Rollover IRA versus ROTH IRA

[musicprofessional]

Hi all,

It's been awhile since I've been on here. Things are moving along. In early 2012, I had moved a 401K from a previous job into a Rollover IRA with T. Rowe Price. About a year later, I started a ROTH IRA with the same broker. I have a little over 6K in the Rollover, and 4K in the Roth. My question is this: since my income is still rather low, and my age is somewhat low (I just turned 37) would it be best for me to move the Rollover IRA funds into the ROTH IRA? I think there are some fees with them that if you have an account under 10K with them, you're charged a yearly fee of $20 for each account. Has anyone here ever had accounts with T. Rowe Price? I'm just finishing up a Doctorate, and my income is still rather low. I'd like to just let this money grow, and add funds when I can. Would combining the Rollver into the ROTH be a good idea? Thanks.

[bUU]

You would end up paying income tax on the rollover amount (and you'd have to pay that tax with other money - i.e., not from the amount within the account - to avoid early withdrawal penalties). If you are in the 15% tax bracket, and would still be in that bracket even if with the extra $6000 in income, then it probably would make sense to consolidate. You have lots of time to contribute pre-tax income to 401ks and traditional IRAs, but the ability to contribute to Roth accounts is constrained when your income is higher, and it costs more to do conversions like this (because your tax rate is higher).

[cardtrick]

I've thought about this issue quite a bit and feel that paying taxes now is the way to go. Especially since you are likely in a very low tax bracket. If I ever have a low income year, I plan on converting as much of my then IRA into Roth. Hopefully tax rates will still be low enough.


There are a few brokers out there that charge no fees and have no account minimums. Also, their trading fees are low. I use Optionshouse. No fees except for when you close your account, you are charged a $20 fee. You never have to close it though. If you empty it out, just leave $5 in there forever. $3.95 stock trades and they have wonderful customer service. If you decide to switch, PM me. We can both get a referral bonus. : )

[musicprofessional]

Thank you for your responses. I agree with most of what you have to say. However, I spoke with an tax accountant friend today, and he mentioned something I didn't figure in.... If I move my funds from the Rollover to the ROTH, I'll have to pay a 10% penalty. Does this sound correct? That's a lot of money to lose. So, his advice to me was to just leave it alone, and keep contributing to the ROTH. When I retire, withdraw on the Rollover then as I'll be in a lower tax bracket when I have pay the taxes on the amount. Considering the small('ish) fees I originally mentioned, it may be best to just leave things alone.

[Petunia 100]

Thank you for your responses. I agree with most of what you have to say. However, I spoke with an tax accountant friend today, and he mentioned something I didn't figure in.... If I move my funds from the Rollover to the ROTH, I'll have to pay a 10% penalty. Does this sound correct? That's a lot of money to lose. So, his advice to me was to just leave it alone, and keep contributing to the ROTH. When I retire, withdraw on the Rollover then as I'll be in a lower tax bracket when I have pay the taxes on the amount. Considering the small('ish) fees I originally mentioned, it may be best to just leave things alone.

No, that does not sound correct. In fact, it sounds very incorrect. From IRS publication 590:

Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.

http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230658

[musicprofessional]

Thank you for that info. This is why I like to cover all my bases...and ask around first. It may be best for me to call T. Rowe Price about this, too. Again, thank you for that info!

[TBH]

I have a rollover IRA from an old workplace retirement account, and I have moved money from it a couple of times into my Roth. I have done it gradually to spread out the tax burden. It's not very difficult, just requires some paperwork. I think it's a good idea to do it if you can afford to pay the taxes on it with other money. For one thing, it simplifies things because you have fewer accounts. And when you have small balances like you're talking about, $4k or $6k, it can be hard to diversify your investments because many funds have a minimum deposit amount of $2500. If you put all $10k in one account, you can buy 4 different funds. That way you have more options and don't have to go with a fund that attempts to balance your investments for you, and not always in the way you would want.

My accounts are all with Fidelity, except for an old workplace plan with TIAA-CREF that my former employer's plan rules won't allow me to move. But my sister has used T. Rowe Price for years and swears by it.