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I recently switched jobs, and have about $50K in a 401(k) plan from my previous employer. I was deluged with offers from T. Rowe Price (where the account is held) to rollover to one of their IRAs. My new employer also offers a 401(k), which I have signed up for, but the fund choices are pretty bogus so I don't want to rollover to that account. I'm currently 26, with about $120K in income, and will be married in August of this year.

I'm planning on contributing to the new 401(k) up to the employer match.

My soon-to-be spouse is 22 with about $30K in income in 2005. She is a teacher and does not have access to a 401(k) plan, just a defined benefits pention plan, that we'll likely never see since we are planning on moving in 1-2 years.

After 2 years of hard work, I've paid down my debt and we have 3 months expenses stashed with ING direct, and are now ready to take the next steps towards foolishness.

My questions are:

* Should I rollover the 401(k) to Vanguard and into a Roth IRA? As I understand it, this is possible without penalty, although I'm confused as to how I can dodge the tax man on the contributions I made to the account on the front end, and then dodge him again on the backed with the Roth.

* Independant of the previous comment, I'm planning on doing a Roth for my fiancee and I (two accounts) at Vanguard, and dumping $3k each from our ING "slush fund" into the 2 accounts for the 2004 tax year. Any reason I shouldn't do a Roth? I assume I can open a fresh account and still qualify the contributions for tax year 2004? Will 401(k) contributions offset our taxable income for Roth qualification purposes in 2005? I think we can just duck under the $150K celing if we juice up contributions a little bit.

* Is an ING Orange account (at 2.35%) the best place to stash the emergency cash fund (the 3 months expenses)? Should that be diversified or reallocated somehow?

Thanks for any and all comments!

pgray007: license to become foolish
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* Should I rollover the 401(k) to Vanguard and into a Roth IRA? As I understand it, this is possible without penalty, although I'm confused as to how I can dodge the tax man on the contributions I made to the account on the front end, and then dodge him again on the backed with the Roth.

You can roll over the 401k to a "Rollover IRA", which is basically the same thing as a traditional IRA. From there, you can convert it to a Roth IRA if you'd like, but you will have to pay income taxes on the distribution amount. Many people do this in stages to maximize their tax bracket each year rather than taking it lump sum. Also, you will have to pay "estimated taxes" on this amount as well, so you don't get a free ride all the way until April 2006 if you convert this year.

I'll let the tax professionals take the 2nd one.

* Is an ING Orange account (at 2.35%) the best place to stash the emergency cash fund (the 3 months expenses)? Should that be diversified or reallocated somehow?

For convenience and ease-of-use, I haven't found anything better than ING Direct. Personally, I keep about $2,000 in my bank's savings account so I can have that money that day if I need to...I can't think of any emergencies that would require >$2k in CASH immediately, so the rest is socked away at ING Direct.

No need for it to be diversified...it's FDIC-insured. You want stability of capital, so this isn't an investment, per se. It's simply a good place to park your money to preserve capital and earn some interest as well. As an alternative to ING Direct, Presidential Bank is still paying 2.75% for its checking account, but there are some minimum balance and direct-deposit requirements.

-Agg97
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pgray007: "I recently switched jobs, and have about $50K in a 401(k) plan from my previous employer. I was deluged with offers from T. Rowe Price (where the account is held) to rollover to one of their IRAs. My new employer also offers a 401(k), which I have signed up for, but the fund choices are pretty bogus so I don't want to rollover to that account. I'm currently 26, with about $120K in income, and will be married in August of this year.

I'm planning on contributing to the new 401(k) up to the employer match.

My soon-to-be spouse is 22 with about $30K in income in 2005. She is a teacher and does not have access to a 401(k) plan, just a defined benefits pention plan, that we'll likely never see since we are planning on moving in 1-2 years.

After 2 years of hard work, I've paid down my debt and we have 3 months expenses stashed with ING direct, and are now ready to take the next steps towards foolishness.

My questions are:

*Should I rollover the 401(k) to Vanguard and into a Roth IRA? As I understand it, this is possible without penalty, although I'm confused as to how I can dodge the tax man on the contributions I made to the account on the front end, and then dodge him again on the backed with the Roth."


I will not address the Vanguard question. As another posted noted, without penalty does not mean without income tax being due. In addition, at first glance it looks like your income might be to hire to convert a regular IRA to a Roth IRA.

"* Independant of the previous comment, I'm planning on doing a Roth for my fiancee and I (two accounts) at Vanguard, and dumping $3k each from our ING "slush fund" into the 2 accounts for the 2004 tax year. Any reason I shouldn't do a Roth?"

