Roth IRA and Traditional IRA, merge or no?

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Topic Author
GettingAheadSD
Posts: 2
Joined: Sat May 23, 2020 5:37 pm

Roth IRA and Traditional IRA, merge or no?

Post by GettingAheadSD » Sat May 23, 2020 6:27 pm

Emergency funds: Yes, 6 Months+

Debt: Zero

Tax Filing Status: (Single, Head of Household, No Dependent Children)

Tax Rate: 22-24% Federal, 8-9.30% State

State of Residence: CA

Age: 40

Desired Asset allocation: 90% stocks / 0% bonds
Desired International allocation: 10% of stocks

Please provide a hint as to the size of your current total invested portfolio 25K

Current retirement assets

Cash
78% cash (for investing – do not include emergency funds)

Taxable
3% VANGUARD INFORMATION TECHNOLOGY ETF (VGT)
6% E-Trade

New 401k
1% TRP BLUE CHIP GRTH I (TBCIX) (0.45)
Company match? Yes

Roth IRA at Vanguard
6% Vanguard Health Care Fund Investor Shares (VGHCX)

Traditional IRA at Vanguard
6% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
_______________________________________________________________
Note: Total percentage of all the above accounts together (not each account individually) should equal 100%.

Contributions

New annual Contributions
3%+ 401k (also specify any employer matching contributions)
$3000 IRA/Roth IRA
$0 taxable (for retirement, not short term goals)

Available funds

Funds available in 401(k)
?

Questions:
Hey Bogleheads, new to the forums and new to Vanguard in recent months. My family advises Vanguard over the rest and I have taken the option to open an account and be a Boglehead. I have recently read The Bogleheads' Guide to Investing: SE

I left my long time employer and with it my Roth 401K (Vanguard Wellington) account. I rolled it over to Vanguard, but I had to make a Roth and a Traditional account because how it was funded. My father who is a CPA is advising I keep both but ultimately keep contributing only to the Traditional in the long run. I'm assuming the Traditional as I'm middle aged and my salary bracket. He wants me to equally fund the Roth and Traditional for a couple of years, then leave the Roth as is and focus on the Traditional for the rest of the duration.

Would it be best to do it this way or merge the accounts into the decided type? If everything is paired equally, I feel a larger lump some account will return more when I retire vs one medium and one smaller account. Right now my Traditional IRA is 100% VTSAX and the Roth is 100% VGHCX

Thanks
Last edited by GettingAheadSD on Sat May 23, 2020 9:17 pm, edited 1 time in total.

Silk McCue
Posts: 4512
Joined: Thu Feb 25, 2016 7:11 pm

Re: Roth IRA and Traditional IRA, merge or no?

Post by Silk McCue » Sat May 23, 2020 7:35 pm

Welcome to Bogleheads!

Glad to see you have read the Bogleheads Guide to Investing. It’s how I got my start setting things right a few years ago.

You cannot “merge“ the tIRA and Roth together. If you wanted only Roth you could convert the tIRA to Roth but will pay taxes on the amount at your marginal rate. I converted over $100k last year because it made good sense for us.

In regards to your reasoning for wanting to do so, one big account versus two accounts from a growth perspective isn’t a thing. Open 10 accounts with $10k each with VTSAX and it will perform the same as one account with $100k of VTSAX assuming no per account charge. Money is fungible.

You would be well served to hold Tax deferred funds, Roth (never again taxable funds) and Taxable accounts for your successful financial future.

I would recommend that you post your information using the format provided below so that you can get real feedback from folks.

https://www.bogleheads.org/wiki/Asking_ ... _questions

Cheers

retired@50
Posts: 2646
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Roth IRA and Traditional IRA, merge or no?

Post by retired@50 » Sat May 23, 2020 7:35 pm

I think we need more info.

Are you currently working or retired?

If you're working, do you have access to a 401k plan?

Regards,
This is one person's opinion. Nothing more.

02nz
Posts: 3929
Joined: Wed Feb 21, 2018 3:17 pm

Re: Roth IRA and Traditional IRA, merge or no?

Post by 02nz » Sat May 23, 2020 7:44 pm

There are some misconceptions here. You cannot "merge" the accounts. You can do conversions from traditional into Roth, but that's taxable income for the year in which the conversion is done, so generally that only makes sense to do in small bits, and in years when you have low income (e.g., after you retire but before starting Social Security). And that conversion is one-way only and irreversible.

