Rolling over an IRA + mutual fund

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Rolling over an IRA + mutual fund

Postby Rob810 » Wed May 01, 2013 2:59 pm

Emergency funds: 3 months - We had six months worth, but just moved and used some of it for deposits and such. This will gradually be replenished to a 6 month level.
Debt: Total: $10575
His school loans
$375 At 5.6%
$5400 at 4.5%
$1800 at 3.4%
Her school loans -
$3000 at 6.8%

Tax Filing Status: Married Filing Jointly
Tax Rate: 15% Federal, 10.8% State
State of Residence: Just moved to CA, lived in OR last year
Age: Him - 25. Her - 26.
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks

Current retirement assets

Taxable account at Edward Jones ~$2400
53% American Funds Growth Fund of America Class A (AGTHX) ER:0.71%

His TSP
5% L2050 ER:0.027% - Just opened.
Match up to 5% of income.

Her Roth IRA at Edward Jones ~$1900 - $40/year management fee + 5.75% load on additional contributions
42% Franklin Templeton 2045 Retire Trgt A (FTTAX) ER:2.06%

Contributions

New annual Contributions
$1550 + 1550 match to His TSP
$480 to her Roth IRA
Additional contributions might be possible depending on her school expenses.

Currently my wife is working on a master's degree so most of our extra income will be spent on her education to minimize further loans (at 6.8% interest).
We (naively) started a Roth IRA this year through Edward Jones with our tax return, however, now that I have spent some time learning about investing the fees associated with this account and it's holding (2% ER, 5.75% load, $40/year) are much more than I would like to be paying.


Questions:
1. I am thinking of closing both of the accounts with Edward Jones and moving them into the Vanguard Target Retirement 2050 fund (VFIFX) in a Roth IRA at Vanguard. Does this seem reasonable? Are there any special considerations that need to be made in doing this? We didn't fully understand what we were doing when we opened the IRA and I am trying to be very deliberate to avoid moving the money again after this.
2. Should we try to pay off all of her loans before contributing any additional money to the IRA? What about the portions of mine with higher interest?
Last edited by Rob810 on Thu May 02, 2013 12:40 am, edited 2 times in total.
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Re: Rolling over an IRA + mutual fund

Postby Duckie » Wed May 01, 2013 10:25 pm

Rob810 wrote:Emergency funds: 3 months - We had six months worth, but just moved and used some of it for deposits and such. This will gradually be replenished to a 6 month level.

Good.

Tax Rate: 1% Federal, 7% State

This is supposed to be your tax bracket, the percentage paid on your last dollar, not the percentage in total.

Age: Him - 25. Her - 26.
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks

90/10 is a little aggressive. I'd recommend 80/20.

Current retirement assets

Taxable account at Edward Jones
53% American Funds Growth Fund of America Class A (AGTHX) ER:0.71%

Why do you have a taxable account for retirement when you aren't maxing your tax-sheltered accounts and you have student loans? If you sold this would you have a taxable gain? Could you use this to pay down your debt, pay for her school, or live on while you increase your TSP/Roth IRA contributions?

New annual Contributions
$1550 + 1550 match to His TSP
$480 to her Roth IRA
$720 to a 529 for our son.

You need to contribute more for your retirement and less for your child's education. He can borrow for college, you can't borrow for retirement.

I am thinking of closing both of the accounts with Edward Jones and moving them into the Vanguard Target Retirement 2050 fund (VFIFX) in a Roth IRA at Vanguard. Does this seem reasonable? Are there any special considerations that need to be made in doing this? We didn't fully understand what we were doing when we opened the IRA and I am trying to be very deliberate to avoid moving the money again after this.

Yes, move. (This assumes you have at least $1K in the Roth IRA.) Edward Jones will probably hit you with an account closure fee, but it's worth it to get away from them. As for the fund choice I would recommend (VTHRX) Vanguard Target Retirement 2030 Fund (0.17%) for the Roth IRA and L 2040 for the TSP. They have more bonds. You pick a TR or LC fund by the AA inside, not by the date in the title.

Should we try to pay off all of her loans before contributing any additional money to the IRA? What about the portions of mine with higher interest?

It depends. I don't know the amount in your taxable account at EJ but I'd liquidate that to pay down the debt. You want to get it away from EJ anyway.
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Re: Rolling over an IRA + mutual fund

Postby Rob810 » Thu May 02, 2013 1:10 am

Thanks, I've gone back and updated my original post a bit. The taxable account was started for my wife when she was young and has sat and gathered interest for several years now, if it were sold it would be taxed at the long term capital gains rate.

We are both young and this is the first 'real' job that either of us have held. Because of this, we don't have a large amount of money saved yet. The taxable account is somewhere around $2400 and the Roth IRA has $1900.

Duckie wrote:90/10 is a little aggressive. I'd recommend 80/20.

I was thinking that since we are both young we can afford to be a bit more aggressive for the time being. I've looked through the forum for a while and it seems like a lot younger people want to keep their bond allocation low like this. I don't think I have a very full appreciation for the bond side of AA quite yet. It's all about reducing exposure during bear markets at this stage, isn't it? I'm not trying to argue with what you are suggesting or anything like that, just trying to understand why everyone pushes for bonds early on.

You need to contribute more for your retirement and less for your child's education. He can borrow for college, you can't borrow for retirement.

I debated even including that. Technically my mother-in-law pays for our portion of the bundled cell bill with the understanding that we will contribute the equivalent sum into college savings for our little one.