Your income appears too high, as a single, to contribute to a Roth for 2004. Your joint income will be borderline (bit probably just under the cutoff for a Roth for MFJ status). I do not mean to be a pessimist or a jinx, but sht happens, so I would not open the 2004 Roth for you that presumes you will be married on 12/31/05 (i.e., do not count your chickens before they hatch). Your fiance probably should do a Roth IRA instead of a regular if she can afford the current taxes.

"I assume I can open a fresh account and still qualify the contributions for tax year 2004?"

Until 4/15/05; just give very clear instructions to your trustee, and triple check the paperwork that it gets properly identified.

"Will 401(k) contributions offset our taxable income for Roth qualification purposes in 2005? I think we can just duck under the $150K celing if we juice up contributions a little bit."

I beleive that it is MAGI and not TI that is the issue. If the board FAQ does not address this issue, I am sure that TMF must have some articles posted.

"* Is an ING Orange account (at 2.35%) the best place to stash the emergency cash fund (the 3 months expenses)? Should that be diversified or reallocated somehow?"

Probably yes in terms of return on safe, liquid investment. In terms of convenience, I cannot answer for you.

Regards, JAFO
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Thanks for your reply. My limited understanding of retirement accounts, and the marketing-oriented approach I had seen in the T. Rowe literature had me assuming you could get the best of both worlds by rolling over a 401(k) to a Roth IRA (tax free on the front end and back end). It was silly of me to think the IRS man would miss something like that!

I'm not sure I completely understand your comment. I'm with you up to the part in bold:

Your income appears too high, as a single, to contribute to a Roth for 2004. Your joint income will be borderline (bit probably just under the cutoff for a Roth for MFJ status). I do not mean to be a pessimist or a jinx, but sht happens, so I would not open the 2004 Roth for you that presumes you will be married on 12/31/05 (i.e., do not count your chickens before they hatch). Your fiance probably should do a Roth IRA instead of a regular if she can afford the current taxes.

I think my income will just eek under the limit for 2004 (first time I've been hoping for lowered income!), and my finacee should be fine. Assuming I make the cutoff for 2004, and open a Roth for both of us, would I then be able to max each Roth in 2005 (again assuming we were under the cutoff, and were filing MFJ)? If, filing jointly we exceed the cap, does that mean neither of us can contribute? Conversely, if we're under the cap in terms of joint income, do we both get $4k to contribute?

This may be biting off more than I can chew at this stage, and perhaps a topic for another day in my learning process, but what are folks doing with combined incomes above $150K for retirement accounts or tax-protected retirement investing in general?

Thanks again for your insightful and helpful comments!
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pgray007:

"Thanks for your reply. My limited understanding of retirement accounts, and the marketing-oriented approach I had seen in the T. Rowe literature had me assuming you could get the best of both worlds by rolling over a 401(k) to a Roth IRA (tax free on the front end and back end). It was silly of me to think the IRS man would miss something like that!"

Your welcome. Just remember that I am no tax pro; the real pros hang on the Tax board, and tolerate interested kibitizers.

"I'm not sure I completely understand your comment. I'm with you up to the part in bold:

JAFO: <<<<"Your income appears too high, as a single, to contribute to a Roth for 2004. Your joint income will be borderline (but probably just under the cutoff for a Roth for MFJ status). I do not mean to be a pessimist or a jinx, but sht happens, so I would not open the 2004 Roth for you that presumes you will be married on 12/31/05 (i.e., do not count your chickens before they hatch). Your fiance probably should do a Roth IRA instead of a regular if she can afford the current taxes.>>>

"I think my income will just eek under the limit for 2004 (first time I've been hoping for lowered income!), and my finacee should be fine."

When I posted earlier, I forgot which board I was on, the Tax Board FAQ - http://www.fool.com/taxes/taxcenter/topics/topics.htm - has a whole Section dedicated to Retirement Tax Issues.

Sorry to belabor the obvious, but I hope you realize that the income limits for contribution depend upon filing status - single under 95k with phase-out until zero at 100k, IIRC, and MFJ is under 150k with phaseout until zero at 160k.

If you do not get married this year, then your income may be too high for a Roth IRA (or all of a Roth IRA).

The deadline for opening a 2004 IRA is 4/15/05. As I understand it, you will not be married on or before 4/15/05. I am conservative, but I would not open an 2004 IRA that presumed I would get married later in the year; as I said before, sht happens and life is full of funny bounces

Your fiance, OTOH, if she remains single, clearly qualifies for a Roth IRA; the only question, in my mind, is whether she can afford the taxes or whether she would need the deductibility of a traditional IRA in order to fully fund the IRA.