Also, you seem to think that 1 account say with 500K will somehow grow to be more than two accounts with 400K and another 100K ("I feel a larger lump some [sic] account will return more when I retire vs one medium and one smaller account.") This is mathematically impossible. If they're invested the same, they'll have the same returns.

Topic Author
GettingAheadSD
Posts: 2
Joined: Sat May 23, 2020 5:37 pm

Re: Roth IRA and Traditional IRA, merge or no?

Post by GettingAheadSD » Sat May 23, 2020 9:26 pm

Silk McCue wrote:
Sat May 23, 2020 7:35 pm
Welcome to Bogleheads!

Glad to see you have read the Bogleheads Guide to Investing. It’s how I got my start setting things right a few years ago.

You cannot “merge“ the tIRA and Roth together. If you wanted only Roth you could convert the tIRA to Roth but will pay taxes on the amount at your marginal rate. I converted over $100k last year because it made good sense for us.

In regards to your reasoning for wanting to do so, one big account versus two accounts from a growth perspective isn’t a thing. Open 10 accounts with $10k each with VTSAX and it will perform the same as one account with $100k of VTSAX assuming no per account charge. Money is fungible.

You would be well served to hold Tax deferred funds, Roth (never again taxable funds) and Taxable accounts for your successful financial future.

I would recommend that you post your information using the format provided below so that you can get real feedback from folks.

https://www.bogleheads.org/wiki/Asking_ ... _questions

Cheers
Updated. Okay merge wasn't really the right word. I rather keep things simple with a single IRA account. I seemed to read that having a larger amount in a fund earlier like lump sum vs DCA seems to have better returns. Larger compounding effect.
retired@50 wrote:
Sat May 23, 2020 7:35 pm
I think we need more info.

Are you currently working or retired?

If you're working, do you have access to a 401k plan?

Regards,
Working and yes I have new 401k plan with Fidelity NetBenefits.

User avatar
grabiner
Advisory Board
Posts: 26882
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Roth IRA and Traditional IRA, merge or no?

Post by grabiner » Sat May 23, 2020 9:35 pm

02nz wrote:
Sat May 23, 2020 7:44 pm
There are some misconceptions here. You cannot "merge" the accounts. You can do conversions from traditional into Roth, but that's taxable income for the year in which the conversion is done, so generally that only makes sense to do in small bits, and in years when you have low income (e.g., after you retire but before starting Social Security). And that conversion is one-way only and irreversible.
One other reason you might want to do this is to open up the backdoor Roth IRA. If you earn too much to contribute directly to a Roth IRA, you can still contribute to a non-deductible traditional IRA and immediately convert to a Roth IRA. But this does not work if you already have a traditional IRA, because the IRS does not allow you to convert just the non-deductible portion; you must either convert the deductible portion as well, or get rid of it if your employer allows you to roll the traditional IRA into its 401(k).
Wiki David Grabiner

LeeMKE
Posts: 1921
Joined: Mon Oct 14, 2013 9:40 pm

Re: Roth IRA and Traditional IRA, merge or no?

Post by LeeMKE » Sat May 23, 2020 11:49 pm

Do what your Dad is suggesting. He is correct.
The mightiest Oak is just a nut who stayed the course.

User avatar
celia
Posts: 10649
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth IRA and Traditional IRA, merge or no?

Post by celia » Sun May 24, 2020 12:45 am

GettingAheadSD wrote:
Sat May 23, 2020 9:26 pm
Okay merge wasn't really the right word. I rather keep things simple with a single IRA account.
This still doesn't make sense. You can't combine accounts with different "attributes" or "characteristics". And there are different rules for each kind of account.

For example, a Roth account had taxes paid on the contributions and the money can be withdrawn tax-free after age 59.5 if the account has been opened at least 5 years. A Traditional IRA, on the other hand, usually didn't have any tax paid on the contributions (you deducted it from your income when doing taxes), but withdrawals will have to be taxed. So how can these two accounts be "combined"?

GettingAheadSD wrote:
Sat May 23, 2020 9:26 pm
I seemed to read that having a larger amount in a fund earlier like lump sum vs DCA seems to have better returns. Larger compounding effect.
This makes sense only because the initial investment is different in each case. Let's assume an investment that pays monthly dividends and DCA $100 a month into the fund (it doesn't matter what kind of account this is in). Each month, the balance will get a little growth that (on average) increases each month as more is added to your principal. Compare that to someone else who lump sums $1,200 for the year in January. The growth at the end of one month will be 12 times as much as the first example that is DCA-ing.