So, I'll roll the IRA over to Vanguard, pay for my wife's school with the money from taxable account, and if we have spare money after living expenses and grad school tuition would it be better to contribute into the Roth IRA or Roth TSP or traditional TSP? My current thoughts are that the Roth TSP makes the most sense at this point given it's lower expense ratio and our low current tax bracket. Is this reasonable for us at this point or is there an advantage to the Roth IRA that I am missing?
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Re: Rolling over an IRA + mutual fund

Postby BL » Thu May 02, 2013 9:58 am

Rob810 wrote:Thanks, I've gone back and updated my original post a bit. The taxable account was started for my wife when she was young and has sat and gathered interest for several years now, if it were sold it would be taxed at the long term capital gains rate.

The capital gains rate is zero while you are below the 25% tax rate, so get rid of it now and pay toward her loan or current education costs.

We are both young and this is the first 'real' job that either of us have held. Because of this, we don't have a large amount of money saved yet. The taxable account is somewhere around $2400 and the Roth IRA has $1900.
Yes, move to Vanguard. Set it up with Vanguard and have them "pull" it from EJ. Agree with Target Ret recommendation above. (Perhaps someone here could weigh in on the possibility of just cashing it in (undoing the Roth) and using it to pay off loans.)

Duckie wrote:90/10 is a little aggressive. I'd recommend 80/20.

I was thinking that since we are both young we can afford to be a bit more aggressive for the time being. I've looked through the forum for a while and it seems like a lot younger people want to keep their bond allocation low like this. I don't think I have a very full appreciation for the bond side of AA quite yet. It's all about reducing exposure during bear markets at this stage, isn't it? I'm not trying to argue with what you are suggesting or anything like that, just trying to understand why everyone pushes for bonds early on.

You need to contribute more for your retirement and less for your child's education. He can borrow for college, you can't borrow for retirement.

I debated even including that. Technically my mother-in-law pays for our portion of the bundled cell bill with the understanding that we will contribute the equivalent sum into college savings for our little one.

How nice of her! Yes, you want to follow through with her gift.

So, I'll roll the IRA over to Vanguard, pay for my wife's school with the money from taxable account, and if we have spare money after living expenses and grad school tuition would it be better to contribute into the Roth IRA or Roth TSP or traditional TSP? My current thoughts are that the Roth TSP makes the most sense at this point given it's lower expense ratio and our low current tax bracket. Is this reasonable for us at this point or is there an advantage to the Roth IRA that I am missing? That is a reasonable choice. I would pay off loans/education after putting in the match. Don't know if you have the same access for emergencies and college at Roth TSP.
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Re: Rolling over an IRA + mutual fund

Postby Duckie » Thu May 02, 2013 9:35 pm

Rob810 wrote:
Duckie wrote:90/10 is a little aggressive. I'd recommend 80/20.

I was thinking that since we are both young we can afford to be a bit more aggressive for the time being. I've looked through the forum for a while and it seems like a lot younger people want to keep their bond allocation low like this. I don't think I have a very full appreciation for the bond side of AA quite yet. It's all about reducing exposure during bear markets at this stage, isn't it? I'm not trying to argue with what you are suggesting or anything like that, just trying to understand why everyone pushes for bonds early on.

Bonds provide ballast when the stock market is on a roller-coaster ride. They can also be used for rebalancing purposes. 90/10 isn't bad. 80/20 in your 20s is just a personal preference. See this discussion.

Technically my mother-in-law pays for our portion of the bundled cell bill with the understanding that we will contribute the equivalent sum into college savings for our little one.

Okay, in that case funding the 529 makes sense.

So, I'll roll the IRA over to Vanguard, pay for my wife's school with the money from taxable account, and if we have spare money after living expenses and grad school tuition would it be better to contribute into the Roth IRA or Roth TSP or traditional TSP? My current thoughts are that the Roth TSP makes the most sense at this point given it's lower expense ratio and our low current tax bracket. Is this reasonable for us at this point or is there an advantage to the Roth IRA that I am missing?

For now, until you have more income, I recommend you fund the TSP not the IRA. It has the cheapest expense ratios. At the very least put in enough for the 5% match. Never turn down free money. Later she can fund her Roth IRA and you could also open and fund a Roth IRA.

As for TSP vs. Roth TSP, see the article Most TSP Participants Should Switch To The Roth TSP. This was written by tfb who posts here frequently.
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Re: Rolling over an IRA + mutual fund

Postby Rob810 » Fri May 03, 2013 3:10 pm

Sounds good. Thanks for your replies.

I've been searching the forums over the last day or so looking at AA topics and had come across the bond thread referenced, I thought it was one of the best topics for answering my AA questions. I don't think that I've seen TFB's Roth TSP article before, but it is very helpful as well.

For now, until you have more income, I recommend you fund the TSP not the IRA. It has the cheapest expense ratios. At the very least put in enough for the 5% match. Never turn down free money. Later she can fund her Roth IRA and you could also open and fund a Roth IRA.

No problems here. As soon as I was eligible to contribute I set my contribution to 5% and once our situation allows I'll bump it up. The only question that I have right now about this is when to transition to funding both the TSP and IRAs. When the TSP is maxed out? We probably won't make enough to max out the TSP's $17500 (or whatever it changes to) contribution limit for quite a while unless something unexpected happens but having everything thought out beforehand will help once we reach that point.
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