My Rollover IRA Account — The Backstory

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