I'm good with money, but when it comes to retirement, I'm an idiot.

March 7, 2013 11:17 AM

Tell me about traditional IRAs...like I'm 5 years old.

The only dumb question is the one that isn't asked. Right? RIGHT?!?

Ok. Thanks for not judging me.

Anyway, I bought a house a few years ago and finally feel like all of my finances have simmered down since that investing incident. I've always contributed a little bit (like, 4-6%) to my company's 401k plan, figuring something was better than nothing, but never really understanding the plan, how it works, or what exactly I was doing. However, now that I feel like things are in a good place, I want to focus on socking money away like it's no one's business for retirement.

I currently have 3 different 401ks that are not consolidated/rolled together from various jobs. Is this bad?

I'm about to start a new job. My new employer has a 401k but does not have a company match due to the size of the company. I'm trying to figure out how much I should be contributing to this 401k and/or if I should also open a traditional IRA (I do NOT qualify for a Roth IRA).

Questions:

*Is this a good idea?
*How do traditional IRAs work?
*Can I contribute to my employer's 401k AND an IRA?
*What's the maximum amount of money I can contribute to each per year (isn't it something like $17,000 for a 401k and $5,000 per IRA)? Or is there some weird rule that I can't max out both?
*Is a traditional IRA the same wherever I go, or do I need to research different banks, etc.?
*If I should roll all of my random 401k bits together, how do I do this? Where should I put it?

What else am I missing?

FWIW, I'm a single taxpayer/filer and live in Massachusetts. My only debt is my mortgage and minor credit card stuff which gets paid off monthly. My credit is in the 800s.

Thank you in advance for helping!

posted by floweredfish to Work & Money (14 answers total)

Yes this is a good idea.

Traditional IRAs are savings vehicles, kind of like your 401k, except that if you don't qualify for a Roth IRA, you probably aren't going to be able to deduct your TIRA contributions. So you will put in post-tax dollars, and then when you take the money out you will have to pay taxes on the gains (eg any investment gains between now and when you remove the money, ideally after 59.5).

Yes, you can contribute to both - max for the 401k is $17.5k, and max for the IRA is $5.5k, for a total of $22k per year.

The IRA is basically the same wherever you go - it's just a container for the money which you will then invest in something (stocks, bonds, mutual funds, etc). I keep my Roth and TIRA's at Vanguard, and have had a great experience with them.

You can roll your random 401k bits into the same TIRA you will use for your annual $5.5k investment. That way you can have only 2 accounts to keep track of instead of 5. If you call the bank you decide you want to have your TIRA at (eg Vanguard) they will talk you through the process of rolling over the money.

Good luck!
posted by CharlieSue at 11:29 AM on March 7, 2013 [1 favorite]

First of all, find a brokerage you like. I prefer Fidelity, they are awesome to deal with.

Then roll-over all of your current 401(k) into one Individual IRA account. My recommendation is that you invest in the Standard and Poors 500 Index fund, An Exchange Traded Fund for this is SPDR. It has low overhead/management fees, and it tracks the S&P 500.

Another option is a Freedom Fund. You pick the year you plan to retire (they go in fives) so let's say if you're 30, you want to retire when you're 70, so pick the Freedom Fund for 2055. (2055 being the year you plan to retire.) The fund will be aggressive at first and reallocate to more conservative as you approach retirement. It's a bit of a no-brainer, but a lot of people like that!

Now.

If you want to contribute your pre-tax earnings into an IRA, you can keep doing it in your individual brokerage account. There is NO point in investing in your employers 401(k) if there's no match. You'll have a limited selection of funds and very little flexibility to trade with your employer, whereas, if you have an individual IRA, you can do what you like.

Your other, better option, would be to sock your retirement funds away, POST-TAX, in a Roth 401(k). The good thing about a Roth is that you have WAY more flexibility to withdraw in an emergency, AND there are no tax penalties for doing so. In addition, whatever you withdraw in retirement isn't taxed! This is so HUGE it's not even funny.

I'd rather sock away $50 in a Roth than $100 in a Traditional IRA.

The reason you don't want to leave your money all over creation in different 401(k) is that it's a hassle, and they don't let you invest in whatever you want.

Whatever brokerage you choose, they'll help you with the rollovers! It's very easy!
posted by Ruthless Bunny at 11:29 AM on March 7, 2013

I'll let others answer most of the questions because, while I have a handle on most of this stuff, I'm not an expert and I don't want to inadvertently give you bad advice. But one thing I do want to say is that IMHO it is worth rolling all of your previous 401ks into one place (ideally the same place your current employer's 401k is). Between my wife and I, we at one point had something like 10 or 15 investment accounts (401ks, IRAs, normal brokerage accts., etc.), and it was a major pain in the butt. The biggest issue is that when we moved (which doesn't happen often, but does happen), we had to remember what all the accounts were, and update our contact information on them. I actually "lost" one account for over a year because I forgot I had it, and getting control of the account back was quite an ordeal (involving a bunch of phone calls, faxes, etc.). Consolidating them also makes it a lot easier to keep track of which funds your money is in, and updating them when necessary. The more you can lower the overhead of managing this stuff, the better.
posted by primethyme at 11:29 AM on March 7, 2013 [3 favorites]

There are income limits on making deductible contributions to a traditional IRA if you are covered by a plan (like a 401(k)) at work. Here are this year's limits for that scenario. They phase out starting at $59,000 of income for a single person and you can't deduct anything at all if you earn more than $69,000 (modified AGI).
posted by payoto at 11:34 AM on March 7, 2013 [1 favorite]

If your Roth ineligibility is due to income limits ($125k single / $183k married), you can still do a Roth IRA conversion from pre-tax dollars in a traditional IRA.

