Roth IRA Question - Related to Fees

Investing
#1

Hi there,

I’m wondering if I should rollover a Roth IRA that I currently have with American Fidelity. The reason for my wondering is because of the fee structure. Not only is there a 1.5% annual fee for administrative purposes, they also charge me $15.00/year as a policy fee, and on top of all that, I also have to pay the expense ratios for whatever I’m invested in. The only thing that I can say is positive about them is that they provide access to Vanguard funds. I do, however, have a Vanguard Roth IRA that I could roll this over into and leave American Fidelity altogether, but I only just started the Vanguard RIRA this year.

This is complicated by the fact that I just reached my 5 year limit for Roth IRAs and I’m not so sure that losing that is beneficial. However, it is also complicated by the fact that I would have to pay a surrender charge (at least I think that’s true) if I choose to rollover from Am.Fidelity to Vanguard and its like $300.

Any thoughts? Much appreciated!

Best,
A

#2

I would roll out of that high fee situation asap. Don’t throw good money after bad.

What do you mean by your 5 year limit?

#3

I’ll get the paperwork going on this right away – you just confirmed what I already knew.

I think I used the wrong word: instead of typing “limit,” I should have indicated “rule.” I thought that for Roth IRAs you had a 5 year rule: that you get full tax-free treatment of any withdrawals once you’ve held the account for five years, which generally starts on the first day of the tax year for which you made the Roth contribution. Does that help clarify?

Thanks for your response! :slight_smile:

#4

Hm… I think you may be misunderstanding that 5 year rule? I’m pretty sure that only applies to Roth conversions. Here’s the basics on how you can access Roth money:

  • Regular contributions principal: You can access the principal at any time. (i.e. if you contribute $6,000 and it grows to $10,000 you can always take out the $6,000 tax/penalty free)
  • Regular contributions growth: You can access everything, including the growth tax/penalty free at 59.5 years old.

But a conversion is kind of a weird gray area. Let’s say you contributed $10,000 to a 401k. Then it grows to $20,000. Then you roll it over to a Rollover IRA. Then you convert it to a Roth IRA (and pay tax on it). Is that $20K principle or is it growth? Or some of each. The IRS doesn’t make you figure it out, instead they say, “ok, just wait 5 years, then we’ll call it all principal” in line with the above rules.

That’s the basis for the “Roth IRA ladder”, a strategy for early retirement. Contribute all your money to traditional accounts, then slowly convert them to roth so every year, you can spend what you converted 5 years ago. :slight_smile:

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