2016 Investment Planning

I’ve been doing some planning for 2016 and decided I should take a gander at my investment plan. Apparently I’d already made a spreadsheet for 2016 months ago and so it took me all of about 10 seconds to estimate things – I just had to update the current balances.

I’m working with a target asset allocation of 30% fixed income (age in bonds + 2 percentage points for having > $200,000 in investments) and then the stocks split 50/50 to US and international.

Category Current Value To Add EOY 2016
Total $209k $52.5k $261.5k
Fixed income $60.8k $17.6k $78.4k
US stocks $77.7k $13.8k $91.5k
International stocks $70.5k $21.1k $91.5k

US and international stocks are somewhat out of whack, so I’ll add more to the international stocks in 2016 than to the US ones.

I started out with adding all of my fixed income ($17.6k) with my pre-tax 401(k) contributions (including employer match) and then will put the remaining 401(k) money to US stocks. I’m still undecided on this, but I may make it international stocks instead. I like the Vanguard international fund better than the Fidelity one, but it might be more worthwhile to get things less out of whack. I still have a few weeks to think on this and it’s not a super big deal either way. I’ll update this so it all happens automatically on January 1st.

As far as timing goes, my pre-tax 401(k) contributions will be spread out over the first 5 pay periods of the year, finishing up in mid-March. I will make the full Roth IRA contribution once I have $5,500 in earned income, so sometime in February or March, and the after-tax 401(k) money will be invested in Vanguard in July once I’ve maxed out my contributions there.

I plan to use my 2016 Roth IRA contributions to open up the Vanguard Total International Stock Market Index Fund there. I’ll then finish up my international stocks allocation with my after-tax 401(k) money in the summer and the last dribble of it to US stocks.

Easy peasy after many years of doing this!

 

Poof goes the rollover (and my 2015 investment plan and updates to my Investment Policy Statement)

I realized in hindsight that this could have been three separate posts, but I’m going to leave it as is.

Rolling over a 401(k) is a slow process stuck in the archaic ages. At the beginning of April, I initiated the termination from my old employer’s plan. The next day, I had my Roth 401(k) money invested in my Roth IRA. Three business days later, I had in my hands a check for the tens of thousands of dollars that I had in my pre-tax 401(k). I filled out the rollover paperwork that I had acquired from the new 401(k) plan a few weeks prior and mailed off the check the next day, with the morning mail pickup. Within 10 business days of the original request, the funds were in my new 401(k) and I could breathe clearly again.

It was pretty scary seeing the ~$100k in my 401(k) disappear the evening after I started the process and the vast majority of it still not in a bank account. It definitely made me question my attachment to the Backdoor Roth IRA and make me wonder if I was making the right decision not rolling my old 401(k) into a Rollover IRA. Once the funds had arrived in the new 401(k) though, I was definitely in agreement that this was the best and simplest decision, to keep all of my 401(k) money in one spot.

My asset allocation was quite a bit out of whack during this time – basically all of my fixed income was in my 401(k) that disappeared. For reference, today, 2/3 of my fixed income is in my 401(k). Since my 401(k) is a bit over half of my investments, that wasn’t the end of the world. My allocation looked something like 23% fixed income (not bad), 57% US stocks (way too much), and 20% international stocks (way too little).

Overall though, the rollover went reasonably smoothly and so far, I’m glad I did it instead of trying to manage two 401(k)s.

My 2015 investment plan

Since there was a large chunk of money to be invested, this was a great time to re-balance and set up my 2015 investment plan!

I’m working with a target asset allocation of 28% fixed income (age in bonds + 1 percentage point for having > $100,000 in investments) and then the stocks split 50/50 to US and international.

Category EOY Value Current Missing
Total $218.4k $87.4k $131.0k
Fixed income $61.2k $18.6k $42.5k
US stocks $78.6k $52.1k $26.6k
International stocks $78.6k $16.8k $61.9k

The missing chunk represents the rollover, my mid-April through end of year pre-tax and after-tax 401(k) contributions, and expected 401(k) employer match contributions. This year is going to be reasonably easy to re-balance with contributions and not needing to exchange anything.