If in fact, you both do marry, then your income will be close to (but probably under) the limit for MFJ, and Roths would be a good idea. I, personally, would feel like I was jinxing my wedding, however, by doing so; kind of like throwing a hanging curveball to fate. To each his own.

The income limit for converting a traditional IRA to a Roth IRA is 100k, single or married, in the year of conversion. There are not retroactive conversions. Thus, it is too late for your to convert for 2004. If you marry in 2005, your joint income will not allow a conversion. Even if you do not marry, your individual income might be too high to convert.

"Assuming I make the cutoff for 2004, and open a Roth for both of us, would I then be able to max each Roth in 2005 (again assuming we were under the cutoff, and were filing MFJ)?"

If I understand the question correctly, yes. 2004 contributions may be made 1/1/040 to 4/15/05 and 2005 contributions may be made from 1/1/05 until 4/15/06. Thus, from 1/1/05 until 4/15/05 you can make essentially two years worth of contributions (assuming under income cut-off, MFJ).

"If, filing jointly we exceed the cap, does that mean neither of us can contribute?"

To a Roth IRA, yes. You could still contribute to a traditional IRA, though it might well not be deductible.

"Conversely, if we're under the cap in terms of joint income, do we both get $4k to contribute?"

Whatever the 2005 limit is, yes.

"This may be biting off more than I can chew at this stage, and perhaps a topic for another day in my learning process, but what are folks doing with combined incomes above $150K for retirement accounts or tax-protected retirement investing in general?"

Fully funding 401-k or equivalent. Many are self-employed and have a broader range of choices (and dollar limits). Given the lower tax rates on qualified dividends and long-term capital gains, many are investing in regular accounts, and then managing the taxes. Some go for VULs (generally not well liked or often recommended on TMF, though they may have a place for some people, subject to alot of caveats).

Regards, JAFO





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... so I would not open the 2004 Roth for you that presumes you will be married on 12/31/05

I don't understand this comment. The 2004 Roth IRA has to qualify based on calendar year 2004, which means if one wants to qualify based on AGI and tax filing status, the AGI and tax filing status is for 2004 (Year 2004 income, marital status as of December 31, 2004), no matter when one contributes. You cannot use qualifying conditions for 2005 to be able to make a Year 2004 contribution.

But if one does qualify for a Year 2004 Roth IRA contribution, one can make that contribution as late as April 15, 2005, but whatever happens in 2005 is totally unrelated to the Year 2004 qualifications.

Likewise, to be able to make the Year 2005 Roth IRA contributions, one must qualify based on Year 2005, including the effect of marital status on December 31, 2005 and one's tax filing status. But if one qualifies in Year 2005, one can make a contribution any time between January 1, 2005 and April 17, 2006. (No, not a typo; April 15, 2006 is a Saturday, so the deadline is the following business day.)
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Mark0Young:

<<<<... so I would not open the 2004 Roth for you that presumes you will be married on 12/31/05>>>>

"I don't understand this comment."

Duh, possibly because it makes no sense. You are correct. I revert to my original statement that it is not clear that OP qualifies under the 95k (100k phase-out) for singles for 2004.

Regards, JAFO
(who amply demonstrated that he is no tax pro; my apologies to the OP)
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ING Direct is not as responsive as you might imagine. You can find they hold a deposit from a major bank for days -- presumably pretending the money is coming by pony express rather than EFT, so if you needed that money in a hurry it wouldn't be available. ING Direct may pay OK, but they are not a user friendly place to deal with. So keep that $2K or whatever in your local bank.

db
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db,

ING Direct is not as responsive as you might imagine. You can find they hold a deposit from a major bank for days -- presumably pretending the money is coming by pony express rather than EFT, so if you needed that money in a hurry it wouldn't be available. ING Direct may pay OK, but they are not a user friendly place to deal with. So keep that $2K or whatever in your local bank.

I make monthly EFTs from my checking account into my ING account and also have a payroll direct deposit every two weeks. The payroll deposits are executed and available immediately while the EFTs seem to take one or two days to process.

Last Friday, after close of business, I transfered $8K from my ING account to my bank account to pay for some home renovation. The money was in my checking account on Tuesday.

For the 2.35 percent interest my ING account earns, I can live with a two-day wait to transfer money. I have not experienced a situation where I needed money immediately and waiting two days would have imposed undue hardship (hopefully I never will).

Mike
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We transferred about $10K out of ING for emergency funds last year. I agree with Mike, the transfer took 2-3 days. Not a problem. Long before the bill appeared on the credit card that we needed to pay, the money was in our local checking account.

