When most people talk about retirement accounts they focus on two main types, pre-tax accounts and post-tax accounts. Pre-tax accounts are not taxed in the beginning and grow over time, then when you take the money out, you are taxed on your withdrawals at your ordinary tax levels. 401-k’s, 403b’s, 457b’s, and traditional IRA’s are examples of pre-tax accounts for retirement. Examples of post-tax accounts include Roth 401-k’s, Roth 403b’s, Roth 457b’s, and Roth IRA’s (are you seeing a pattern here?). There is a special super power retirement account called a Health Savings Account (HSA) that, when used for the purposes of health expenses is put in pre-tax, grows, and is used tax free, I hope to one day use one and revel in the beauty of it. Today is not that day. We are focusing on my dance with Roth, the Roth IRA to be more specific.
I’ve heard Roth is named for the main Senator who sponsored creating this special retirement account. Right when I was an upperclassmen in high school, these accounts came into being. For a history of the Roth see wikipedia, there is a nice article here.
I didn’t hear about the Roth IRA until about a decade after it was shaped into being. I heard about the amazingness of Roth IRA’s and how you don’t have to pay taxes on the interest they earn, so I went down to my favorite credit union, where I had held an account for more than 12 years and opened a Roth IRA. (side note – don’t do this, the potential earnings are very low, open a Roth IRA in a brokerage account – I now hold mine at Vanguard). I then forgot about it besides putting money into this account every year. I wasn’t keeping track of how much I put in, what the interest rates were, what it was invested in(hint: low rates, probably in a cd or money market).
When I was 31, there was an American Fidelity Insurance agent at my school and when I told her my Roth IRA was housed at my credit union, she convinced me this was a bad idea. I rolled my funds over to her business and maxed it out each year. The agent possibly asked me what my risk tolerance was and possibly helped me allocate my funds, my memory on this is fuzzy, and I somehow came up with the allocation of 20% Total Stock Market, 20% money market, 60% bonds.
Six and a half years later I started listening to a little podcast called ChooseFI and decided to look into my Roth IRA at American Fidelity Insurance Co. I found these electronic documents connected to my plan (some are called Prospectuses) and I was trying to find what fees I was paying. The yearly fee was about $25 and the expense ratios didn’t seem very high, perhaps less than 0.10, but there was an expense I didn’t know about that was 1.5%. I was invested in a Variable Annuity and this 1.5% of assets/year charge was for something called a mortality fee. If I were to pass away, paying this mortality fee ensured my beneficiary would at least be paid out however much I had put into the account. I would not suggest having your Roth IRA or other investment accounts with a business that is primarily an insurance business.
When I realized what my allocations were (mind you I had 30 years ahead of me when I began this and should have been close to 100% in total stock market) and what I had paid every year for a mortality fee I was so stinkin’ mad. I was ready to pull my funds out and roll them over somewhere else. Then I saw this $ amount that I had seen before, but didn’t really understand what it meant. There is a fee for rolling your Roth funds out of American Fidelity Insurance Co., it starts at 8% of assets the first year and scales down to 2% the 6th year, 1% the 7th year. I would take a 2% hit if I rolled it over at that moment. In June I would take a 1% hit. If I left it in longer, I would be charged my 1.5% mortality fee. So, I waited and six months later I rolled my ROTH IRA into one at Vanguard. The process is fairly straight forward, I printed off copies of the forms, had to go to my bank for a special stamp(a little more than a notary), it was free at my bank, then I sent paperwork to Vanguard and they communicated with American Fidelity to roll over the Roth IRA funds. When I went to Vanguard, I still had to choose what funds to purchase, I am still two decades or more from tapping these funds, and have decided to be 100% in the stock market, low cost index funds. There are a myriad of choices, and one should always look at available information, though past performance is not an indicator of future gains.
For 2020, the maximum contribution you can make to your Roth IRA, if you are under 50 years of age is $6000. One fun benefit or Roth IRA’s are that you can contribute until the tax filing date for that year. So, to contribute for 2020 you can put in money any month of 2020 and also January 2021, February 2021, March 2021, and half of April 2021 (if tax day is April 15, 2021). I have continued to max out my Roth IRA every year, my husband now has his own Roth IRA, which we have maxed out for three years, and I plan on helping my kids open Roth IRA’s when they begin working W-2 jobs. I remember in my early 20’s, seeing a chart similar to the one below from this article, showing what a difference saving made early on, when you have time on your side and compound interest working for you.
I have also thought about when I am better at planning budgets and realizing how much is left over to invest, deploying a Roth 403b or Roth 457b I have at Fidelity (this is money that goes in after tax, but from your paycheck). This would be after maxing out my 457b, hubby’s 401k. When my husband and/or when I retire I also plan on using a Roth conversion ladder to move money over from our pre-tax retirement accounts into Roth accounts. We will pay taxes on these amounts, but we can plan on how much we are wanting to pay in taxes. To do this method, we will also need enough saved in taxable investments or previous Roth contributions, or cash to live off of for up to five years. I first read about this method from the Mad Fientist in this article.
You can see I’ve danced a few rounds with Roth and our party is far from over. A few caveats, of course, are that tax brackets have changed in the past and may change in the future, also that tax law may change, and possibly Roth conversions won’t be an option. Even with these possibilities, I plan for the future(loosely), as I must go on what we know, and when we know differently, we sashay/pivot/pirouette, you get the idea.
As Ever, SOS
No Comment