At the moment, my Roth IRA holds US stocks, so I just sent my Roth 401(k) to the Total Stock Market index fund there. I used to hold shares of an Extended Market index fund in my Roth IRA as well to balance out the large portion of my 401(k) that was in a S&P 500 index fund, but I now have access to a Total Stock Market index fund in my 401(k) and don’t need to worry about that anymore, so I exchanged all of the Extended Market index fund into the Total Stock Market index fund.

Since my Roth IRA holds mostly US stocks and that’s where my after-tax 401(k) contributions will go, I plan to put my after-tax 401(k) contributions into a US stock market index fund in my 401(k) until I move the money over to my Roth IRA since it’ll take several months to max it out.

That means my 2015 contributions will be allocated as follows:

Account Category $
After-tax 401(k) US stocks $Xk
Pre-tax 401(k) US stocks $26.6k – $Xk
International stocks $61.9k
Fixed income $42.5k

I calculated the percentages for each of the pre-tax 401(k) contribution categories overall for the year and then applied those to the amount that was being contributed this week (the rollover and the mid-April paycheck deductions and employer match).

That means that the only manual thing left to do for my investments this year is to move my after-tax 401(k) to my Roth IRA in the fall. I’m a little overweight in fixed income at the moment (30% of my investments) since a big stock contribution will come later in the year, but that’s perfectly fine.

I’m so happy to have finally finished this! Usually I do this work in December/January and it’s now late April…

Updates to my Investment Policy Statement

With the new job and 401(k), I decided it was time to check up on my Investment Policy Statement, which hadn’t really been updated since early 2012.

My long-term goal has always been to be able to retire at 50 with a paid-off home and enough in investments to cover estimated living expenses at a 3% withdrawal rate. I also added a medium-term goal of having the mortgage paid off by my 30th birthday and enough in investments to cover my then-current expenses at a 4% withdrawal rate. This sounds like a Big Hairy Goal, but I’m actually on track to meet it.

I changed my IPS to reflect my plan to lump sum my 401(k) contributions since it no longer affects my employer match. I also added some notes on my feelings about rollovers.

I’ve been contemplating asset allocation a lot over the last six months or so. I’ve been using the following model for the last several years:

The percentage of the investments in stocks is 100 minus (at the time of re-balancing):

  • My age
  • The multiples of $100,000 in investment assets that I have

I added an additional note of: “This formula will continue until I reach 30% in fixed income and 70% in stocks and then it will stay there until I choose to re-evaluate it.”

Why? I’ve realized that with the possibility of early retirement, I’ll need more money in stocks than I’ve previously considered. If I end up working past when a 3% WR on my investments is achieved, then I’ll re-evaluate my asset allocation formula.

“I want the US stocks to replicate the entire US stock market.

I don’t want to stake everything on the US stock market. Market weighting sounds good, so my ideal split would be 50/50 on US/International Stocks.”

My plan for now is to keep my Roth IRA 100% stocks, all of the fixed income in my 401(k), and all stocks in my taxable investment account.

There was an interesting section at the bottom of my IPS showing short-term goals, including estimated net worth for 2010 through 2014. I surpassed all of those numbers, some by a long shot! Some of my goals for the next 5 years include getting my savings rate above 80%, paying off the mortgage, reaching a $1M net worth by the end of 2018, and reaching a $1.5 M net worth by the end of 2020. It seems pretty crazy to imagine my net worth going from the mid $500k range today to $1.5M in 5.5 years, considering that it took the last 5 years to build it up to $500k, but that’s what my spreadsheet shows! The next five years are going to be some incredible wealth building years and I thank all of you readers for following along on this wonderful ride!

Frontloading my 401(k)

I’ve often thought about front loading my 401(k), i.e. contributing the full amount at the beginning of the year in as few paychecks as possible, but never done it.

Why? My former employer, although they did a true-up match the following year, would only contribute the matching money each paycheck if you contributed at least X%. So if I front loaded my contributions, then I would possibly not get the full matching money if I was no longer employed with them when they did the true-up.

With my new employer, I can maximize the 401(k) match even if I front load my 401(k) contributions.

Why do I like the idea of front loading my 401(k) contributions? I like going through my list of savings goals for the year and checking off one at a time, only concentrating on one goal at a time.

