Penalties for moving IRA assets 3 fund investment

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Tue Feb 25, 2014 7:56 pm

I think I am ready to ask a new set of questions. We have moved a good chuck of investments to Vanguard; what remains is mostly our IRA contributions from over the years. The total in this area is about $500,000. There is about $350,000 that will incur a penalty of about $17,000 if all is moved at this time. The penalty goes down each year but it will take 10 years to get all of it over to Vanguard. I will list these holdings below.

We want to get all of this and everything else we have (or will have) into a 3 fund portfolio, a la Taylor Larimore. We want to make the future easy. So the question - do we wait this thing out or is it wise to take the hit and move on? Can this be treated as a loss for tax purposes? What strategies might I employ?

Some what related - we have a large chuck of money from the sale of a business ready to invest. Do I simply put it all into the 3 fund portfolio or are there smart steps to take to “enhance” this investment? I will be using the advise of Vanguard but I prefer the wisdom of this group.

I will be working thru 2015 as an employee with no company IRA program. Can I start a personal IRA? Is the max contribution about $15,000?

Tim

Category Symbol Description Account Market Value
Mutual Funds BASIX BLACKROCK STRATEGIC INCOME OPPTYS CL A SPS ADVANTAGE $17526.69
Mutual Funds BASIX BLACKROCK STRATEGIC INCOME OPPTYS CL A SPS ADVANTAGE $21164.99

Equities IJR ISHARES CORE S&P SMALL CAP ETF SPS ADVANTAGE $5966.90
Equities IJH ISHARES CORE S&P MID CAP ETF SPS ADVANTAGE $4212.90
Equities IVW ISHARES S&P 500 GROWTH ETF SPS ADVANTAGE $5202.60
Equities IVE ISHARES S&P 500 VALUE ETF SPS ADVANTAGE $4394.52

Alternative Investments 22003D102 CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INC AMERIPRISE BROKERAGE $29000.00
Alternative Investments 22003D102 CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INC AMERIPRISE BROKERAGE $5070.00

Variable Annuities N/A AMERICAN CENTURY VP MIDCAP VAL RVS RAVA 4 ADVANT Q $1040.54
Variable Annuities N/A AMERICAN CENTURY VP VALUE RVS RAVA 4 ADVANT Q $38386.49
Variable Annuities N/A COL VP CASH MANAGEMENT FD CL3 RVS RAVA 4 ADVANT Q $21552.82
Variable Annuities N/A COL VP DIVERSIFIED BOND FD CL3 RVS RAVA 4 ADVANT Q $2059.53
Variable Annuities N/A COL VP GLOBAL BOND FUND CL3 RVS RAVA 4 ADVANT Q $806.71
Variable Annuities N/A COL INCOME OPPORTUNITIES CL3 RVS RAVA 4 ADVANT Q $580.24
Variable Annuities N/A COLUMBIA MARSICO GRTH RVS RAVA 4 ADVANT Q $23637.29
Variable Annuities N/A VP PARTNER SMALL CAP CL3 RVS RAVA 4 ADVAN Q $1024.25
Variable Annuities N/A FIDELITY VIP CONTRAFUND SVC 2 RVS RAVA 4 ADVANT Q $5526.52
Variable Annuities N/A FIDELITY VIP III MID CAP PORT RVS RAVA 4 ADVANT Q $10757.23
Variable Annuities N/A FIDELITY VIP OVERSEAS PORT RVS RAVA 4 ADVANT Q $2458.29
Variable Annuities N/A FT VIP GLB REAL ESTAT RVS RAVA 4 ADVANT Q $11748.30
Variable Annuities N/A OPPENHEIMER GLBL STRTGC INC SS RVS RAVA 4 ADVANT Q $30771.80
Variable Annuities N/A WANGER INTERNATIONAL RVS RAVA 4 ADVANT Q $989.65
Variable Annuities N/A WANGER USA RVS RAVA 4 ADVANT Q $11503.45
Variable Annuities N/A FIDELITY VIP STRATEGIC INC CL2 RVS RAVA 4 ADVANT Q $25258.40
Variable Annuities N/A AMERICAN CENTURY VP MIDCAP VAL RVS RAVA 4 ADVANT Q $1040.54
Variable Annuities N/A AMERICAN CENTURY VP VALUE RVS RAVA 4 ADVAN T Q $39052.43
Variable Annuities N/A COLUMBIA MARSICO GRTH RVS RAVA 4 ADVANT Q $24160.68
Variable Annuities N/A VP PARTNER SMALL CAP CL3 RVS RAVA 4 ADVAN T Q $1024.25
Variable Annuities N/A FIDELITY VIP CONTRAFUND SVC 2 RVS RAVA 4 ADVANT Q $6610.23
Variable Annuities N/A FIDELITY VIP III MID CAP PORT RVS RAVA 4 ADVANT Q $9969.16
Variable Annuities N/A FIDELITY VIP OVERSEAS PORT RVS RAVA 4 ADVANT Q $2736.41
Variable Annuities N/A FT VIP GLB REAL ESTAT RVS RAVA 4 ADVANT Q $7390.26
Variable Annuities N/A OPPENHEIMER GLBL STRTGC INC SS RVS RAVA 4 ADVANT Q $37498.61
Variable Annuities N/A WANGER INTERNATIONAL RVS RAVA 4 ADVANT Q $1066.51
Variable Annuities N/A WANGER USA RVS RAVA 4 ADVANT Q $11804.60
Variable Annuities N/A FIDELITY VIP STRATEGIC INC CL2 RVS RAVA 4 ADVANT Q $32172.76

