This blog occasionally gets into trouble because after years of answering similar questions over and over again, sometimes you want a change of pace. But maybe I’m spending too much time in the weeds and forgetting that most doctors and other high-income professionals reading this site still just need help with what I consider to be the basics. Let’s answer some of those more basic questions today.
These questions come from internet forums and my email inbox, but they are all relevant to the WCI community.
How to leave a bad situation
“I want to move my $200,000 from Edward Jones to Fidelity. My Edward Jones managed account has never given me good returns, and the fees, commissions, and expense ratios are too high. I want to make sure I can roll over my investments without paying taxes or penalties. We have two traditional IRAs, two Roth IRAs, and an individual account. What’s the smartest way to do this, and what should I invest in with Fidelity? I’m 50 years old and I think I still have about fifteen years to go to get where I want to get.”
Your first question is whether you are competent to do this yourself or whether you just need a real asset manager. If the answer is the latter, they can help you with both problems. But let’s focus on finding someone who can help you. Here you will find our list of recommended advisors.
If the answer will soon be the former (obviously it isn’t yet), just keep reading forums and good investment books and you’ll find out. Most answers you get on forums assume you’re going to try this yourself. It’s up to you to decide if that’s a good idea.
Now let’s answer the questions you actually asked.
First, the rollover has no taxes or penalties, but it will likely incur some fees and charges from Edward Jones. Contact Fidelity and they will assist you with the paperwork required to complete the rollover. It takes a few weeks, but it’s really not that difficult once you’ve done one or two of them.
Second, jump to step 4 of investment management. That’s really difficult. Figure out steps 1 to 3 first, and then step 4 becomes easy.
- Set SMART goals.
- Choose which accounts you will invest in for each goal.
- Choose an asset allocation (mix of investments) for each goal.
- Choose investments (typically low-cost, broadly diversified index funds) that give you that asset allocation
Here are some additional resources:
What should I do about a bad IRA?
“I had a question about what to do with a worthless IRA. My wife has an IRA totaling almost $30,000 at Lincoln Financial from a previous employer. The money is currently invested in a fixed annuity that pays 1%. I tried to change her investments, but that didn’t work; it tells me I have ‘assets in a fixed account.’ Can I really not change these investments? And if so, does it make sense to withdraw the money, pay the necessary taxes, and then invest it in Vanguard index funds? A quick calculation tells me that the answer is absolutely yes, but am I missing something? My wife and I are both in our early 30s and have a long time horizon before retirement, and we have the remainder of our investments in the Vanguard Total Stock Market Fund (VTSAX) and the Vanguard 500 Index Fund (VFIAX).
No, you don’t miss anything. There is an IRA; that’s the baggage. There is a fixed annuity within the IRA; that’s the clothes. Any clothes can fit in any luggage. You will need to move your luggage to another airline and you will need to put a change of clothes in the luggage. Two separate processes, but you can and almost certainly should do both.
Let’s do the clothes first. Check whether there is a surrender penalty on the annuity, and if not, pay it out now. If there is a fine, it’s probably still best to pay it now, but at least make sure you understand what it will cost you. You may want to wait a little longer if the costs are very high but will drop quickly.
Now let’s do the luggage. You have cash in an IRA with Lincoln Financial. Contact Vanguard or Fidelity or your 401(k) or 403(b) and let them help you roll over to the new IRA (or 401(k)) at a decent place. Is there a financial advisor associated with this account that you should also fire?
Once the money is in the new place, it’s time to think about clothes again. You will almost certainly want to invest that money in accordance with your written investment plan. If it’s a good plan, it probably specifies that most of it is invested in low-cost, broadly diversified index funds.
As for whether you should roll that IRA into Vanguard or your 401(k), I think it comes down to whether you have a 401(k) and whether it’s good and whether you do the Backdoor Roth IRA process every year. If you have a 401(k) and it’s good and you’re doing Backdoor Roths, definitely roll it over to a 401(k) so you don’t have pro-rata issues with the conversion step of your Backdoor Roth IRA each year. If you don’t have a 401(k) or it’s worthless, or you’re just not going to do Backdoor Roths, fine, just roll it into an IRA at Vanguard and let it invest.
If that’s all nonsense to you, feel free to write back with questions. If this all just feels too hard and you’d rather pay $5,000 – $15,000 a year to have someone help you with this, check out our list of recommended people.
Here are some additional resources:
The attentive reader will notice that it is almost exactly the same list of sources that I gave in response to the previous question. That shouldn’t be a surprise. Most of the “basic” questions I get can be answered using the same 5-10 blog posts. This stuff isn’t that complicated, even though it seems that way when you first encounter it.
Do I have to withhold taxes if I do the backdoor Roth IRA?
“I put $7,000 into my traditional IRA for the Backdoor Roth IRA process, and the website said it wouldn’t be ready to transfer until January 16. This scared me, but I called them and over the phone they helped me transfer it all to [my] Roth account. VERY USEFUL! (Also a lesson learned: don’t wait until the end of December to do this.) When I transferred it to my Roth account, Fidelity asked if I wanted to pay taxes on it before I transferred it. I just said no because I haven’t done that in the past when handing over myself. Would paying taxes during the transfer negate some of the paperwork I need to do when filing taxes the following year? Or would it just complicate things when filing my taxes? I guess what I’m ultimately asking is what is the difference (and consequences) of paying the taxes when I transfer the money?
No.
Yes.
You did the right thing. Don’t let them withhold taxes because there are no taxes due. You will end up having less in the Roth IRA.
And don’t wait until December to do your Backdoor Roth IRA. By December, it’s time to start thinking about next year’s Backdoor Roth IRA, not this year’s. And realize that if you transfer funds to the IRA provider, you will often have to wait 1-3 weeks for the funds to be paid before you can complete the conversion step of the Backdoor Roth IRA process.
Do I need to register my sole proprietorship with FinCEN?
“If I give gig income and file the income as a sole proprietorship, do I have to register it with FinCEN? I don’t have an LLC.”
No, that was only for LLCs and corporations, and at the time of writing you only need to register with FinCEN as your entity was formed outside the US.
Term life insurance for a stay-at-home spouse
“My husband currently stays at home with our 15-month-old son. We expect him to continue this job even when my son starts school in 3-4 years, as it provides more flexibility regarding illness, school holidays, and my generous vacation time. Our goal is to be financially independent for the next 10-12 years. We think $1 million for 20 years is appropriate to take into account childcare needs, and we could cancel the policy when he is financially independent. He is 41 and healthy, but he has a previous smoking history (cigarettes > 10 years ago, nicotine vaping > 3 years ago) and is approved for $102 per month This seems so to me, but I have no idea what is reasonable.
Make sure you think about everything he does and what your plan would be to repeat that if he died. It can be more than just childcare. This may also include cleaning, garden maintenance, laundry, transportation to children’s activities, etc.
That $102 amount seems too high. A quick look at an online source for instant quotes shows that $1 million for a 20-year term for a healthy 41-year-old male non-smoker starts at $57 per month. After three years I don’t think the tobacco counts against him, but if he were still using the policy would start at $232 a month so maybe it still counts. If you want to save money, you can get a 10-year policy or even an annually renewable policy.
I see questions like this all the time: “My stated premium for disability or life insurance was such and such. Am I being scammed?” In fact, all you need to do is discuss your options with a competent, independent broker. They show you all your options and you KNOW what the going rate is for you, without having to check in with people who don’t even sell insurance.
Here are some additional resources:
What do you think? Have all questions been answered correctly? How do we get this ‘basic’ information into the hands of more high-income professionals?
#Keeping #real #mailbag #White #coat #investor