1. Get my savings account up to $60,000. done with mid March paycheck
2. Contribute the full $18,000 to my pre-tax 401(k). will be done with end of May paycheck
3. Contribute the maximum I can to my after-tax 401(k) and then transfer it to my Roth IRA. will finish with a September paycheck
4. Contribute the maximum I can to the Employee Stock Purchase Plan. ongoing
5. Pay down the mortgage by $28,671.79. this one probably won’t get done, but I’m forecasting I’ll get 75% of the way there.

I used to not like the idea of the small paychecks, but it has grown on me since I have a nice cash buffer now. I plan to use the BrokerageLink feature of my new 401(k) to set up a three fund portfolio and I can’t set that up to automatically put money into a specific allocation like I can with the regular funds in the 401(k) plan, but by front loading my 401(k) contributions, the money will only be sitting in cash for ~2.5 months if I let it sit there until all the money is there and then invest it. If I wasn’t front loading, I would feel a need to log in more often and set up the money.

Why have I always wanted to do this? Over the last few years, I’ve often wanted to leave my job before the end of the year and it would have been nice to have already maxed out my 401(k), be on the path to get the maximum match, and not worry about that while I was contemplating quitting my job.

Front loading also means I don’t have to worry about getting the contribution % exactly right to max it out with my last paycheck of the year or worry if my last paycheck will actually come in the following year or if there are more paychecks than expected.

I had forgotten about this idea, even after thoroughly reading my new job’s 401(k) plan’s Summary Plan Description (SPD) in detail to learn as much as I could about the after-tax contributions and how the matching worked. But then I read Mad Fientist’s blog post on why you should front load your 401(k) and I was hooked!

Readers, have you ever considered front loading your 401(k)?

An Ode to My Old 401(k)

When leaving a job, there are a few actions one can take with their old 401(k):

  1. Do nothing and leave it where it is, paying any fees your employer charges you now that you’re no longer with them
  2. Withdraw the entire balance, paying a 10% penalty and regular income taxes (ew, this would cost me about $40,000) based on the current balance
  3. Roll it over into the new employer’s 401(k) plan
  4. Roll it into an IRA

I definitely don’t want to withdraw the balance with how much that would cost in taxes and the fact that I would then lose the tax-deferral on my ~$100,000 for another 34+ years! I also don’t want to roll it into an IRA as then I would lose my ability to do a Backdoor Roth IRA. So there rules out half of my options!

The choice between the other two options depend on what the options look like in the new 401(k) compared to my existing one. My employer will charge a small quarterly fee that basically equates to a ~0.04% additional fee with my balance, which is actually a decent chunk considering that the funds in the new plan are cheaper than the equivalent funds in my old one.

When I first started investing, I posted a portfolio review on the Bogleheads forum and got some helpful feedback. Since then, I haven’t requested any feedback from them, but I still use their format to do a periodic review of my investments. I find it’s a great way to take an overall look at my portfolio. I follow the format right down to the questions asked. Here is the questions I asked myself this time around as I was figuring out what to do with my old employer’s 401(k):

  1. My old 401(k) will start to charge a quarterly fee at some point (turns out this kicked in last week) that equates to about 0.04% annually of my current balance. I don’t want to roll my old 401(k) to an IRA since that would cut off my access to the Backdoor Roth IRA, but should I roll it into my new 401(k) plan? The only catch I can see here is that if I roll the old 401(k) out of the plan, then if I were to return to that employer in the next few years, I would have to start the vesting period over again.
  2. My new 401(k) plan allows me to contribute after-tax in addition to pre-tax. It also allows me to do an In-Plan Roth conversion or I can instead move the money to my Roth IRA. Which is a better option?
  3. The international stock index fund I have access to in my new 401(k) doesn’t include small-caps, but the one in my old employer’s 401(k) does. Is that a deal breaker to me?
  4. I see a few options here:
    a) roll old 401(k) into new 401(k), do in-plan Roth conversions to keep things simple
    b) leave old 401(k) where it is until I don’t need it any more to keep my international stock allocation out of the new 401(k) and then roll it into the new one (move after-tax 401(k) contributions to Roth IRA)
    c) roll old 401(k) into new 401(k), but move after-tax 401(k) contributions to Roth IRA
    d) leave old 401(k) where it is and do in-plan Roth conversions

I then made a huge spreadsheet to compare options A, B, C, and D for question 4. B was much more expensive than A or C due to the fee my old employer will start charging soon, so I didn’t make a spreadsheet for option D at all. C ended up being cheaper than A for the first several years and then eventually A became cheaper, but not by a huge margin either way. This makes it a strong vote in favor of option C.

