Investing in rollover IRAs

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Topic Author
Analytix
Posts: 2
Joined: Wed Mar 13, 2019 10:42 am

Investing in rollover IRAs

Post by Analytix » Wed Mar 13, 2019 11:44 am

First time poster (and new Boglehead) here.

On the advice of my CPA, to facilitate a potential backdoor conversion, I recently rolled over two old 401(K)s into traditional And Roth IRAs at Fidelity (accounts had been there for years, so it was convenient). In the process, due to the funds I had previous investments in, only one fund position was available for IRAs and was maintained, while the rest were moved to cash. I now have the opportunity to invest into any low cost index fund/ETF.

I am currently in the 35% tax bracket and at least 15 years away from retirement.

I am considering dollar cost averaging over 6 months into the following funds:
FZROX - Total market index - 55% - no transaction fee, exp ratio 0%
FZILX - Total international index- 20% - no transaction fee, exp ratio 0%
FTBFX - Total bond index - 25% - no transaction fee, exp ratio 0.45%

Questions:
1. Should any one of these choices be restricted to the traditional IRA vs. the Roth IRA? I have read arguments on previous threads both for or against bonds in tax-advantaged accounts.
2. Should I wait until the backdoor conversion strategy is clarified (after tax season) before I start buying into positions?
3. Are these reasonably good picks for. 3 fund Fidelity portfolio? If not, what are the alternatives?

Thanks in advance!

bloom2708
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Location: Fargo, ND

Re: Investing in rollover IRAs

Post by bloom2708 » Wed Mar 13, 2019 1:59 pm

Lots to unwrap.

If you are considering a back door Roth strategy, the existence of the Rollover/Traditional IRAs will prevent that (pro-rata rule).

You should (if possible) move them into your current 401k if the provider will accept the funds.

As for funds, look at your portfolio as one entity. Placing based on funds available and tax efficiency.

1. Pre-tax 401k/403b/457/Thrift - All your bond allocation, balance in stock index funds (depends on options/expense ratios)
2. Rollover IRAs - Bonds if they don't fit in #1, otherwise stock index funds (Total US and Total International or Total World)
3. Roth IRAs - Stock index funds - Total US and/or Total International and/or tilts
4. HSA - Depends on options and expense ratios
5. Taxable - Stock index funds - Total US and/or Total International

You do not need/want all the funds everywhere. That causes too many funds. I use and/or because you may need 1 or 2 funds in an account based on the amount and what "fits" for your allocation of US/International and Bonds.

The funds you list are all good. The question is do you need all 3 based on above? Should you move them into your 401k so you can do the Back Door Roth?

I wouldn't buy any funds until you figure out the back door Roth question.

Good luck!
Last edited by bloom2708 on Wed Mar 13, 2019 2:31 pm, edited 1 time in total.
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celia
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Re: Investing in rollover IRAs

Post by celia » Wed Mar 13, 2019 2:25 pm

Analytix wrote:
Wed Mar 13, 2019 11:44 am
On the advice of my CPA, to facilitate a potential backdoor conversion, I recently rolled over two old 401(K)s into traditional And Roth IRAs
Oh my! You (or your CPA) have this backwards.

In order to facilitate Backdoor Roths, you should move all pre-tax IRAs (traditional IRA (which includes Rollovers), SIMPLE IRA, SEP-IRA) to a 401K, not from a 401K. Now you've done a Roth conversion for the money that went into the Roth, if it was tax-deferred, and need to pay taxes on it.

Before you do a Backdoor Roth, you need to understand everything on the wiki page that I just linked to. The page is very detailed and will probably need to be read several times to understand everything. Most importantly, you need to understand the pro rata rule and how to fill out Form 8606, even if you have someone else do your taxes. (You should confirm their generated Form 8606 is correct before signing the return.) If the CPA explained the opposite of what the wiki page says, you need a new CPA / tax preparer.

Living Free
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Joined: Thu Jul 19, 2018 7:31 pm

Re: Investing in rollover IRAs

Post by Living Free » Thu Mar 14, 2019 12:03 pm

Analytix wrote:
Wed Mar 13, 2019 11:44 am


I am considering dollar cost averaging over 6 months into the following funds:
FZROX - Total market index - 55% - no transaction fee, exp ratio 0%
FZILX - Total international index- 20% - no transaction fee, exp ratio 0%
FTBFX - Total bond index - 25% - no transaction fee, exp ratio 0.45%

Questions:
3. Are these reasonably good picks for. 3 fund Fidelity portfolio? If not, what are the alternatives?

Thanks in advance!
I do not really know what the story is with the FTBFX bond fund. I would pick the FXNAX US bond index fund which has an expense ratio of 0.025%, or about 1/20th the expense ratio of the FTBFX.

Topic Author
Analytix
Posts: 2
Joined: Wed Mar 13, 2019 10:42 am

Re: Investing in rollover IRAs

Post by Analytix » Mon Mar 18, 2019 1:12 pm

Thank you, all!

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Investing in rollover IRAs

Post by retiredjg » Mon Mar 18, 2019 1:22 pm

I agree that you and your CPA have gotten derailed somewhere along the line.

What you did is fine if you want to do Roth conversions. But doing Roth conversions is not a good choice in the 35% bracket.

What you did will completely mess up using the "back door" to contribute to Roth IRA. You need to have $0 in tIRA to do that. Therefore, unless you have a current 401k or similar plan, to roll that IRA into, you should forget about using the back door.


The bond fund is not the one you want. Yes, it is called "total bond", but it is an actively managed fund, not an index fund. This has fooled many people - you are certainly not the first.

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