account is there, use the money in the account to buy whatever funds you'd like.

Then basically just wait to convert it to a Roth once your income is under the 15% bracket, and you'll never have to pay taxes at all.

[notsofast]

if you pull money out of the ira then you pay 10% in penalty's plus taxes.  so 25% to cash out versus 15% to to convert to Roth.   at a minimum you can transfer the account to another institution as a previous poster stated.   I'd personally convert to roth if you had the cash to pay the taxes.

[FrugalFreddyFingers]

I did not realize you were taxed as well as penalized! I wrongfully, and ignorantly, missed that, seems obvious now that you said it, thank you!

You all have been very helpful. I appreciate the sound advice and I will definitely give USAA a call tomorrow and update this thread. 

ML

[TomTX]

Mmmmkay, sounds like Wells Fargo is not where you should be.

Roll it over to your TSP, invested in a stock index fund (C or S)

Or

Roll it over to a Vanguard Traditional IRA, invested in a stock index fund.