I’m about two months’ away from Vanguard telling me my 5 year return (it’s the small, psychological things…) and if I roll my old 401(k) out before then, I won’t see that number on Vanguard’s site…

I also decided that since the international stock index fund I have access to in my new employer’s 401(k) plan isn’t as complete as the Vanguard one, I’m going to try to keep as much of my international stock allocation as possible in my taxable and Roth IRA accounts. It’s currently the only fund in my taxable account, so I’ll do some rearranging in my Roth IRA at some point.

This also answers question 2, suggesting that I should move the after-tax money to a Roth IRA instead of doing an In-Plan Roth conversion. I’m going to see about rolling the Roth portion of my old 401(k) into my Roth IRA and otherwise, I’ll wait until early May to roll the pre-tax portion to my new 401(k).

I’ve started investigating how to do the rollover. I called the old 401(k) plan administrator and they said that I can roll the Roth portion into my Roth IRA and the pre-tax portion into my new 401(k), so long as I do it all at once. I can initiate leaving the old plan online and the funds should get to my Roth IRA within 2-3 business days. The new plan required me to request some papers to be mailed to me, which will take 3-5 business days, and then I’ll take a look at things again. The telephone rep from the old plan told me that the new plan will most likely require a check to get mailed to them, which will take about 2 weeks. My boyfriend and I were both pretty amused/confused at how much mailing was involved in this process despite the fact that it is 2015…

Yay for a plan (though still with some details to fill in) on this at last! It was stressing me out quite a bit to be unsure what to do with this, especially since my old 401(k) is worth about $100,000, which is about 55% of my overall investments.

Here’s a graph of my old 401(k) balance over the last ~5 years, as an ode to it. It has been a good 401(k) to me over the last five years and I will miss it. (I also refused to shred my old health insurance card. It’s with my previous health insurance card. Yes, I am a bit of a hoarder…) You can see that I didn’t contribute as much in the first year, but I started maxing it out partway through 2011 and it has grown quite nicely since then!

Ode to my old 401(k) balance

Readers, what do you usually do with your old employer’s retirement plan when you leave?

Re-balancing my investments: 2015 Roth IRA contribution edition

I set my 2014 investment allocations back in December 2013 and then left them alone, which went great!

As of 01/02/2015, my investments portfolio was worth ~$164,400. I decided to re-balance my investments now with this Roth IRA contribution and then I’ll re-evaluate things once I start the new job. That will likely be calculating what my new 401(k) contributions should go into and then re-balancing my overall portfolio when I make my 2016 (!) Roth IRA contribution and set my 2016 401(k) contributions.

(Note: when I wrote this post last year, I estimated that my end of year balance would be $156,000. It is $8,400 higher than that! Crazy!)

First, what are the balances in my various accounts?

  • $38,900 Roth IRA (with $5,500 new contribution)
  • $8,400 Old tax-deferred CDs
  • $10,200 Series I Savings Bonds
  • $15,300 Taxable account
  • $97,100 Now-old 401(k)
  • $169,900 Total investments

What is my asset allocation?

% Category Amount
27% Fixed income $45,873
36.5% International stocks $62,013
36.5% US stocks $62,013

My allocation has gotten itself to the following with the markets and contributions in 2014 (a tiny bit out of whack):

  • 27% Fixed income
  • 34% International stocks
  • 39% US stocks

And if I just added my 2015 Roth IRA contribution to total US stocks, my allocation would get a tiny bit more out of whack:

  • 25.8% Fixed income
  • 32.8% International stocks
  • 41.4% US stocks

At which point, US stocks are 4.9 percentage points higher than they should be, which warrants re-balancing in my 401(k) account at the same time. Last year, since I’d just re-balanced in November 2013 to make my 2013 Roth IRA contribution, I didn’t do any when I made my 2014 Roth IRA contribution and instead re-balanced with my 401(k) contributions over the course of the year.

If we follow my ordering from my post on tax-efficient investment placement, what does that ideal portfolio look like?