DSInvestor
Posts: 10624
Joined: Sat Oct 04, 2008 11:42 am

Re: Penalties for moving IRA assets 3 fund investment

Post by DSInvestor » Tue Feb 25, 2014 8:23 pm

If you're a W-2 employee with no employer sponsored employer plan for 2014, you'd be eligible for Traditional IRA and take the tax deduction. Your W-2 has a check box for retirement plan and if this box is not checked, you weren't covered. You may be eligible for Roth IRA contributions if your MAGI is below certain limits. The limit for Traditional and Roth IRA is $5,500. If you're married and file joint tax return, your spouse can contribute to IRA as well based on your income.

You listed a whole bunch of Variable Annuities (VA) holdings. Are these inside an IRA, 401k or 403b? If this is a non-qualified VA, they would not be eligible for transfer into an IRA.

Variable annuity surrender charges are a sunk cost and you essentially paid it when you signed up for the VA. If you wait 10 years for them to disappear, you're paying the high expense ratios and fees for 10 years. They get make you pay either way. Figure out how much those fees will be and then compare them to the low expense ratios at Vanguard. You may find that it is cheaper to exit the VA immediately, pay the surrender fee and start our low cost investing. There wouldn't be a tax liability to move money from an VA in IRA to another IRA.

If you have a non-qualified VA, there would be taxes owed on earnings so be careful if this is the case. You may want to consider moving the non-qualified VA to a Vanguard VA to get lower expenses. I think this is called a 1035 exchange and avoid taxation of the earnings.

Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Wed Feb 26, 2014 7:10 pm

You may be eligible for Roth IRA contributions if your MAGI is below certain limits. The limit for Traditional and Roth IRA is $5,500.


So for 2 more years we could contribute $22,000 max. Should I be asking is this worth it in the short(2 years) or long run (30+ years)? Or does one want to put everything he can into an IRA?

You listed a whole bunch of Variable Annuities (VA) holdings. Are these inside an IRA, 401k or 403b?


Yes they are. I do not know if they are non-qualified (I don't know what it means). But I can find out (from a recent conversation with Vanguard I think they are eligible

you're paying the high expense ratios and fees for 10 years


Good point and I will learn what the ratio is. If I transfer all of this - bit the bullet - I will be over the 1 million mark and get the better Vanguard rate.

Helpful. Need to do some math. Anyone else want to have me swing one way (do it now) or the other (hold)?

Thanks

DSInvestor
Posts: 10624
Joined: Sat Oct 04, 2008 11:42 am

Re: Penalties for moving IRA assets 3 fund investment

Post by DSInvestor » Thu Feb 27, 2014 12:50 am

Generally it is best to max out tax advantaged options like 401k, IRA before investing in taxable accounts.

Will you have any employer sponsored retirement plan like IRA, 401k, 403b, pension etc? If not and your W-2 will show that retirement plan box is not checked, you will be able to contribute to Traditional IRA (TIRA) $5,500 or $6,500 if over age 50 and take full tax deduction. Check your 2013 W-2 forms. If you haven't yet contributed to Traditional or Roth IRA for 2013, you still have time. Deadline for 2013 IRA contributions is April 15, 2014. Hopefully you haven't filed your 2013 tax return yet, otherwise you would need to amend the 2013 return to get the TIRA tax deduction.

