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My Rollover IRA Account – The Backstory | Budgets Are Sexy

My Rollover IRA Account – The Backstory | Budgets are sexy

Last week I wrote about how to track one of my rental properties and compare it to the growth of an index fund that’s currently worth roughly the same amount. Post here – Real estate for stocks

I’ve received a ton of feedback and questions that I’ll address over time. For today, I’ll start with a backstory about my IRA, my own pocket contributions, and what the future could mean for that account.

Next week I’ll dig deep into the rental property backstory and other stuff.

Index funds in a rollover IRA – the background story …

I moved to the US in late 2007 when I was 22. And during the first ~ 5 years that I lived here, I had no idea what a 401k really was. Maybe I was told about it at work, but the very thought of “locking my money up until I turn 67” scared me. Silly me. If I only knew what I know now!

Anyway, at the end of 2012 I got together and opened my first 401k account. My job at the time offered a great incentive – to cover my pension contributions of up to 4% of my salary. This later fluctuated between 2% and 6% as my employers chopped up and changed their benefit programs.

Regardless of the agreement with the employer, I’ve made additional contributions from my paychecks here and there, and in 2014 I increased my total December paycheck to 401,000.

Here’s how much I’ve contributed over the years: before the employer matching: (Had to dig back into my old W2 to find these numbers! – Appears in field 12b, code D on your W2 if someone wonders where to find this information)

2013 contribution – 3,977 USD

2014 contribution – 12,308 USD

Contribution 2015 – 6,596 USD

Contribution 2016 – 7,041 USD

2017 contribution – 10,542 USD

Contribution 2018 – 1,887 USD

Total: $ 42,351.

Woot woot! It’s cool to see this number – this is the first time I’ve calculated it. That’s an average pre-tax saving of $ 136 per week. Maybe ~ $ 100 a week after tax.

I have a hard time finding out what my employers have contributed. It’s not showing up on my W2 or old tax returns. Since they have kept changing pension plans and providers, I don’t even know if I can find this old information!

Regardless, it’s nice to know that I personally deposited ~ $ 42,000 pre-tax into an account that is now worth ~ $ 109,000.

Converting an old 401k to a rollover IRA

Here is my most recent Fidelity IRA snapshot:

I left an employer in April 2016 and transferred my 401k to this IRA. The balance at this point was approximately $ 45,000. Then I did that again in March 2018 when I left my last job – that was another $ 31,000. The light blue line on the graph shows how much the account costs would be worth it if my contributions stayed in a cash position while the dark blue line is the actual balance.

There are a number of reasons why I left my old 401k programs.

First off, I had a really bad taste in my mouth from my old 401k vendors. I mentioned that my employers have switched plans frequently … and each change has come with a clunky new web portal, limited investment opportunities, new hidden fees, and incompetent customer service agents. All in all, I never felt like I was in control of my money.

With a 401k, my employer always had the power to change my investment. In a self-governing IRA, I have more control over my investment and retirement options.

Future contributions and options for this IRA account

Currently, my wife and I are not contributing to 401,000 or pre-tax pre-tax accounts. This is because we both currently have no benefits and our 2020 income is relatively low. We plan to finance any excess savings that we keep in cash Roth IRAs again early next year. That may change, but here we are!

Hence, this Fidelity IRA will likely be left alone for the next several years. Your growth depends entirely on the overall stock market. That’s a scary thought! But we’re in for the long run so these uncertain times don’t worry us.

Early access to these IRA funds (and possibly even avoidance of future taxes)

In my 20s, I got the impression that you can’t touch the pre-tax retirement account until you are over 60. So when I launched my first 401k, my intent was not to make any changes for ~ 40 years.

But since then I’ve learned that there are definitely ways to access these funds sooner – some methods even involve no fees and / or low taxes!

Even if we don’t need To get early access to this IRA money (wife and I have enough after-tax assets to live on if we retire early) it might be a good idea to move money from this IRA account into a more tax efficient investment vehicle to move.

I read about Roth conversions in the background and moved money from a traditional IRA to a Roth IRA. I’m not a genius, but as I understand it, I could convert this IRA money with impunity as long as I: a) pay taxes on the converted money and b) don’t take off the money after the conversion for at least 5 years.

Given that my wife and I are in a low tax bracket (and may soon have another gap year with no income), this might be a good time to do a backdoor Roth conversion. Paying little tax now would mean no tax later. Even a partial conversion is a great option while our tax bracket is low.

TLDR / All in all

  • I’m an idiot and should have started my 401k earlier in life.
  • Employer matching is nasty, use it if you can!
  • This IRA currently has ~ $ 109,000 and was built with only ~ $ 42,000 in personal contributions over 6 years.
  • By converting that dollar from a pre-tax investment account to an after-tax investment account, I could save money on taxes later in life.
  • In the next post, I’ll share the rental property’s backstory and compare the numbers to see if it has grown faster than this IRA. (Spoiler alert – don’t).

Thoughts / Comments / Advice? Have you successfully performed any of these backdoor conversions?

* Top picture over GotCredit

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