Steps

  1. (not necessary – all in S&P 500 index fund) My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. CDs that are already in my Roth IRA
  4. The remaining portion of my fixed income allocation to the stable value fund in my 401(k).
  5. (not necessary) As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  6. (not necessary) If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  7. (not necessary) Any other fixed income went to a tax-exempt bond fund in taxable.
  8. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  9. Next, I added any of the remaining international allocation into my 401(k).
  10. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  11. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  12. The remaining Roth IRA funds went to Total Stock Market.
  13. (not necessary) The remaining taxable funds went to Total Stock Market.

Ideal portfolio

Account Fund Current Ideal Difference
401(k) Stable value $25,300 $27,300 +$2,000
Taxable Total international stock index (admiral shares!) $15,300 $15,300 (same)
401(k) Total international stock index $40,400 $46,700 +$6,300
401(k) S&P 500 index $31,400 $23,100 -$8,300
Roth IRA Extended Market index fund $7,100 $5,800 -$1,300
Roth IRA Total Stock Market index fund (admiral shares!) $26,300 $33,100 +$6,800

Note that these numbers are all rounded, so they may be slightly off if you try to make calculations with them, but they should still illustrate my example sufficiently.

My portfolio is pretty simple right now: one taxable account, one 401(k), and one Roth IRA, with one fund in taxable, two in the Roth IRA, and three in the 401(k). My re-balancing here is really just adding new money to the Total Stock Market index fund in my Roth IRA and then adding some money to fixed income and international stocks in my 401(k).

I performed a few transactions to accomplish this:

  1. Contribute $5,500 to the money market account in my Traditional IRA.
  2. Convert the $5,500 from my Traditional IRA into the total stock market index fund in my Roth IRA once the funds settle.
  3. In my Roth IRA, exchange $1,300 from the extended market index fund into the total stock market index fund.
  4. In my 401(k), exchange $8,300 from the S&P 500 index fund to $2,000 in the stable value fund and $6,300 in the international stock index fund.

D’oh! I did all of these transactions and then realized while writing this post that I needed to set it to only use my Traditional 401(k) portion to do the exchange, so it’s trying to do the re-allocation using all sources (also my Roth 401(k) and employer matching money), which I have conveniently set to only have one fund in those “accounts”. Oops! I called the plan administrator on Monday and they couldn’t do anything to fix the transaction. So my asset allocation is on track, but my accounts are a tiny bit more complicated than I like them to be. Oh well.

Re-balancing my investments: 2013 Roth IRA contribution edition

My investments have been mostly plodding along this year. Occasionally, I have adjusted how much of my 401(k) contribution went to what (S&P 500 index, total international index, and stable value fund) and then left it alone again. For example, my September and October contributions went about 50/50 to the stable value fund and the total international index because the US stock markets had been doing so well.

But now that it is time to make my 2013 Roth IRA contribution, I am going to re-balance by exchanging some funds around. Back in May, I wrote a post on Tax-Efficient Investment Placement Over Time, which I have referenced so many times that I should really bookmark it.

First, what are the balances in my various accounts?

  • $23,600 Roth IRA (with $5,500 new contribution)
  • $8,200 Old tax-deferred CDs
  • $10,100 Series I Savings Bonds
  • $15,700 Taxable account
  • $74,500 401(k)
  • $132,000 Total investments

What is my asset allocation?

% Category Amount
26% Fixed income $34,320
37% International stocks $48,840
37% US stocks $48,840

If we follow my ordering from my post on tax-efficient investment placement, what does that ideal portfolio look like?

Steps

  1. My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. CDs that are already in my Roth IRA
  4. The remaining portion of my fixed income allocation to the stable value fund in my 401(k).
  5. (not necessary) As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  6. (not necessary) If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  7. (not necessary) Any other fixed income went to a tax-exempt bond fund in taxable.
  8. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  9. Next, I added any of the remaining international allocation into my 401(k).
  10. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  11. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  12. The remaining Roth IRA funds went to Total Stock Market.
  13. (not necessary) The remaining taxable funds went to Total Stock Market.

Ideal portfolio

Account Fund Current Ideal Difference
401(k) Stable value $14,300 $16,000 +$1,700
Taxable Total international stock index (admiral shares!) $15,700 $15,700 (same)
401(k) Total international stock index $22,100 $33,200 +$11,100
401(k) S&P 500 index + employer stock $38,000 $25,300 -$12,700
Roth IRA Extended Market index fund $8,400 $6,300 -$2,100
Roth IRA Total international stock index $9,700 $0 -$9,700
Roth IRA Total Stock Market index fund (admiral shares -soon!) $5,500 $17,300 +$11,800

Note that these numbers are all rounded, so they may be slightly off if you try to make calculations with them, but they should still illustrate my example sufficiently.

