I started the rollover IRA with $5,026.80
I bought a bit of a target date fund (2045, so it would be different from the 2050 fund in my Roth…because I thought that would be diversifying…whoops!) and kept the rest in the Cash/Money Market fund. When it started, the return on the money market was around 2.4%. Now it’s 0.01%. Bleh. And then I never touched the account again.
So, with the ups and downs of the market, after 4 years, as of this posting, I now have $5,308.69 in that account. So my money has grown ~5.6% total in the past 4 years. It’s not terrible. Especially considering the financial crash. But it’s not fantastic.
But here’s the thing. I want to do more with this money. Not crazy “invest in the next bubble” more. Just put it into something normal like an index fund. And apparently most low-cost index funds available to me in my IRA have minimum investments of $10k. Which is hard to do if you only have $5k. So I’d like to roll over my IRA into my Roth IRA.
Another reason I want to roll my IRA over is because I assume my 401(k) will remain larger than my Roth IRA, since 401(k) plans have higher contribution limits, AND my company puts money in through a match and a defined contribution plan. So I’d like to be able to diversify my tax liability when I retire (you know, have more options on what distributions to take and when), and so the more I have in my Roth, the better!
Lastly, there’s the taxes themselves. Everyone’s freaking out about the Fiscal Cliff. I’m honestly not sure what tax rates might change to in 2013. They could stay the same. Or they could increase due to phasing out of tax cuts we’ve enjoyed for years. I honestly don’t know. What I do know is that if any of the tax rates go up, I might as well convert now, just in case. Plus, I’m still in a pretty low tax bracket at this point in my life, so I might as well take advantage of these rates as well. (yeah it’s only taxes on a tiny bit of money. So I might as well do it now! And I guess it wouldn’t matter much either way).
As a reminder, I’m not a financial advisor. I’m just sorting out my personal finance thoughts on this blog. So please don’t take this as financial advice. I mean, you can still convert an IRA to a Roth IRA if you want. But talk to your own tax/money people!
Saying that, here is something I learned from my tax/money people (i.e. customer service at Fidelity):
“At the time of your conversion, you will have the option to have taxes withheld. Many investors choose to pay the taxes due on the conversion from another source, as any taxes withheld from the conversion will be considered an IRA distribution and will be subject to any applicable taxes and an early withdrawal penalty if you are under the age of 59 1/2.”
I am planning on paying the taxes using another source. The taxes I have to pay on this conversion I will pay for out of my regular bank accounts. The other (not preferred) option is to pay the taxes out of the money you’re converting…which just seems like a horrible idea, because you have to pay a withdrawal penalty for that amount, and you’re lowering the amount of money you’re putting into your retirement account. I guess some people do it if they have no other option. Though I’ve also heard of people only partially converting to a Roth so that they can pay taxes on it bit by bit.
As a reminder: Converting or contributing to a Roth IRA isn’t for everyone. Depending on your income, your age, your tax liabilities, and plenty of other issues, you might stick with a traditional IRA or try something different.
What tax-related steps are you taking before the end of the year? Is the drama over the Fiscal Cliff impacting your decisions? Have you ever converted one retirement account type to another? Do you agree with my decision to convert my IRA to go into my Roth IRA?