What should I do with this money?

[FrugalTexan75]

Back in 1999 I opened what I thought at the time was a
Traditional IRA with BOFA. After becoming a bit more financially savvy, I've realized that while it was a Traditional IRA, it was invested (completely) in a CD. That CD has earned anywhere from 1 - 4%. My initial and only investment of $2,000 has grown to $2,231. I just recently received my statement - it showed that I had earned $14 interest in the past year and that I had been charged a $30 maintenance fee.

Since it is a CD it only becomes available for me to do anything with it every two years. This coming April I will once again have a small window of opportunity to do something smart with it.

As of March 1, I will be able to begin contributions to my company's 401k plan. I also recently (in Oct) started a Roth IRA with TROWE.

I know it would be foolish of me to leave that money sitting in a CD for another two years, but I'm really not sure what to do with it.

Should I:

a - Roll it over into my company's 401k plan?

b - Roll it over into my Roth IRA?

c - Start a new Traditional IRA plan and roll it into that?

or

d???

What kind of tax consequences would I be looking at for any of these options? (I'm not asking about future consequences - I'm more interested in the here and now consequences.)

Also, since I am now eligible for my company's 401k plan, can I continue to contribute to my Roth IRA? (and no, my income is NOWHERE NEAR the max outs for a Roth.)

Thanks so much for your input. I really don't want to let the opportunity roll away from me yet again.

[Ima saver]

I had my first IRA in a cd cause I did not know any better. I turned to Vanguard and let them do the work. They rolled it over into my roth IRA. No taxes to pay because I never touched the money. I would roll the CD over into your roth IRA!

[meaghanchan]

If you roll the money into a Roth IRA, you will have to pay taxes now (since it's a traditional IRA, you didn't pay taxes on the money when you contributed initally).

If you roll it into a new traditional IRA, you won't have to pay taxes now.

I don't know anything about option A, rolling it into a 401(k), but even if that's an option, I wouldn't do it, because you won't have as many options as you'll have in an IRA, and depending on your 401(k), you may be paying additional fees you wouldn't need to with an IRA.

What _should_ you do? If it were me, I would probably roll it over into a traditional IRA at T Rowe Price. That way you don't have to worry about the tax consequences. But there may be advantages to rolling it over to a Roth that I'm not thinking of (other than the future tax break, of course).

To answer your other question, yes, you are still eligible to contribute to a Roth if you're contributing to a 401(k).

[disneysteve]

meaghanchan is correct. If you roll a traditional IRA into a Roth, you'll have to pay taxes on the money. I'd keep it as a traditional IRA.

What to do with it? That's a little more difficult. It is a very small amount. Vanguard has a $3,000 minimum, so that's out. If you can find a fund company where you meet the minimum and won't get hit with fees for the low balance, I'd consider that. Otherwise, for that amount, I'm not sure I see anything wrong with sticking with CDs. Right now, the best 6 month CDs are in the 5.45% range. Longer term CDs are actually paying less due to the inverted yield curve. It might not be unreasonable to open a 6 month CD for now and see what happens to rates.

[humandraydel]

Originally Posted by FrugalTexan75

Should I:

a - Roll it over into my company's 401k plan?

b - Roll it over into my Roth IRA?

c - Start a new Traditional IRA plan and roll it into that?

or

d???

What kind of tax consequences would I be looking at for any of these options? (I'm not asking about future consequences - I'm more interested in the here and now consequences.)

Also, since I am now eligible for my company's 401k plan, can I continue to contribute to my Roth IRA? (and no, my income is NOWHERE NEAR the max outs for a Roth.)

Thanks so much for your input. I really don't want to let the opportunity roll away from me yet again.

The tax consequences of distributing the IRA and then putting it into a Roth IRA makes it a bad idea - you'd owe 10% (early withdrawl penalty) plus your income tax rate. PLUS you would lose the ability to add that much to your Roth for the year. Definitely a bad idea.

