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Retirement Part III

May 20th, 2019 at 10:18 pm

I’m all mixed up. Thanks everyone for your advice regarding the Roth account. I thought when I read the “all about Roth’s” section, it stated that taxes were basically held off and at age 59 1/2 one could withdraw without penalties. 🤦🏽‍♀️🙄

I also had no clue about the conversation from a 401(k). So now I need to open a traditional IRA to transfer the funds. I’ll do that this weekend, once I’ve done a little more research and asked more questions.

Now my is question, though the amount to open the Roth was minimal, what do I do with it, if I’m opening a traditional IRA? Do I keep both and from time to time make a contribution? I personally feel like one is enough for me to try and manage until I get these credit cards paid off.

Also it looks like the Roth doesn’t allow me to pick funds as of yet, due to the balance I think, the current fund is VMFXX. From what I can tell, I’m still learning, the risk factor is extremely low, the investment is designed to provide a current income while maintaining liquidity. I get this part, but it also states it has a stable share price of $1, what does this mean? I think the cash on hand doesn’t change regardless of what the market is doing.

5 Responses to “Retirement Part III”

  1. Stephanie Says:

    I know it call be very confusing. The Roth IRA grow tax free because the money you pay in is after tax and you can't claim the amount toward a tax reduction on your federal tax return. With the Traditional IRA, it is possible to claim tax deduction for the amount you contribute. There are income limitations on IRAs so it's good to educate yourself.

    Some advisors will push the Roth IRA over Traditional IRA because the belief is that we are in a low tax environment so pay it now and not worry that tax will rise. If you do a Traditional IRA, when you are eligible to withdraw without penalty, you pay the going tax rate. Most people will have a blend of both accounts. This will give you choice of where to withdraw money when you are in retirement.

    The VMFXX is just like a money market fund. It is the initial investment vehicle. It is a low earner because of the liquidity feature. When you have enough to buy into another fund, consider an index fund to give you diversity.

    From what little I know, I hope it helps. Good luck!

  2. Amber Says:

    Yes, thank you Stephanie this definitely helps. I really appreciate it. One other question, can you max out both a Roth and a traditional IRA?

  3. creditcardfree Says:

    VMFXX is a money market account, principal stays the same and you earn interest on the balanced. This is not the type of account that will keep up with inflation or help you grow your investment for the long term. I think I mentioned the Target Retirement funds at Vanguard in the comments of one of your blog posts. Did you pick VMFXX? Once the money is in there you can eventually pick a different fund. That is called an exchange, and it's simply a move from one fund to another, but your account title, ROTH IRA stays the same. This is not a taxable event for retirement accounts, if the account type is the same.

    It's true, if you take a 401K to a Roth you will have a taxable event for the year. While this can be smart planning long term, if you don't have the funds to pay those taxes, it's not worth doing. I do think it's smart to roll those 401K balances into a Traditional IRA (may also be called a Rollover IRA, which indicates the funds came from an employer plan). The reason I like this is simply because it gets the money into your total control with your investing options. If you put all your investments at Vanguard for example, it's just easier to keep track of as well.

    You CANNOT max out both an IRA and a Roth. You can contribute to both, but the maximum you can contribute in a single year is $6,000 combined. Now you can also contribute to your 401K in addition to that $6,000, that maximum is currently at $19,000 per year.

    To answer one your questions, I think you need to roll the 401K to the traditional IRA, pick one fund for all of it. Then just let it sit. Open the Roth, pick one fund, with the minimum amount required and use it as the account you will add to going forward. The traditional and Roth could be the same fund, but they will appear as two different accounts at Vanguard because they are two different account types. Try to keep it as simple as possible in the beginning. You can pick more funds farther down the road as you have done more research. Most of my retirement funds are in the S&P 500 index at Vanguard.

    Definitely do your research and ask questions before you leap to fast!

  4. MonkeyMama Says:

    Amber, Traditional IRA contributions will give you a tax break in the here and now, which is probably what is most important given your current situation (stretching limited dollars further). If you find you have a bigger tax refund than expected, due to funding retirement, you also have until April 15, 2020 to finish funding the $6k max for 2019. You can throw that refund at your 2019 retirement contribution.

    I am more of a fan of the ROTH in general, but the taxes do not favor single people (your tax rate is probably very high compared to mine) and you could probably use the tax break to help fund more into retirement.

    If you used Turbo Tax, save a copy of your 2018 tax file and add a $6k traditional IRA contribution. IT's the quickest/easiest way to get some ballpark of your personal/actual tax savings with the Traditional IRA contribution. That just gives you a ballpark. Then you can make the final decision when you complete your taxes for 2019.

  5. Amber Says:

    @CCF thanks. I did not pick the VMFXX fund. It seems like I can’t make any selection u til the account balance grows, so now that’s another goal.

    I opened the IRA and will roll the funds into that account. I won’t be leaping anymore until I post here first. I almost had a debacle with the conversation had I rolled that 401(k) money.

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