I encourage you to think carefully about the division of money between savings and an IRA, because of the penalties for withdrawing early from an IRA. One thing I’ve done to get a little bit more from my savings is to have two accounts, one a regular one at my credit union and the other an online CD, which I can’t touch without penalty between renewal periods (one year) but that has a higher interest rate.
Keep in mind that you can withdraw your contributions to a Roth IRA without penalty or tax consequences, so it’s a great vehicle for an emergency fund.
I think you have to have had the Roth open for five years before you can withdraw without penalty, and only the contributions, not the growth.
However, if I thought I might need this money, I wouldn’t take a chance. I’d leave it in an emergency fund, and not take the chance that I’d have to pay a penalty to use it. I’d definitely build up a decent emergency fund first, particularly with so many difficult health issues, as much as I love the Roth benefit.
Sorry I meant that is why I’m not maxing out contributions to the IRA or whatever. It’s because we’re building 2 savings sources. This is money that we’ve had set aside to start contributing to a no-touch account but we just literally haven’t gone in and actually opened an account or whatever.
When you rollover, critical to let the receiving institution make the arrangements. The old money can never touch your hands, even as a check mailed to your home.
Roth’s include both federal tax free withdrawals and the ability pass on the account to your heirs, which they could withdraw tax free. Your kids could potentially have 70+ years of appreciation. For that reason and especially since you have no way of knowing what the marginal tax rates will be when you retire, I would go with a Roth.
@lookingforward I am not sure that is true. If it is made out to the new institution, I believe it can come to your home address. I did this with a rollover a couple of years ago. It was the only way I could do it, due to one of the institutions’ policies.
The check can be made out to you, too. As long as you deposit it within a month, it is treated as if you rolled over directly. Or is it 60 days?
60 days. But a portion withheld for taxes. You avoid this by moving it direct.
“Will taxes be withheld from my distribution?
IRAs: An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.”
There’s also some exception if you’re over 59.5.
And exceptions for certain kinds of fin needs.
Maybe something changed. LBowie. I dunno.
You can opt out from withholding in most cases. It’s not complicated. Just have to remember check a box.
About Vanguard, in some funds, there’s a minimum amount to open an account. I guess they do that to keep the cost down. Also, their phone lines can be extremely long. My first paycheck was invested in Vanguard in the early 1980s. Had an index fund long before people were talking about it. As words get around and they get bigger, their service has deteriorated somewhat.
Timely blurb just now on an investment radio show I have on. Summary:
If you’re separated from service, you can go to the former employer who holds your IRA, roll that money. If you do it correctly, eg, direct transfer to a new plan, and you don’t get the money as an interim step, no tax implications. No fees, unless either the present administrator assesses, eg, a surrender charge. Or the new admin charges, eg, commission. You ask each about that and any ongoing maintenance fees.
Unless there’s some odd issue, it’s simple to just let the admins do their thing. No fed tax on the ‘distribution.’ Out of one plan, into the new.
Just passing that along. Sometimes, for a young person, simple is simple. No second guessing, no worrying about defending to the IRS.
I’ve never been charged for a direct transfer.
Schwab charged us for a direct transfer out. I think it was $20. As far as I know, no charge at Vanguard tansfer in or out.
When I did the rollover with the checks coming to my home, the checks were made out to the new institution for my benefit (FBO my name). These were the instructions of the receiving institution (my new employer) Nothing has changed and this still counts as a direct transfer. There was no other option to do it any more seemlessly.
Iglooo, electing not to withhold doesn’t exempt from possible taxes.
Thank you all. I’ve been following but this ended up being an unexpectedly busy weekend so I haven’t had time to follow-up on anything here.
@lookingforward, Of course not. If you owe taxes, you have to pay the taxes whether it’s done by a direct transfer or through you. If not withheld, you pay taxes when you file the tax. If withheld, you pay upfront. Some withholds 20%. Withholding is no big deal if your tax rate is higher than 10 or 20%. It could be a pain if you are taking required minimum distribution. If you don’t want to take more than necessary, you have to consider tax withholding on RMD. I just went through this in August. Rolled over everything from 401K to Roth and tIRA. I had multiple 401k accounts with different restrictions. I did a direct transfer from most of them. In one or two accounts, the paperwork got too onerous to do a direct transfer. I just took the money and deposited it. It will be fun filing taxes for 2016 sorting all this out
The direct transfer, afaik, doesn’t incur taxes. One needs to be sure any other method isn’t taxable as a ‘distribution.’ And that no early withdrawal penalties apply. Since Romani is young, I see sparing her complicating her taxes when direct xfer is generally a no brainer. This really isn’t about some unique and peculiar situation. Not yet.
An indirect transfer doesn’t incur taxes, either. As far as taxes or penalties are concerned, a direct or indirect transfer makes no difference as far as you deposit it back within 60 days. I think we are off topic talking about transfers. OP is thinking about opening an account not rollovers of any kind.
Before initiating a transfer I would recommend to sell all securities in the old account.
We had a Vanguard initiated transfer where securities were not sold but just transferred over to Vanguard. Vanguard charges a fee up to $35 to sell non-Vanguard mutual funds. This was an IRA to IRA transfer but I wonder if it can happen during 401K to IRA transfer as well.
I didn’t know about $35 fee at Vanguard. Schwab charges $70 or $75 to buy nonschwab mutual funds but selling is free.