The main thing here is that I’m moving my Roth IRA from being mostly Total International Stock Market index (TISM) with a bit of Extended Market index to being mostly Total Stock Market Index (TSM) with a smaller amount of Extended Market. I’m also going to exchange all of my company stock into the S&P 500 index fund to diversify better. (So many people don’t know you can do this!)

I’ll perform a few transactions to accomplish this:

  1. Contribute $5,500 to the money market account in my Traditional IRA. – done!
  2. Convert the $5,500 from my Traditional IRA into the total stock market index fund in my Roth IRA once the funds settle. – done!
  3. In my 401(k), exchange all of the company stock money to the S&P 500 index fund.
  4. Next in my 401(k), exchange ($11,100 – company stock money = $12,700) from the S&P 500 index fund to $1,700 in the stable value fund and $11,000 in the total international stock index fund.
  5. In my Roth IRA, exchange $2,000 from the extended market index fund and the entirety of the total international stock index fund into the total stock market index fund.

And that’ll be the last re-balance I make by exchanging until early 2015 when I make my Roth IRA contribution for 2015 – all other rebalancing will be done by adjusting which funds in my 401(k) get how much of my contribution each month.

Happy Friday, all!

[My] Backdoor Roth IRA: near the end of the year

NOTE: Based on Bichon Frise’s comments and some research on Publication 590 from the irs.gov website, as well as the link to fairmark.com in the comments from Bichon Frise, I’ve decided to make my 2014 Backdoor Roth IRA contribution at the very beginning of 2014. Since it’s so late in 2013 already, I’m going to continue with my existing plan for my 2013 contribution. You’ll see an update on both of these in one of my remaining net worth updates for the year. I’m still leaving the content of the post here because I feel that my concerns and wonderings are still valid. Just please read the first few comments as well.

 

Many people who can make the maximum contribution to their Roth IRA at the very beginning of the year, in January. Some people even make a game (?) of trying to do this as early as possible in the year. Me? I try to do this as close to the end of the year as possible. I’m not against setting aside the cash to make the contribution throughout the year so that I could technically do it at any point.

Why do I do this? Well if you read line 6 on form 8606, you need to enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2013. I want to be confident that there will be no money in a traditional IRA at the end of the year before I make the Roth IRA contribution when I’m making it through the back door. Why?

My employer charges a fee to keep money in my 401(k) once I’m no longer an employee. The difference in expense ratios between admiral shares and what I can get through my employer is not worth paying this fee, so I plan to roll my 401(k) into a Rollover IRA or the next employer’s 401(k) as soon as the plan administrator will let me. I don’t want to be caught with having money in a Traditional IRA at the end of the year, so I’d rather wait on making the Roth IRA contribution. If the new employer doesn’t let me contribute to the 401(k) for some period of time or their plan isn’t as good as admiral shares at Vanguard, I would rather use the Rollover IRA, even though it would make me ineligible for a Backdoor Roth IRA that year.

With the current balance in my 401(k), most of my conversions from Roth IRA to Traditional IRA would have been taxable, which would be expensive in my 28% bracket. That would be approximately a $2,500 mistake. I’d rather pay the fee to leave money in my 401(k) than the income tax on the conversion. Honestly, looking at form 8606 now, I should have waited until the end of the year to make the conversion from Traditional to Roth on my 2012 contribution. Or I should have just made it in 2012 itself.

In conclusion: my assumption that some day I will have a Rollover IRA instead of a 401(k) is also part of why I am doing the Backdoor Roth IRA for now, even though I was originally against it. Since I hit the income cap for direct Roth IRA contributions so young (at 24), I would like to build up some Roth space while it’s still possible. I’m hopeful that I will at least get to contribute to a Roth IRA through the backdoor this year, in 2014, and in 2015, which would give me $35,000 to $40,000 in the account. My Roth account will almost always be dwarfed by my eventual Traditional IRA from my 401(k) and my taxable account, but it’s still valuable space to have, to diversify on future taxes, especially since I otherwise would have invested the money in a fully taxed investment account.

Readers, when do you make your Roth IRA contribution for the year?