Opening a Roth: What route to use?

[red92s]

I'd like to open a Roth IRA. I'm 24 years old and currently control the following existing investment accounts.

• 401(K): For current employer. ~$7,500 current balance. Current contribution is 10%. Employer match maximum (4% additional) achieved with a 5% contribution.
• Traditional IRA: From a previous employer (internship while in school). $1,407 current balance. Have not paid made a contribution since rollover (2005).
• Money Market: ~$5k. Don't actively use contribute to it.

I've had multiple people suggest I cut my 401(k) contribution to the level where I get the max employer match, and use the remainder from what I contribute towards a Roth. I'm fine with that logic, my question surrounds the best way to initiate the Roth. I see three potential options. Any input or advice would be greatly appreciated. I don't really have a lot of liquid cash on hand as I'm still eliminating debt and building an emergency fund at a rapid rate.

Option 1: Convert Trad. IRA into Roth, pay taxes out of pocket
I'd pay taxes on the rollover amount (25%= $350) out of pocket, avoiding any additional withdraws penalty. I don't have a ton of cash on hand, as I'm trying to grow my EF and pay down debt rapidly.

Option 2: Convert Trad. IRA into Roth, pay taxes out of balance
Incurring an additional 10% penalty on the WITHDRAWAL amount would be pretty paltry, around $35-50. With such a small balance, and therefor tax due, the additional 10% hit seems pretty negligible if it means I don't dip into my growing EF.

Option 3: Leave Trad. IRA in place, open NEW Roth IRA
Last option I can think of is leaving the existing IRA where it is, and opening a Roth with Fidelity (or other) that waives initial account minimums with automatic monthly contributions (which would be funded via the reduced 401(K) contributions).

[sweeps]

Forget option 2, you should only convert if you're going to pay the taxes out of pocket.

So between option 1 and 3... Are you sure that your effective tax rate is 25%? If it really is that high, then you probably should stick with option 3. I have a feeling it's not really that high though... it's probably more like 10-15%. In that case I would convert, i.e. choose option 1.

[Scanner]

From a pure numbers standpoint, Option 3 seems to be the best idea. But I don't blame you if you don't want to have multiple small balances to keep track of and you'd just like to consolidate.

It depends I think on where you think your income will be. If your income is high, it's theorectically possible that you'd max out your 401(k), your Traditional and your Roth IRA.

If that's the case, then you may want to keep it open and fund in the order of 401(k), Roth, and then Traditional.

Like you said, not much is at stake here so whatever makes you happy.

[red92s]

I don't know what my effective tax rate is, or how to calculate it. Are federal and state taxes due when converting an IRA from traditional to a Roth? I'm not exceedingly worried about what the exact tax amount is, as the account in question is pretty small.

I'd like to avoid having the several small accounts that I'm not actively contributing to. With that in mind, I guess there are some additional solutions:

- Roll IRA into current 401(K), avoiding any tax penalties. Then fund a new Roth account.
- Convert IRA to a Roth, and pay the resulting taxes via the funds in my money market account. This account was established by my grandparents ~10 years ago and was used to cover living expenses in college (I had a fully scholarship). That way, I wouldn't hurt my emergency fund, or incur the additional withdrawal penalty.

[sweeps]

You probably can't roll over into your 401k... check your plan.

My recommendation... roll over your traditional IRA to the company where you want to consolidate your investments. Most companies will allow you to do the Roth conversion as part of the rollover. You'll have to pay taxes on the $1,400 of "income" at the end of the year. Then you can contribute additional money to that Roth you just created.

[anonymous_saver]

I don't know what my effective tax rate is, or how to calculate it. Are federal and state taxes due when converting an IRA from traditional to a Roth? I'm not exceedingly worried about what the exact tax amount is, as the account in question is pretty small.

I'd like to avoid having the several small accounts that I'm not actively contributing to. With that in mind, I guess there are some additional solutions:

- Roll IRA into current 401(K), avoiding any tax penalties. Then fund a new Roth account.
- Convert IRA to a Roth, and pay the resulting taxes via the funds in my money market account. This account was established by my grandparents ~10 years ago and was used to cover living expenses in college (I had a fully scholarship). That way, I wouldn't hurt my emergency fund, or incur the additional withdrawal penalty.

How much money do you make per year (approximate is fine)?

Since you would like to simplify your accounts, I would definitely choose option #1.

I would choose to go with Vanguard since they have the lowest fees around.

What is your current asset allocation?

[Skooby]

I would choose to go with Vanguard since they have the lowest fees around.

I thought T. Rowe Price had the lowest fees...

[Scanner]

I think it depends on the mutual fund.

Any index fund, whether Vanguard or not, is going to have a low expense fee compared to a managed fund.

I am planning on putting money into Schwab S&P 500

http://www.schwab.com/public/schwab/research_strategies/mutual_funds/summary/schwab/at_a_glance.html?cmsid=P-1018488&lvl1=research_strategies&lvl2=mutual_funds&ticker_sym_nm=SWPPX

I can't imagine Vanguard's much cheaper than that. If it is, it ain't really worth my time.

An index fund is an index fund is an index fund.

[red92s]

How much money do you make per year (approximate is fine)?

Since you would like to simplify your accounts, I would definitely choose option #1.

I would choose to go with Vanguard since they have the lowest fees around.

What is your current asset allocation?

~$52k

[anonymous_saver]

I think it depends on the mutual fund.

Any index fund, whether Vanguard or not, is going to have a low expense fee compared to a managed fund.

I am planning on putting money into Schwab S&P 500

At-a-Glance

I can't imagine Vanguard's much cheaper than that. If it is, it ain't really worth my time.

An index fund is an index fund is an index fund.

https://personal.vanguard.com/VGApp/hnw/funds/snapshot?FundId=0040&FundIntExt=INT

Vanguard's Expense Ratio for the 500 Index is 0.18%, so not a big difference than the one from Schwab but there are many cases when Vanguard has a 1% lower expense ratio over other companies.

In addition, if you receive e-mail statements from Vanguard instead of receiving it in snail mail, you will have no other fees other than the expense ratio. This is a fairly unique benefit. https://personal.vanguard.com/VGApp/...302004_ALL.jsp