Your two options are:

1. Buy another CD at a different bank, if possible.
2. Start a new traditional IRA and roll the money into it.

Personally, I'd pick option 2. Steve is right in that many brokerages like Vanguard or Fidelity have minimums higher than $2,000.

So, your options for number 2 then become:

1. Make a contribution this year into a traditional IRA to meet the minimum - though now that you are eligible for a 401k, that contribution might not be deductible.
2. Open an IRA at Sharebuilder which I'm pretty sure has no minimum balance - I know I started my Roth there with an initial deposit of a few hundred.

And finally, to answer your question regarding the Roth, yes, you can contribute both to your 401k and your Roth. You can even contribute to both a 401k and a traditional IRA, though the contributions may not be deductible.

[LuxLiving]

Yes, you'd pay a tax, BUT it is a relatively small amount and if you think going forward that a Roth is all you're ever going to want then doing it now with a lower tax hit would be the time to do it.

Still, I'm not one to give to "Unc" unnecessarily. Only you can decide if the less paperwork hassle for the long term is worth it to you.

[Ima saver]

I agree with lux, pay the small tax and put it in your roth IRA.

[creditcardfree]

Originally Posted by humandraydel

The tax consequences of distributing the IRA and then putting it into a Roth IRA makes it a bad idea - you'd owe 10% (early withdrawl penalty) plus your income tax rate.

There would be no penalty if you convert the traditional ira to the roth ira. The conversion is an exception to the penalty, because it is still being invested for retirement. Yes, you would still pay ordinary income tax on the converted amount.

If you can afford the taxes next year, I would convert all of it to your current roth account. No need to then worry about the minimums of a new account. The growth would then be tax free. The taxes would amount to no more than $300 on $2000 if you are in the 15% tax bracket and would be paid at the time you file your taxes in 2008 (next filing season). Plenty of time to save the money to pay the taxes...or increase your withholding to cover it.

[FrugalTexan75]

Thanks everyone for your input. I'm wondering about something though. The original 2,000 was post-tax money.

So, if I were to roll it over into my Roth, would I be taxed on the whole amount (~$2300) or just on the growth ($300) ??

I'm not going to be able to even come close to maxing my Roth, so rolling this over into it won't limit what I put into it this year.

Thanks again all!

[disneysteve]

Originally Posted by FrugalTexan75

So, if I were to roll it over into my Roth, would I be taxed on the whole amount (~$2300) or just on the growth ($300) ??

You would be taxed on the full amount. This assumes that you took a deduction for your contribution originally. If you didn't already pay taxes on that money, you would need to when you rolled it over.

[humandraydel]

Well, here's the deal - you SAY that $2,000 was post tax money, but if it's a regular IRA, it's supposed to be pre-tax. That's because in the year you make the contribution (1999) you were supposed to take that $2000 off your taxable income. I suspect that when you roll it over you will automatically be taxed on the entire amount because of the type of account it is. You MIGHT be able to fight with the IRS and prove you never took the deduction when you were supposed to, but I'm not sure that excuse would hold up. Also, I'm not sure it's worth it.

[Snoopy2645]

well if you dont put it in a IRA but I do think thats a great idea check around other cds are paying over 5% interest & no maintence fees at other banks sorry I cant give any advice about the IRA because I have yet to open one hopefully we will do that in the next few months though but thats a great idea for you also.

[project15]

You could take it out, pay taxes/fees on it, and give the rest to me =)


Sorry, that's what I think of everytime I glance over this title.

[FrugalTexan75]

Project 15 - LOL! Very funny.

Humandreydyl & DisneySteve - You're right, it is pre-tax money. I didn't think about the fact that I got a bigger tax refund the year I put that money in the IRA. So, even though it wasn't money that came out of my paycheck pre-tax, it still was money I got the taxes refunded on.

I think maybe what I'm going to do is call TRowe and ask them for advice - if I have to, I could take the difference of the min balance from savings to start an account - although that definitely is not my first choice.

Thanks again for your opinions and advice.