Roth IRA contributions may make sense if you're eligible. If your MAGI exceeds 188K (Married Filing Jointly), you cannot contribute to Roth IRA.
Traditional IRA contributions are allowed but the tax deduction is subject to MAGI limits.

If you're in high tax bracket and can get the full TIRA tax deduction, TIRA contributions makes lots of sense.
If you're in a low tax bracket and are eligible for Roth IRA contributions, Roth IRA contributions makes lots of sense and give you some tax diversification.
If you're in a high tax bracket, ineligible for Roth IRA contributions, and cannot get the TIRA tax deduction, maybe skip the IRA and direct money to taxable account.

If your Variable Annuities are held in IRA then they should be eligible for rollover to a Vanguard IRA.

350K subject to 17K surrender charge. Let's say expense ratios for funds inside the VA are 1% (but they could be much higher). Vanguard expense ratio would be ~0.10% of you hold separate index funds, 0.16% if you hold a Target Retirement or LifeStrategy Fund in an IRA or taxable account.

Annual cost of 1% expense ratio on 350K assets is $3,500 inside the VA
Annual cost of 0.1% expense ratio on 333K assets (after taking out surrender charge) in Vanguard IRA account is $333.

So you stay in the VA and pay over $3K/yr more in higher expense ratios.

Let's assume the portfolio grows 4% per year before expenses for 10 years. Let's also assume that similar investments are held in both accounts with similar gross returns. We subtract the expense ratio from the gross return to give net return after expenses.

In the VA, growth will be 3% after 1% expense ratio.
350,000 grows to 470,370 in 10 years. In excel: 350000 X 1.03 ^ 10 = $470,370

In the Vanguard IRA, growth will be 3.9% after 0.1% expense ratio
333,000 grows to 488,202 in 10 years. In excel: 333,000 X 1.039 ^ 10 = 488,202.

$1million in Vanguard would give you Flagship status and would give you some perks like free financial plan, commissions and turbotax but I don't think you can get lower expense ratios than Admiral shares. You can get Admiral shares of index funds with 10K minimum initial investment. Institutional shares have lower expense ratios but that may require minimum of $5million in each fund.

Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Thu Feb 27, 2014 7:17 am

Both of the 2 replies gets me to where I think I should be. Obviously the my biggest mistake was not having my investments in low cost funds from day 1. Much appreciate the math and comments.

My current employer does not contribute to an IRA and when I owned the business it was a SIMPLE set-up. I worked January for the old business so I maxed out my 2014 already (did the same for 2013) and will set up a new IRA joint account to contribute to 2014 and 2015 under my current employment (with the people that purchased my business).

Tim

Laura
Posts: 7973
Joined: Mon Feb 19, 2007 7:40 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Laura » Thu Feb 27, 2014 8:48 pm

Tim,

I am confused about the terminology you are using. Did you max out 2014 IRA or roth contributions? Also, there is no such thing as a joint IRA (Individual Retirement Arrangement) so I am not sure what you mean by a joint account for 2014 and 2015 contributions. What kind of account are you talking about?

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Thu Feb 27, 2014 10:17 pm

Laura

My business, which I sold February 1, operated for one month in 2014. I was instructed by my accountant to contribute $14,500 for the 2014 year. I have done this. This was a SIMPLE IRA thru the business I owned.

We have no Roth at this time and never did, but maybe we could/should have. So it has been suggested that for the balance of 2014, as I am getting a salary and W-2 that we establish a Roth. At least that is how I understand it. I will be getting a salary for 2014 and 2015 and then retire. My wife is no longer working but again I was told that since we file a joint tax return not only I but she can contribute to a 2014 Roth.

I am on the right path?

Tim

Laura
Posts: 7973
Joined: Mon Feb 19, 2007 7:40 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Laura » Thu Feb 27, 2014 10:24 pm

That makes more sense. A simple isn't a joint account so that is what threw me off. Yes, the roths are good options depending on your annual income level. Check your income against the IRS instructions.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Thu Feb 27, 2014 10:31 pm

Laura

We should be OK with the income levels.

