My Rollover IRA Account — The Backstory

Last week I wrote about tracking one of my rental properties and comparing it to the growth of an index fund that’s currently worth about the same amount. Post here – Real Estate vs. Stocks

I got a ton of feedback and questions, which I’ll delve into over time. For today I’ll start with some backstory on my IRA, my out-of-pocket contributions, and what the future might hold for this account.

Next week I’ll deep dive into the rental property backstory and other stuff.

Index Funds Inside a Rollover IRA – The Backstory …

I moved to the USA in late 2007, when I was 22. And for the first ~5 years living here, I had no clue what a 401k really was. Maybe I was told about it at work, but just the thought of having my money “locked up until I turn 67” scared me off. Silly me. If only I knew then what I know now!

Anyway, in late 2012 I got my act together and started my first 401k account. My workplace at the time offered a great incentive – to match my retirement contributions of anything up to 4% of my salary. This later fluctuated between 2%-6% matching as my employers chopped and changed their benefits programs.

Regardless of employer matching, I contributed extra bits here and there from my paychecks, and in 2014 I think I added my entire December paycheck to 401k.

Here’s how much I contributed over the years, before employer matching: (Had to dig back into my old W2’s to find these figures! – Shows in Box 12b, Code D on your W2, if anyone’s wondering where to find this info)

2013 contribution – $3,977

2014 contribution – $12,308

2015 contribution – $6,596

2016 contribution – $7,041

2017 contribution – $10,542

2018 contribution – $1,887

Total: $42,351.

Woot woot! Kind of cool to see this number – this is the first time I’ve calculated it. That’s like saving an average of $136 per week, before tax. Maybe ~$100 a week after tax.

I’m finding it tough to figure out what my employers contributed. It doesn’t show on my W2’s or old tax filings. Since they changed benefit plans and providers constantly, I don’t even know if I can find this old information!

Regardless, it’s nice to know that I personally contributed ~$42k in pre-tax money to an account that is now worth ~$109k.

Converting Old 401k’s to a Rollover IRA

Here’s my current Fidelity IRA snapshot:

In April 2016 I left an employer and rolled over my 401k into this IRA. The balance was about $45k at the time. Then I did this again in March 2018 when I left my last job – that was another $31k rolled over. The light blue line in the chart represents how much the account would be worth if my contributions remained in an all-cash position, while the dark blue line is the actual balance.

There are a bunch of reasons I left my old 401k programs.

First, I had a really bad taste in my mouth from my old 401k providers. I mentioned my employers switched benefit plans a lot … and each change came with a clunky new web portal, limited investment options, a new set of hidden fees, and incompetent customer service reps. All in all, I never felt like I had control of my money.

In a 401k, my employer always had the power to change how I was invested. In a self-managed IRA, I have more control over my investment and retirement options.

Future Contributions and Options for This IRA Account

Currently, my wife and I are not contributing to any 401k’s or pre-tax retirement accounts. This is due to us both having no employer benefits right now, as well as our income being fairly low for 2020. Any excess savings we are keeping in cash, and plan to fund our Roth IRAs again early next year. This may change, but for now, that’s where we are!

So, this Fidelity IRA will probably be left alone for the next few years. Its growth is solely dependent on the overall stock market. That’s a scary thought! But, we’re in it for the long run so these uncertain times don’t worry us.

Accessing These IRA Funds “Early” (and Maybe Even Avoiding Future Taxes)

Back in my 20s, I was under the impression that you can’t touch pre-tax retirement accounts until you’re over the age of 60. So my intentions in starting my first 401k were to never make any changes for ~40 years.

But I’ve since learned there are definitely ways to access these funds earlier in life – some methods even involve no fees and/or low taxes!

Even though we don’t need to access this IRA money early (wife and I have enough post-tax assets to live off if we retire early), it might be a good idea to move money out of this IRA account into a more tax-efficient investment vehicle.

I’ve been reading up on “backdoor” Roth conversions – moving money from a Traditional IRA into a Roth IRA. I’m no genius, but from my understanding I could convert this IRA money penalty-free, as long as I: a) pay taxes on the money when it’s converted and b) don’t withdraw the money after conversion for at least 5 years.

Given that my wife and I are in a low tax income bracket (and maybe soon we will have another gap year with NO income) this could be a great time to do a backdoor Roth conversion. Paying little taxes now would mean no taxes later. Even a partial conversion is a great option while our tax bracket is low.

TLDR / All Things Considered

  • I am an idiot and should have started my 401k earlier in life.
  • Employer matching is wicked, take advantage of it if you can!
  • This IRA currently has ~$109k in it, and was built with only ~$42k of personal contributions over 6 years.
  • Converting this $ from a pre-tax to a post-tax investment account could save me money on taxes later in life.
  • Next post, I’ll share the rental property backstory and compare the numbers to see if it’s grown faster than this IRA. (spoiler alert – it hasn’t).

Thoughts/comments/advice? Have you successfully done one of these backdoor conversions?

