I am comparing and trying to find any significant differences to recommend a brokerage, and there’s really few differences I am seeing.
Details: Slightly >$25k in the 401k, all traditional. Wants to convert to roth effective in 2017 tax year. Fidelity suggests instead of directly to a roth to do a conversion IRA and then convert that to roth. Might withdraw some or all for a home purchase in 2018.
Options:
Fidelity - $5 trades, no minimum or account fees
Vanguard - $7 trades, $20 yearly account fee if under $10k balance.
TDAmeritrade - $100 bonus for $25k rollover +90 days free trades
Scottrade/Merril/Ally bank - $100 bonus $25k deposits in new ira and/or free trades
I was first recommending fidelity, but maybe TD would be better for the $100 bonus?
Yeah. For myself I’d go to vanguard or fidelity. (If I weren’t at IB. Where I have account fees on the IRA but want the convenience. ). Don’t know if the others are worth it instead for them for the $100 bonus since their account is relatively small and the other fees shouldn’t matter. They shouldn’t be trading often (I would somewhat hypocritically recommend 100% index funds to everyone) but I can’t predict and I can’t set the rules… Fidelity was my first suggestion. But if td is just as good I may change my suggestion. I’m not too familiar with etfs or what to look for. They are also not very familiar or comfortable with setting up online accounts for financials, etc, so ease of use and customer service is a priority.
I was able to convince conversion over just cashing out because ira allows $10k without penalty for first house and 401k does not - that’s $1000 saved right there. Ideally I can convince to keep at it to at least get the full $2k saver’s credit every year, that’s a lot of FREE money from the irs, and a significant amount for them. (And I think I’ve seen somewhere you disqualify savers credit for up to 3 yrs if you withdraw?) They do plan to get the new employer’s full match amount.
I’m out of my game in comparisons because my own accounts I care about different things, as I paid over $6k in margin interest and commissions this year.
Can they convert it to a Roth 401k within the current plan? You may really have to move fast, and the 401k moves can be slow, to get it to a new place and convert it in time for 2017. Also, be aware that you may not get a recharacterization option if the new tax bill passes once we get into 2018.
They’re hopefully requesting the transfer tomorrow. Fidelity said once it’s in the conversion IRA that they can instantly convert to a roth IRA (When I pressed, I got them to agree with me that earlier than the 31st would make sense, and said 28th was their deadline for withdrawals so go with that as 100% no problems if done on the 28th).
Re-characterization? Wouldn’t this just be a conversion not a recharacterization? I thought recharacterization was “Oops, I deposited in the wrong account”.
Fidelity is good for customer service type stuff (although I dislike them for certain types of more active investing). they can convert the IRA the same day / overnight just with a phone call too. arguably for only $25k, completing the IRA maneuvers probably matters more than the trade costs or the bonuses. I would go with Fidelity, although TDA is probably similarly good. Scottrade can do the same, but there’s more paperwork and it may take a few days to convert things since the IRA groups get busy doing tons of RMDs this time of year.
Thanks for the confirmation, maybe I’ll stick with that recommendation. They also have a local office, which is irrelevant to me but may make them feel better. Do you know if the fidelity storefronts just sales outlets or can they actually do things other than just fax in paperwork for you? (Like print out withdrawal checks if they withdraw for home purchase/etc)
I went to their local office for something on a joint account and it seemed like all they could do was fax in forms to the real employees to make account changes just like you can upload through the website.
Fidelity, Charles Schwab, and TDAmeritrade have physical offices, in case face-to-face time is important. Fidelity and Schwab will both accept checks for deposit in person, if mobile deposit isn’t an option for them.
Looks like I missed that you can’t take the penalty free withdrawal from the roth IRA until 5 years wait is satisfied. I think you could immediately take it from the traditional ira after rolling over from 401k, though.
I’m also not 100% clear but I think if you take the $10k first home purchase withdrawal (from traditional) to save the $1k penalty, you would be disqualified for the saver’s credit for 3 years meaning up to $6k effective penalty. Of course that still applies if you just withdraw from the 401k directly, but that would occur this year rather than next year (so only $4k penalty vs $6k for saver’s credit at a cost of $1k).
Just as an update, we got it done last week. It turned out there was a place in the website where you could do changes effective end of next trading day for roth conversion, staying within the 401k. Weird they didn’t give this option over the phone, plus that website is the most poorly organized I’ve ever seen. And gives the least amount of information too. You get one chart (or a configurable date-range chart) of your portfolio’s value. It also doesn’t even show roth/vs traditional anywhere except another place I found buried.
I also saw their fee breakouts and they weren’t “terrible”, just add 0.1% to the funds’ fees. They even had an option to do a self-directed brokerage at schwab. (Would be nice if mine offered something like that). IMO it’s best the relative keeps it there with the limited options.