Thanks Tim

DSInvestor
Posts: 10624
Joined: Sat Oct 04, 2008 11:42 am

Re: Penalties for moving IRA assets 3 fund investment

Post by DSInvestor » Thu Feb 27, 2014 10:34 pm

Tim, SIMPLE-IRA is a small business retirement plan. In addition to contributions to SIMPLE-IRA, you are permitted to contribute Traditional IRA or Roth IRA. If you didn't contribute to Traditional IRA or Roth IRA for 2013, you still have time to do so. Deadline for 2013 contributions is April 15, 2014.

Note that Roth IRA contributions are not permitted if MAGI exceeds 188K. If your MAGI exceeds 188K, it is possible to contribute to Traditional IRA but because you were covered by an employer plan, your TIRA contributions will not be deductible. Given that you have SIMPLE-IRA assets, it may be better not introduce non-deductible contributions (IRA basis) to your IRA picture. IRA basis needs to be tracked to avoid double taxation and must be prorated with partial withdrawal/conversion. IRS views Traditional IRA and SIMPLE-IRA as one big Traditional IRA.

You sold your firm in January but now work for the new owners/ Are you a W-2 employee or are you a contractor/consultant. If contractor, you have some additional options for retirement plans - like Solo 401k or SEP-IRA to help you defer more income.

Is your Variable Annuity inside your SIMPLE-IRA? If so, you should look into transferring out of SIMPLE-IRA to a Traditional IRA, Rollover IRA or Solo 401(k) to get lower expense ratios and fees.

Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Thu Feb 27, 2014 10:52 pm

In the past my income was probably too high for a Roth IRA. Until the accountant does his thing for the 2013 tax year I will not know if doing a Roth for 2013 will be possible, but this will be something I will have him consider and I should know within the next 2 weeks.

I am currently a W-2 employee and will remain so for the next 22 months. Question - would it be smart for work 1 day or so in January 2016 so I could contribute more to a Roth? Would this be within the rules?

The Variable Annuity is in the SIMPLE-IRA. Regarding going into a
Traditional IRA, Rollover IRA or Solo 401(k) to get lower expense ratios and fees.
this will something I hope Vanguard will suggest, but now I will add this to the list of questions I have for them.

Thanks

DSInvestor
Posts: 10624
Joined: Sat Oct 04, 2008 11:42 am

Re: Penalties for moving IRA assets 3 fund investment

Post by DSInvestor » Thu Feb 27, 2014 11:59 pm

Tim18 wrote:I am currently a W-2 employee and will remain so for the next 22 months. Question - would it be smart for work 1 day or so in January 2016 so I could contribute more to a Roth? Would this be within the rules?


If you can earn enough 2016 taxable compensation in that one day, you're good for 2016 Roth IRA contributions. You'd need about 30K of taxable compensation W-2 salary to max out a SIMPLE-IRA and 2 Roth IRA contributions.

Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Fri Feb 28, 2014 6:33 pm

... ah yes, not like being self employed.

I think I will pass and stay retired. Thanks again for all your help. Tim

Greenleaves
Posts: 25
Joined: Mon Jan 27, 2014 10:08 am

Re: Penalties for moving IRA assets 3 fund investment

Post by Greenleaves » Sat Mar 01, 2014 1:53 pm

Maybe you could negotiate some vacation , sick and personal days to accrue for the next 22 months? Then perhaps with a little work in Jan 2016 your final W-2 would cover IRA's for you and your wife. Just a thought.

Good luck

DSInvestor
Posts: 10624
Joined: Sat Oct 04, 2008 11:42 am

Re: Penalties for moving IRA assets 3 fund investment

Post by DSInvestor » Sat Mar 01, 2014 4:20 pm

Tim, Are you in a Riversource variable annuity? I looked at some of their VA products and the ones I saw had a Mortality and Expense fee of 1% or higher. The expense ratios for the investment options maybe another 1%. If you have other options tacked on, you could be paying close to 3% per year in fees!

Tim18
Posts: 69
Joined: Sun Jul 21, 2013 11:51 pm

Re: Penalties for moving IRA assets 3 fund investment

Post by Tim18 » Sat Mar 01, 2014 8:15 pm

Are you in a Riversource variable annuity?


Yes I am. The Ameriprise CFP "guessed" that the fees might be .8 or so. From the Annuity Digest they say the fee would be between 1.77 to 3.38; they call it fees and "expenses." Based on the math I will make the transfer to Vanguard as soon as I can.

The help here has been great. I gave all my children one of Jack Bogel's books for Xmas. Now I must follow thru with them as I will be doing for me.

Tim

Post Reply