*Top image via GotCredit

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  1. Fiona July 20, 2020 at 8:54 AM

    Joel – Thank you very much for your post. Very insightful and definitely hits on a few pain points that I think are experienced all too often in the 401k / IRA world. I’ve reviewed several old employer 401k plans for some of my peers where fund expenses seem excessive. It only made sense for them to roll their old 401k (since they were separated from service) to an existing IRA… not only for expense reduction but also for consolidation purposes. There certainly are many pros when it comes to considering whether you should roll over your old 401k. Cheers! Fiona xo

    1. Joel July 20, 2020 at 9:12 AM

      Cheers Fiona! One of my friends found an old 401k once which had been left for years untouched. She just assumed it was invested in something that would grow… But after researching she learned that the money in the 401k was transferred to an ‘all cash’ money market position when she left her employer. Basically just sitting there not invested in anything or growing at all. Ouch! I encourage everyone to rollover old 401ks. It’s not that hard!

  2. Debt Free in RVA July 21, 2020 at 7:11 PM

    Joel, Thanks a lot for the backstory!

    At the age of 15 my Dad taught me about compounding interest. He had me buy a gold coin at $ 325 per ounce, and that gold coin is now worth over $ 1,800 – a six fold return on investment.

    He also had me put $ 4,000 into Vanguard’s Total Stock Market Index Fund. That $ 4,000 is now worth 8 times as much at $ 32,000!!! So, I love passive (set and forget) investing in broad, low-cost (Vanguard OR Fidelity) index funds.

    1. Joel July 21, 2020 at 7:40 PM

      That’s a wicked lesson to learn as a kid – to watch your money grow by itself over time. We need more parents like your Dad! Somebody give him a medal!

  3. Jen July 21, 2020 at 9:08 PM

    I rolled over a a very small 401k (6k) into a Roth IRA back in 2014. I’ve contributed another 21k since (I’m a SAHM). I decided at our income level a traditional IRA is more beneficial so I just opened one and plan to stop investing in my Roth and just contribute to my traditional IRA.

    1. Joel July 21, 2020 at 11:20 PM

      Nice! It’s cool to have the flexibility of both pre-tax and post-tax accounts. If your income situation changes, you can always switch back too.

  4. Gladys from Ayres July 23, 2020 at 11:59 PM

    I had the same mentality about avoiding contributing to a tax advantaged retirement fund. Can’t touch it til my 60’s? F*ck that! Stupid, stupid stupid…

    I also wish someone had educated me about pension style funds in addition to contributing to a Roth early in my career. I spent 4.5 years working with a pension benefit not realizing that my contributions were 5-7% of my income. Major drawbacks since I left to pursue a higher potential career path. It left me underprepared and now need to catch up on my retirement contributions because the comparative withholding was so low. Now my income has far exceeded the roth IRA contribution limit and I have to learn tricky back door strategies to roll over from after tax contributions to a maxed out 401k. The cons of not starting to contribute to a Roth have been substantial: i’ve got an underfunded retirement fund and an overfunded taxable brokerage account. Eventually I’ll catch up, but have been kicking myself in the ass ever since.

    The one pro of the pension fund – it’s structure will grow at a guaranteed 6% with 0% volatility. I essentially value it as a risk free bond. No rebalancing option… but can’t hate 6% risk-free growth.

    Did someone say “risk-adjusted returns?” ;p

    1. Joel July 24, 2020 at 9:18 AM

      Dang, that risk free growth is amazing! Especially for something you didn’t realize was being deducted in the first place. Could have been much worse.

      Your income being to high for Roth contributions… Sounds like a first world problem! haha :) When you retire early (I’m assuming you will) and your income drops to $0, you’ll have plenty of years to move money between post and pre tax accounts with low penalties. Cheers for reading Gladys. Have a wicked weekend!

  5. Big T August 3, 2020 at 10:17 PM

    I did some research on Roth conversions before I started doing it, and assuming we are in a higher tax bracket later in life than when we put it in – I’m pretty sure that’s where the benefit pans out. So I imagine if you are in a very low bracket and do the conversion, it’s excellent timing!

    We started converting 2 years ago due to income levels, and had the pleasure of learning what the IRS Form 5498 is. It’s important to get this right, because you want proof later in life that the money in your Roth was all after-tax contributions – and have to be filed every year.

    We’re with Vanguard and use their Personal Advisor Services to manage our Roths.. The pain in the butt is that they (advisors) cannot automatically convert every month after I made Traditional IRA contributions – so I have to call monthly to do it manually (first world problem).

    Thanks for sharing, not a lot of people know about this “back door” method.

    1. Joel August 4, 2020 at 9:58 AM

      Thanks Big T, I’ve heard a few complaints about the 5498 Form and making sure it’s all accurate, etc. I definitely need to read up on that more and share what I learn. It seems most FIRE enthusiasts are also good record keepers – a necessary skill for early retirees for sure!