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Mike,

I transferred money from our Bank of America checking account to ING Direct then discovered that I had transferred more than I should have. ING Direct had a hold on the deposit for a number of days -- it showed in the account, but not as part of the balance available. So the 2 day process is specific and not general. You can't count on it for all transactions. Also, although ING Direct accepts automated monthly EFT deposits from your checking account, they will not do automated monthly EFT to your checking account. My plan had been to move the RMD from an inherited IRA to ING Direct for monthly dispersal to our checking. Instead, I leave the RMD in the Vanguard IRA, and Vanguard does the automated monthly EFT to our checking. The convenience is worth the small difference in return between Vanguard's Prime Money Market and ING Direct's Savings, and I could choose to have the EFT occur from Vanguard's short-term corporate bond fund.

db
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I don't bother with ING since my credit union pays 2% interest and is convenient to access.

IF
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Mike,

IIRC, the hold ING Direct placed on the EFT deposit from our Bank of America was 5 business days. The rationale was that that's the way they've always done it -- you can't expect a pony and rider to travel with the speed of electricity, can you? I don't know if interest is being credited during the holding period, but I do know the funds are in limbo. I've moved our money from ING Direct, but have not closed the accounts.

db
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Kids, ING is not a bank. It is not a checking or savings account. It is a money market fund and follows standard rules for money market funds. It is also not intended to be a high transaction volume account. It is meant for short to long term savings, not transferring money in and out and in and out and in and out and...

Fuskie
Who thinks ING is perfectly suited for an eFund...
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Fuskie,

Did you read my mind? I was going to post that.

Ak, moving slowly at -46 (F), in the hills north of Fairbanks...
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So you say, Fuskie. If you imagine moving money out once a month is excessive, why would you keep funds in any money market fund? Why not choose an investment that pays better?

db
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So you say, Fuskie. If you imagine moving money out once a month is excessive, why would you keep funds in any money market fund? Why not choose an investment that pays better?

Because I can not afford to lose it. Speaking from an experience, an eFund is a lifeline when you lose your source of income, as happened to me in July 2003 when the FEWMNBN&trade informed me they had no more work for me. I knew that was not true, but there it was.

I had an eFund, but I thought I could do better than a savings account (this was before I became INGed) and had about $20k in a combination of non-retirement stocks and mutual funds. The mutual funds were spread among bonds and equities, small cap and large cap, etc.

I sweated every market fluctuation, afraid to liquidate shares of funds that were depressed, unable to give up on a potential recovery that exceeded the 2% ING was bringing at that time. So I only moved out a little bit at a time, trying to give as much time to my investments to fulfil the hopes I had placed in them.

Fortunately I was able to stretch $14k over 10 months until Fuskie's Re-Employed Life&trade, but in looking at my tax returns, I took some big capital gains losses because I was forced to sell shares before they had had the opportuntity to mature. I as lucky as I had invested well enough to not lose my shirt between 2001-2003 when watching the stock market gave so many stress.

If I had to do it over again, I would have stored my eFund from the beginning in the ING account to provide a stable and secure insurance against sudden income loss. Now my quest is to rebuild my ING eFund, which has not progressed as much as I would have liked in the 8 months of FRL&trade, since my income is substantially less than at the FEWMNBN&trade, but that is another story.

Fuskie
Who could summarize the above by just saying that different investment goals warrant different investment strategies...
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Fuskie,

I agree you seem to have invested your previous efund foolishly, but you could have used a short-term corporate bond fund, or a combination of short- and intermediate-term bond funds. I think ING is OK, if you're aware of their practices. A five business day hold is usually a calander week.

I assume you now keep at least six months of income need in short-term fixed assets. I like five years better, especially given that I have to take an RMD from the IRA I inherited whether stocks are up or down in a given year. Like you, I hate to sell stocks during a down market.

db
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My plan had been to move the RMD from an inherited IRA to ING Direct for monthly dispersal to our checking.

I guess I don't understand. You're moving money from the IRA each month to the ING then almost immediately moving it to your checking account?

Why would you want to bother, anyway? I can't imagine that a few days interest would be that big a deal, so the ING would be offering you no advantage.

The ING is a savings account - hence the regulatory requirement of less than 6 withdrawals each month.

As Fuskie said, this is meant to be used for long term funds that you want to keep safe. It's not a transaction account.

I think the direct ACH from Vanguard to your checking account makes sense for what you're trying to do.

3MM
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My plan had been to move 6 months or year of RMD to ING Direct for monthly dispersal to my checking account.

db
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