Over a 30 or 40 year working career, the lump sum investor who put in the yearly contribution in January will come out ahead, but the difference won't be as much as the one-year example because at year 10, 20, or 30, the 'starting principal' (for the next 10 years) is much larger than the lump sum principal in the one-year example.

User avatar
teen persuasion
Posts: 1121
Joined: Sun Oct 25, 2015 1:43 pm

Re: Roth IRA and Traditional IRA, merge or no?

Post by teen persuasion » Sun May 24, 2020 9:48 am

GettingAheadSD wrote:
Sat May 23, 2020 6:27 pm

Tax Filing Status: (Single, Head of Household, No Dependent Children)

Tax Rate: 22-24% Federal, 8-9.30% State


Please provide a hint as to the size of your current total invested portfolio 25K

Roth IRA at Vanguard
6% Vanguard Health Care Fund Investor Shares (VGHCX)

Traditional IRA at Vanguard
6% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)


Contributions

New annual Contributions
3%+ 401k (also specify any employer matching contributions)
$3000 IRA/Roth IRA
$0 taxable (for retirement, not short term goals)

Questions:
Hey Bogleheads, new to the forums and new to Vanguard in recent months. My family advises Vanguard over the rest and I have taken the option to open an account and be a Boglehead. I have recently read The Bogleheads' Guide to Investing: SE

I left my long time employer and with it my Roth 401K (Vanguard Wellington) account. I rolled it over to Vanguard, but I had to make a Roth and a Traditional account because how it was funded. My father who is a CPA is advising I keep both but ultimately keep contributing only to the Traditional in the long run. I'm assuming the Traditional as I'm middle aged and my salary bracket. He wants me to equally fund the Roth and Traditional for a couple of years, then leave the Roth as is and focus on the Traditional for the rest of the duration.

Would it be best to do it this way or merge the accounts into the decided type? If everything is paired equally, I feel a larger lump some account will return more when I retire vs one medium and one smaller account. Right now my Traditional IRA is 100% VTSAX and the Roth is 100% VGHCX

Thanks
Are you eligible to make deductible tIRA contributions? If they are not deductible (based on MAGI), are you eligible to make Roth IRA contributions?

If no to first question, and yes to second, make Roth IRA contributions. If no to both, use the backdoor Roth process: contribute to a non deductible tIRA, convert that to Roth IRA. The drawback here is the existence of a tIRA balance, which will create proration issues when converting. Either roll the tIRA balance into your new employer's 401k (if allowed), or convert the existing tIRA balance (at a tax cost) to clear the decks for an annual backdoor Roth IRA.

Generally, you should contribute enough to your 401k to capture any match, contribute to an employer HSA, contribute to a Roth IRA (backdoor if needed), return to contributions to your 401k to the max, before any taxable investing.

Your tax rate makes your income look high, but your savings rate appears low, balances low for your age. High tax rate implies you should lean to pre-tax contributions (401k, HSA) for the tax break. For the IRA contributions, it's more complex. If you can't get the tax break (not eligible for deduction), easy choice - Roth is the only option. If you have a choice, it becomes: should I take the tax break now (all traditional) or should I tax diversify (pretax 401k + Roth IRA) for later?

mhalley
Posts: 8235
Joined: Tue Nov 20, 2007 6:02 am

Re: Roth IRA and Traditional IRA, merge or no?

Post by mhalley » Sun May 24, 2020 12:37 pm

The amount to save depends on when you want to retire. Check out MMM simple math post and take a look at your savings rate to see how long it will take you to get where you want to be.
https://www.mrmoneymustache.com/2012/01 ... etirement/

crefwatch
Posts: 368
Joined: Sun Apr 15, 2007 1:07 pm
Location: New Jersey, USA

Re: Roth IRA and Traditional IRA, merge or no?

Post by crefwatch » Sun May 24, 2020 1:05 pm

Many people on this newsboard have both traditional and Roth IRAs. In many cases, they want to have flexibility (in retirement) to control their taxable income by taking money out of both IRAs in different proportions. Reasons for doing this can include Federal Income Tax bracket, Medicare IRMAA thresholds, Minimum distribution requirements after 72, and (to a lesser extent than in the past) estate planning.

The OP is completely wrong in believing there is a down side to having one traditional IRA and one Roth IRA. It's considered a normal part of ordinary citizens (I mean, as opposed to multi-millionaires) financial and tax planning. It's not ridiculous to speculate about long-distant possible changes in taxation, but you can't make firm plans for non-existent rules.

Where did you get the idea that you could make more money with one account?

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