novice in need of help (403b and 401k)

[Eimaise]

My wife has a 403b from her old employer (she is a nurse I am a resident) with a small amount of money in it (~$4000). We honestly didn't know much about retirement accounts when we started saving into a few years ago in 2011 so I set it up and saved maybe 2% a year. Could have saved more but lesson learned.

Now I'm in my second year of residency and have read this blog a lot as well as the WCI book so I'm saving a lot more now. I am getting 401k employer match and will plan to be maxing out both my and wife's Roth IRAs this year. Those Roth IRAs aren't actually made yet but I was going to open them soon at Vanguard. Neither of us have regular IRAs yet either so those need to be opened as well.

questions:

1. Would it make sense to roll that 403b over into a regular IRA now? should I roll it into a Roth IRA instead? I'm guessing the former due but I don't know. It's currently with Wells Fargo in a "target fund".

2. My 401k through my residency is with fidelity and I just set it up 2 months ago. They automatically put it in this "JPMCB SmartRetirement® Passive Blend 2055 Fund CF" with  0.38% expense ratio. Why do they automatically pick this? I guess that's their default option until you go in and change things. I found an index fund option in there called FID 500 index (FXSIX) with a 0.035% expense ratio. There's also some vanguard bond funds in there too I can allocate too (such as VBTIX). Is the big advantage of these funds that they are less expensive to own (lower fees)? I don't know much about these "target date investment funds" because I don't see them mentioned much on this site but I am thinking it would be smarter to re-allocate to these cheaper funds. Thoughts?

sorry I just don't have much real world experience with any of this stuff yet so thanks for your help!

 

[PhysicianOnFIRE]

1. If you roll the 403(b) into a Roth IRA, you will owe taxes. Since you are in a lower tax bracket now than you will be when an attending, and possibly retirement, this would be a good time to make the conversion to Roth.

2. The Fidelity S&P 500 index would be a better choice, with an expense ratio 90% lower than the default target date fund, as long as the S&P 500 fund fits in with your overall plan (which it should).

I'm sure you've got many more questions. You may want to connect with a recommended advisor, or if you plan to DIY, come up with a basic IPS as a framework from which to make such decisions.

Best,

-PoF

 

[jfoxcpacfp]

Agree with POF. In a few years when you are a HIP (High Income Pro) and you have to use backdoor Roth maneuver, that tiny 403b will be a thorn in your side. Go ahead and convert to a Roth and pony up the taxes.

As for your TDF, the S&P 500 will do fine for now. No reason to use a cookie-cutter allocation including bonds in your youth with so much potential ahead of you.

Also recommend reading The One Page Financial Plan by Carl Richards.

[Eimaise]

Thanks you both for your replies!

What would the tax rate be for that rollover? Is it based off our AGI for the year that I roll it over (We are MFJ tax status)?

to JFox: Isn't having some bonds (even a small chunk) in your portfolio usually a good idea to balance it out? I know I should be more stock heavy at this point (I am only 28 years old) but I just was curious on your thoughts on this. The current fund it's in is 11% bonds and 86% stocks.

[PhysicianOnFIRE]

Eimaise wrote:

Thanks you both for your replies!

What would the tax rate be for that rollover? Is it based off our AGI for the year that I roll it over (We are MFJ tax status)?

to JFox: Isn’t having some bonds (even a small chunk) in your portfolio usually a good idea to balance it out? I know I should be more stock heavy at this point (I am only 28 years old) but I just was curious on your thoughts on this. The current fund it’s in is 11% bonds and 86% stocks.

Click to expand...

Yes, the tax rate on the rollover will be at your marginal tax rate in the year of the rollover.

At my request, Johanna wrote an extensive post all about bonds in your portfolio. Part I was posted last week, Part II will be posted Tuesday 8/16.

Best,

-Physician on FIRE

 

[jfoxcpacfp]

Eimaise wrote:

to JFox: Isn’t having some bonds (even a small chunk) in your portfolio usually a good idea to balance it out? I know I should be more stock heavy at this point (I am only 28 years old) but I just was curious on your thoughts on this. The current fund it’s in is 11% bonds and 86% stocks.

Click to expand...

Bonds have a purpose, it's just not that. Please read the article that PoF referred to, along with installment 2 on Tuesday.

[Eimaise]

The guy on the phone at Vanguard just told me I cannot roll the 403b over into a Roth IRA because it would "leave a paper trail that could get me in trouble with the IRS."  He said I had to roll it into a traditional IRA then convert through the backdoor, which I understand... but I'm still a resident and my income is mid 50,000/year right now, so I thought that wouldn't be a problem to just convert directly to a Roth. Either way I guess it doesn't matter but this confused me and he wasn't very helpful.

[jfoxcpacfp]

Eimaise wrote:

The guy on the phone at Vanguard just told me I cannot roll the 403b over into a Roth IRA because it would “leave a paper trail that could get me in trouble with the IRS.”  He said I had to roll it into a traditional IRA then convert through the backdoor, which I understand… but I’m still a resident and my income is mid 50,000/year right now, so I thought that wouldn’t be a problem to just convert directly to a Roth. Either way I guess it doesn’t matter but this confused me and he wasn’t very helpful.

Click to expand...

The guy on the phone at Vanguard is wrong on so many levels...you are not confused, he is. Try again and the next person may be more educated.

[Eimaise]

Thank you. As much as I have heard Vanguard lauded around here, this was a pretty disappointing first customer service experience with them! I will try again.

[jfoxcpacfp]

Vanguard is not my first choice but it's fine for those who have a single-minded focus on costs. It's pretty much the luck of the draw when you're calling for online support at any online brokerage, though.