That said, it's kind of Advanced Finance (especially if you are not well-versed in even traditional IRAs) so I wouldn't do it without a tax consultant / financial planner. If you do it wrong you can incur tax penalties.

Of course, if you _are_ Roth ineligible due to income limits, a financial planner is probably a good idea anyway.
posted by wildcrdj at 11:53 AM on March 7, 2013

Another really good reason to roll-over your IRAs to one account at a low-cost brokerage (I agree with others that Fidelity is excellent, but so is Charles Schwab), is because the fees that your old IRAs come with are likely eating at least 1% of your money every year. That may not sound like a lot, but the miracle of compounding interest means you're losing out on gains - especially over time.
Fidelity has some great tools online to help you get educated and understand things.
posted by dbmcd at 12:10 PM on March 7, 2013 [1 favorite]

Response by poster: Yup, it is due to income limits.

Thanks everyone so far! This is a really helpful start!
posted by floweredfish at 12:11 PM on March 7, 2013

Yes to what wildcardj said about being able to roll a traditional IRA into a Roth even if your income is above the limit. I have done that for the past 2 years. It will be less satisfying since you don't have anything else in a Roth as of now, and the funds you can invest in may be limited to a certain dollar amount. Also, the govt may eventually close this loophole. But until then, free Roth IRA savings!

I highly recommend Vanguard. Their fees are amongst the lowest on the market if you do a comparison. Vanguard will walk you through rolling your accounts over or starting a traditional IRA and rolling it into a Roth, etc., with them over the phone, and I have found their phone assistance fairly universally helpful.

Also, if you have over $50K with Vanguard you can get a discount on a financial plan from a CFP through them, which I would highly recommend for you (getting a financial plan from a CFP, that is, not specifically from Vanguard necessarily). You talk to the CFP and tell them about your savings goals, current assets, and they give you advice. Because you pay them a fee, they are not getting paid on commission to try to sell you on any particular financial products, they will advise based on what's in your best interest (hopefully).
posted by treehorn+bunny at 12:40 PM on March 7, 2013 [1 favorite]

Sorry to piggyback on the question, but I have another question about converting traditional IRAs to Roth IRAs.

Can money from the IRA be used to pay the taxes on the conversion without any further penalties? (i.e. not get hit by the additional 10% penalty for withdrawal if the withdrawal is being used to pay the taxes on the conversion)
posted by dforemsky at 1:49 PM on March 7, 2013

So you will put in post-tax dollars, and then when you take the money out you will have to pay taxes on the gains (eg any investment gains between now and when you remove the money, ideally after 59.5)

For a Traditional IRA you will put in pre-tax dollars and you do not pay capital gains tax, you pay income tax, but only when you begin to take distributions. The benefit is, if you are retired, you will likely be in a lower income tax bracket when you start to take distributions.

There is probably no real benefit to keeping several different 401k accounts open, if you can roll them all over into one (I just think it's easier to have things in one place). You'll want to look for a firm that has low or no annual fees or dealing charges, a wide variety of investment vehicles (from a number of different providers) and low or no fees within the actual funds.

Here is a good comparison of online brokerages, if you want to go that route. I am at Fidelity right now, and I have no problem with them, but I would like a better selection of no-fee ETFs so I may look at another place at some point.
posted by young sister beacon at 7:43 PM on March 7, 2013

floweredfish: "*What's the maximum amount of money I can contribute to each per year (isn't it something like $17,000 for a 401k and $5,000 per IRA)? Or is there some weird rule that I can't max out both?"

The amount changes every year to keep pace with inflation. They are non-coordinating, meaning maxing out one won't affect whether you can max out the other.
posted by pwnguin at 8:33 PM on March 7, 2013

For 2013, 401k contributions max at $17,500. Last year was $17,000. This applies to traditional 401k and Roth 401k combined, but not IRAs.

Regular and Roth IRAs outside 401ks now have a $5,500 limit up from $5,000.

(There's also this whole catch-up contribution thing if you're over 50 --- guessing no, but if so you might want to google that, you can contribute additional $).
posted by wildcrdj at 8:37 PM on March 7, 2013

A minor comment about Freedom Fund and other lifecycle products in general (not necessarily in a tax sheltered vehicle): for the convenience of not having to think about asset allocation and portfolio rebalancing, you pay a premium in management fees.

For a five year old with no investment knowledge, no inclination to go the DIY route and without any special event planning, it's an OK product. Just make sure to keep up your contributions, low tide or high tide and pretty much, don't invest in anything else.

If you have no inclination of self-managing your investments but do want to plan for known withdrawal dates (house deposit in about N years, kid's university tuition in Y years, single income from dual income in Z years, etc.), a good financial planner would be the better route.

And if you are in the persuasion of self-managing but know nothing right now, go with low cost index funds or a couch potato portfolio approach.

Lifecycle funds are only a good recommendation for a very specific demographic that can accept a generic one-size fits all approach to their retirement planning.
posted by tksh at 9:21 AM on March 8, 2013

For a Traditional IRA you will put in pre-tax dollars and you do not pay capital gains tax, you pay income tax, but only when you begin to take distributions. The benefit is, if you are retired, you will likely be in a lower income tax bracket when you start to take distributions.


Just as a follow up note - the OP indicated they can't contribute to a Roth IRA because of income limits, so given that they also likely won't qualify to deduct their Traditional IRA contributions. So, their TIRA contributions will be post-tax, not pre-tax (eg 'non-deductible Traditional IRA contributions') so they won't have to pay tax on the original non-deductible contribution when it is removed - only on the growth.
posted by CharlieSue at 10:21 AM on March 11, 2013