This blog occasionally gets out into the weeds, because after you’ve answered similar questions over and over again for many years, sometimes you want a change of pace. But maybe I spend too much time out in the weeds and forget that most of the docs and other high-income professionals reading this site still just need help with what I consider to be the basics. So, let’s answer a few 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 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 then what should I invest in with Fidelity? I am 50 years old, and I figure I have about 15 years left to get to where I’m going to get to.”
Your first question is whether you are now competent to do this yourself or if you just need a real investment manager. If the answer is the latter, then they can help with both of these issues. But let’s focus on getting you to someone who can help. Here is our list of recommended advisors.
If the answer will soon be the former (it obviously isn’t yet), just keep reading forums and good investing books, and you’ll figure it out. Most of the replies you get on forums will assume you’re going to try to do this yourself. It’s up to you to determine if that is a good idea.
Now, let’s answer the questions you actually asked.
First, the rollover has no taxes or penalties, but it will likely have some fees and loads from Edward Jones. Contact Fidelity, and it’ll help you do the paperwork required to do the rollover. It’ll take a few weeks, but it really isn’t that hard once you’ve done one or two of these.
Second, you’re jumping to Step 4 of investment management. That’s really hard. Figure out Steps 1-3 first, and then Step 4 becomes simple.
- 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 Crummy IRA?
“I had a question about what to do with a crappy 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 paying 1%. I tried changing her investments, but I have been unsuccessful; it tells me that I have ‘assets in a fixed account.’ Am I truly unable to change these investments? And if so, does it make sense to withdraw the money, pay any necessary taxes, and then invest it into Vanguard index funds? Some quick math tells me that the answer is absolutely yes, but am I missing something? My wife and I are both in our early 30s with a long time horizon before retirement, and we have the rest of our investments in the Vanguard Total Stock Market Fund (VTSAX) and the Vanguard 500 Index Fund (VFIAX).”
No, you’re not missing anything. There is an IRA; that’s the luggage. There is a fixed annuity inside the IRA; that’s the clothing. Any clothing can go into any luggage. You need to move your luggage to a different airline, and you need to put different clothing into the luggage. Two separate processes, but you can and almost surely should do both.
Let’s do the clothing first. Go figure out if there’s a surrender penalty on the annuity, and if not, cash it out now. If a penalty exists, it’s still probably best to cash it out now, but at least understand what that’s going to cost you. Maybe if the cost is really high but will soon go down, you might want to wait a bit.
Now, let’s do the luggage. You have cash in an IRA at Lincoln Financial. Contact Vanguard or Fidelity or your 401(k) or 403(b) and have them help you do a rollover to the new IRA (or 401(k)) at a decent place. Is there a financial advisor associated with this account that you need to fire as well?
Once the money is at the new place, it’s time to think about clothing again. You are almost surely going to want to invest that money in accordance with your written investing plan—if it’s a good plan, it probably specifies that most of it is getting invested into low-cost, broadly diversified index funds.
As far as whether to roll that IRA to Vanguard or your 401(k), I guess it comes down to whether you have a 401(k) and whether it’s any good and whether you do the Backdoor Roth IRA process every year. If you have a 401(k) and it’s good and you do 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 sucks or you’re just not going to do Backdoor Roths, then fine, just roll it into an IRA at Vanguard and get it invested.
If that’s all gobbledy gook 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, see our list of recommended folks.
Here are some additional resources:
The careful reader will notice that it is almost the exact same list of resources that I gave in response to the prior question. That shouldn’t be a surprise. Most “basic” questions I get can be answered by using the same 5-10 blog posts. This stuff isn’t that complicated, even if it seems that way the first time one encounters it.
Should I Have Taxes Withheld When I Do the Backdoor Roth IRA?
“I put $7,000 in my traditional IRA for the Backdoor Roth IRA process, and the website said it wouldn’t be ready to transfer until Jan 16. This spooked me, but I gave them a call and over the phone they helped me transfer it all over to [my] Roth account. VERY HELPFUL! (Also lesson learned, don’t wait until late December to do this.) When transferring it over to my Roth account, Fidelity asked if I wanted to pay any taxes on it before transferring. I just said no, because I haven’t done that in the past when transferring it on my own. Would paying taxes during transfer negate some of the paperwork I do when filing taxes the next year? Or would it just make things more complicated when filing my taxes? I guess I’m ultimately asking what’s the difference (and repercussions) of paying the taxes when I transfer the money?”
No.
Yes.
You did the right thing. Don’t have them withhold taxes, because no taxes are due. You’ll just 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 be thinking about next year’s Backdoor Roth IRA, not this year’s. And recognize that if you’re transferring money to the IRA provider, it often makes you wait 1-3 weeks until the money settles before you can do the conversion step of the Backdoor Roth IRA process.
Do I Have to Register My Sole Proprietorship with FinCEN?
“If I do side gig income and file the income as a sole proprietor, do I need to register that with FinCEN? I do not have an LLC.”
No, that was only for LLCs and corporations, and as of this writing, you’d only have to register with FinCEN if your entity was formed outside of the US.
Term Life Insurance for Stay-at-Home Spouse
“My husband currently stays home with our 15-month-old son. We anticipate he will continue this job, even when my son goes to school in 3-4 years as it allows more flexibility with sickness, school holidays, and my generous vacation time. Our goal is to be financially independent in the next 10-12 years. We figure $1 million for 20 years would be appropriate to account for childcare needs, and we could cancel the policy when financially independent. He’s 41 and healthy, but he has a previous smoking history (cigarettes >10 years ago, nicotine vaping >3 years ago) and was approved for $102 per month. Is this a reasonable premium? It seems so to me, but I have no idea what’s reasonable.”
Be sure to consider everything he’s doing and what your plan would be to replicate that if he died. It might be more than just childcare. It could also be cleaning, yard care, laundry, transportation to kids’ activities, etc.
That $102 figure seems too high. A quick look at an online instant-quoting resource shows $1 million for a 20-year term for a healthy 41-year-old male nonsmoker starts at $57 per month. After three years, I don’t think the tobacco counts against him, but if he were still using, policies would start at $232 per month, so maybe it does still count. If you want to save money, you could get a 10-year policy or even an annually renewable one.
I see this sort of question all the time: “My quoted premium for disability or life insurance was such and such. Am I being ripped off?” Really, you just need to discuss your options with a competent independent agent. They’ll show you all your options, and you’ll KNOW what the going rate is for you without you having to check in with people who don’t even sell insurance.
Here are some additional resources:
What do you think? Were all the questions answered correctly? How do we get this “basic” information into the hands of more high-income professionals?
