Hello, everyone!

My wife and I each have a 401(k) from our former employers that have been sitting around gathering dust and we're looking to take more control of our finances. She has ~$26.5k at Wells Fargo and I have ~$3600 with Fidelity, of which we are both 100% vested. I feel like we're behind the 8-ball in this regard, but not too much so as I'm 30 and she's only 28 and finally are set in jobs that we can comfortably call careers. We are also contributing the max to our current employers' 401(k)s to get the most out of our company match (hers with John Hancock, mine with Fidelity again).

Our combined incomes allow us to contribute to a Roth IRA (looked at the companys and decided Vanguard is probably the way to go), but I'm wondering if this is our best rollover option and am looking for some direction with our other finances.

Points to consider:

• We have a small emergency fund of $1000 built up in our savings account.
• I am a Quicken junkie and am on top of our spending (even though I liked MS Money's Cash-Flow Forecast MUCH better).
• We are going to have the last of our credit card debt paid off completely by October by making $1500 monthly payments (current remaining balance of ~$11k at 12.65% APR). I'm thrilled about this, as we were able to knock ~$7k off the balance in the last two months, significantly moving up our pay-off date.
• We have one car payment that we pay $500/month to with a remaining balance of $18.6k at 6.99% APR.
• I have a universal life insurance policy ($80k benefit amount) that my parents started for me 25 years ago. I took control of the policy when I was old enough and it currently has a cash value of ~$2700 which I pay a premium of $90/quarter.
• We just closed on the short sale of our home in AZ (relocated to TX for work) and are happily renting an apartment here in the Houston area. Our lease is up in December, but we don't have any immediate plans for home ownership again at this time.
• We don't have any children right now, but are planning to after we are out from under our credit card debt and have freed up more income.

Questions:

• What would you suggest we do with our old 401(k)s? A single fully funded Roth IRA for the both of us and a traditional IRA for the rest of the rollover amounts? Two Roth IRAs - one fully funded by her rollover and one partially funded by my rollover - and a traditional IRA for the rest of her rollover amount? Something else?
• What would you suggest investing in with the IRA/IRAs, assuming they're funded to the max of $5k? Target Fund/Funds ($1k minimum)? Index Fund/Index Funds ($3k minimum)? A combination of each? Something else?
• Once the credit card is paid off, do you recommend paying off the car loan quicker, or is the 6.99% APR small enough to not worry about and contribute more to our 401k/IRA(s)/savings?
• What would you do with the life insurance policy? Anything? My thought was that I could use the money to fully fund the rest of my Roth IRA and then put the rest into savings (or traditional IRA).

I know this is a lot of information at one time, but we're really looking to get our ducks in a row and start paying ourselves.

Thanks for your help in advance!

- Eric

Sounds like you guys are really getting things in order!

On the first question, IRA's have just one account owner, so you can't open a Roth for the both of you together. It would be possible to get a Roth IRA for each of you individually though. Others can chime in, but I think you can convert the whole amount to a Roth IRA if you are willing to pay the necessary taxes. The choice between Roth and Regular comes down to many factors, but primarily it's a question of whether you think your income tax rate will be higher now or later. Personally I like to hedge my bets and do continually invest in both types between my 401k and IRA.

Your investment choices will depend on your personal risk tolerance, financial situation overall, and desires for the future. If you are still in a learning phase regarding investments, I'd put the money in something safe (Money Market?) for now while you read as much as you can to get comfortable with your options. Once you're comfortable with the options, I'd go with the index funds if you want to manage things yourself, or the Target Retirement funds, if you prefer auto-pilot. If you don't have the time/desire to do a lot of research, maybe the Target Retirement strategy is best... just stick with it and be willing to see a large drop in value and not panic. Don't sell at the bottoms - that's when you want to buy more!

I would definitely pay down the 7% loan after October. That is effectively the same as getting a 7% return, guaranteed. That's a deal I'd take any day on an investment!

I don't know enough to comment on life insurance, but I'm interested to see what others think about your situation in that regard.

Good luck!

I just thought of another couple of questions (one of which JMC touched on - thanks!):

• At what point in time do we take the tax hit for the conversion from a rollover IRA to a Roth IRA (is it taken out immediately or when we file our taxes)?
• Do conversions from traditional IRAs to Roth IRAs count as contributions?

Thanks again!

- Eric

Original post edited due to answering some of my own questions...

Conversions do not count as contributions. You can convert the entire amount at once (and I would suggest it, if you can afford the tax).

The taxes would be do when you file the your taxes for the year in which the conversion took place (so if you convert this year, when you file you 2012 taxes in early 2013).

When you do convert DO NOT have them withhold for taxes. [edit: They will give you the option, DECLINE] Save the money and pay them yourself at tax time. If you have them withhold, it is considered a distribution of the amount withheld and it is NOT exempt from the early distribution penalties (10% penalty). (Plus it reduces your account balance).

Do you really need to close your 401k accounts? Fidelity is generally a pretty decent broker with fairly low expense ratios. It might behoove you to simply keep those accounts the way they are.

Rolling over the accounts is also an option, but make sure you roll to an IRA with a more favorable expense ratio...

I started with my SIMPLE IRA at Wells Fargo because I was young and didn't know any better. That was where co-workers were investing, and I thought that sounded as good as anything. Once I started to feel more comfortable with how retirement accounts work, and started looking into fee ratios, I discovered that there are options with better fee ratios.

I rolled my Wells Fargo investments into a Vanguard SIMPLE IRA, and I have been pleased that the lower fee ratios have allowed my money to grow faster.

Just a few starting points:


Consider switching to term life insurance. You seem to have a grasp of investing and you could probably do better than the Universal life policy
Pay off the CC
Pay off the car loan
Build a bigger Emergency fund

then worry about investments.

Thanks a ton for this. Now we just have to figure out how to come up with the ~$7500 in taxes that will come from converting the entire amount.

It's not the expense ratios per se, but more so the fund options (or lack of) that were available with that employer at the time I was contributing. Realistically, I'm only happy with 1 of the 5 funds I have there (and that only contains 13% of the total investment). I want more flexability, which is why we're looking at rolling over - and along with that flexability comes lower expenses, of course.

I completely agree. Comparing my wife's targeted fund with WF (TRRDX) with Vanguard's equivilant (VFORX), Vanguard's outperforms T.Rowe's in both performance and expenses. While I'm not necessarily going to go with a targeted account with her rollover, I believe this simple comparison justifies the move.

I agree with you about the insurance. I'm leaning towards cashing out the policy (and putting it towards the CC) and then going with a term policy once we have more of a family to think about.

The difference is almost certainly because WF is tacking on extra fees.

You can also convert it a little at a time. I don't mean "1/12th per month" which just sounds like a pain. But if you, say, can only come up with ~$3750, you could convert half the account this year, and then half next year.

Yep. You can always do it in pieces.

Because I think in examples, assume I rollover my ~$3600k 401(k) into an IRA and invest in a single target fund. Am I able to convert a specific dollar amount if I choose, or do I have to convert an entire fund?

Also, I called Fidelity today to get the rollover ball moving. They're sending me paperwork and we'll go from there.

Thanks again!

Eric