What should I do with my Simple IRA?

November 13, 2007 12:17 PM

I have a Simple IRA from a previous employer. Should I roll it into my 401(k), convert it to a Roth IRA, or do something else entirely?

I contributed to a New York Life Simple IRA through my previous employer (small % of employer matching, 100% vested) from 2004-2005. I never bothered to roll it over because it's such a small amount of money (Google research supports the idea that come 2008, I can roll my Simple IRA into a Roth IRA in one step. (I meet the qualifications for a Roth IRA; married, filing jointly, income below $100,000.)

* Am I going to incur a bunch of fees or other nonsense that would make this a silly idea? Should I roll it over into my 401(k) instead?

* Is there a smarter, more flexible or financially savvy thing I should do with my Simple IRA that I haven't thought of yet?

* Finally, if I go with a Roth, where's the best place to open it?

posted by junkbox to work & money (8 comments total)

SIMPLE is a traditional IRA, so you've not been paying taxes on that money. Whatever the amount is, you have to determine whether it would be cost effective for you to pay the taxes on those funds now, or if it would make sense to continue deferring that until you are making distributions. If you want to continue deferring, put it in a traditional IRA sort of product (most 401(k) plans work like traditional IRAs in that you deduct the amount you contribute). If you want to pay the taxes on it now, convert it to a Roth product.

For your other two options, I've been out of the game for a while, so I don't know - probably lots of other people will have suggestions.
posted by Medieval Maven at 12:34 PM on November 13, 2007

From my experience one has to acknowledge what is the most optimal way to handle the situation and at the same time be aware of your own human nature. Weighing these two areas and how you fit in this situation is important.

Do you want to, and will you, actively manage accounts outside of your 401(k)?

- You've already let the Simple ride for a couple years; is that an indication on how you'll handle the situation going foward? If so, for ease of use, just moving the money into your 401(k) may be the best option for you (if not the best option for squezing the most out of your $). Less paperwork, accounting, etc.
Also, you don't have to worry about the custodian fees in the IRAs eating away your returns (and with a small IRA that is a very real concern).

- If the honest answer to the above question is yes (and it seems that may be so since you've done some modest research online already), then that leads you to where to put it.

For the Roth IRA, there should be no fees if the rollover is done properly but there is an important detail. Taxes; your contributions into the Simple were tax-deducted. When you Rollover the $, that money will be counted on your taxes as income the year it occurs.
In addition, you'll very likely need to open a traditional IRA first and then convert it. This will be essentially opening a dummy account (which likely will cost fees as well- typically $50-100).
The benefits of the Roth are tax-free growth instead of tax-deferred growth and subesequently those benefits become greater the farther away from retirement you are. If not, there may not be enough of a bump to balance out all the work you'd do.

Where to put it? I'd certainly not trust any online brokerage in this environment. A solid mutual fund company would be good. Since the account is small (my assumption), lower fees may be the driver initially. Look for good a track record, not just last years winners.

Lastly, you're former employer will dictate how the rollover will occur. You should already have the paperwork but often times contacting current carrier (NY Life) will work with just a phone call.
posted by thekorruptor at 12:57 PM on November 13, 2007 [1 favorite]

(gawd that last typo is killing me)
posted by thekorruptor at 1:08 PM on November 13, 2007

Sorry, some of my question got cut off due to my use of the "less than" sign.

-- I'm 28, and the amount in my Simple IRA is less than $2000, so taking the tax hit now wouldn't be a deal breaker.

-- I keep close tabs on my 401(k), and re-balance my portfolio there yearly. This brings me a deeply geeky satisfaction. Current employer is vaguely in the financial industry, so I'm reading Barron's weekly and much more interested in the markets than I was 2 years ago, leading to a desire to have a small portfolio of my own to actively manage.

-- I initially kept the Simple IRA not out of laziness, but because it gave me access to funds my 401(k) doesn't offer. But NYL instituted some nasty small investment fees last year, which necessitated moving all the shares in my Simple into just one fund. Now that this extra account is offering fewer options instead of more, I'm ready to do something else with it.

-- And according to this link, in 2008 I should be eligible to convert directly to a Roth IRA without the step of converting to a traditional IRA first. Although the info I find about the new 2008 rules is pretty confusing.
posted by junkbox at 1:37 PM on November 13, 2007

@ your last point- typical of congress in writing arcane language. It looks like some sort of sunset provision, which there are a lot coming up in the next couple of years. But in short one can make the conversion today, from an IRA to a Roth (from Simple to Roth directly? not sure).

As you've spelled out that you're into managing your money, the real answer lies in the amount in the IRA. Look at it this way; there will be an annual fee on the account of at least $25, likely more. That is immediately shaving more than 1% on off your return (and more if the fee is higher).
The only way to mitigated that is to make contributions into the Roth. But you have to be disciplined.

If you are, then are you maxing your contributions to your 401(k) to the match limits (usually 6-8% of earnings)? If not, do that first. If can you live with that kind of contribution level and add additional contributions to the Roth, then you'd be on to something as at your age the Roth is ripe for you.

But if you can't add anything to the Roth, then fees, paperwork, and accounting could get in your way. + with $2000, it lessens the choice of the funds you'll have access.

If you go the way of the Roth, then look at your asset classes in your 401(k), which sounds like you are aware and pick a solid fund to suppliment your current holdings.
posted by thekorruptor at 2:08 PM on November 13, 2007

I went to your link, junkbox. I think the confusion lies in the difference between a Simple IRA and 401(k). They are not the same. The new rules are for 401(k) and other employer/qualified plans. My understanding is that the Simple IRA is currently eligible for direct Rollover into the Roth because it is an IRA. I'd confirm with your current administrator of the Simple IRA to be sure.
posted by thekorruptor at 2:33 PM on November 13, 2007

It sounds like you are interested in managing your own investments so it makes sense to keep the money in your own IRA (either SIMPLE or Roth) rather than merging it with your 401k. One of the big benefits of changing jobs is that it gives you the opportunity to escape from your former employer's retirement plan, which typically have limited investment choices and unfavorable fees.

Your SIMPLE is already a traditional IRA so you can convert it directly to a Roth, if you have been in the plan for at least two years. (The new rule you cite for 2008 applies to 401ks which couldn't be converted directly in the past.)

The choice of Roth vs. traditional IRA is simply a decision of whether you think your marginal tax rate will be higher or lower than present when you retire. If you think your taxes will be higher, then a Roth will save you money in the long run. Also, you need to have the money available to pay the taxes, which will be $500 if you are in the 25% bracket.

As to where to invest, I think Vanguard has the lowest costs and best selection of investments in the mutual fund industry. It should cost you nothing to rollover your IRA to Vanguard. Vanguard has a minimum investment of $3000 for most of their funds, but they do have one fund called STAR that has a $1000 minimum. This is an excellent diversified fund that is a good starter while you build up your account. As an alternative, to add to your rollover, you can contribute up to $4000 to your IRA this year if you haven't yet made a contribution or $5000 in January to bring your account up to the $3000 minimum which allows you to invest in almost any of Vanguard's more than 100 funds.

Vanguard has very low annual expenses that average only 0.21% annually. Most mutual fund companies average over 1% in annual expenses. Vanguard charges a $20 annual maintenance fee for accounts under $10,000, but they will waive this fee if you opt for electronic statements instead of paper mail. You still get one free paper statement at the end of the year. Doing this eliminates the annual maintenance fee.
posted by JackFlash at 4:50 PM on November 13, 2007

JackF- I respectfully suggest that a fund of funds is a poor choice for someone who is actively managing their investments. Also, that fund has a moderate allocation (meaning 35% bonds); not appropriate for his age.

The fee structure, if true, is excellent @ Vanguard, though.
posted by thekorruptor at 8:11 AM on November 14, 2007