(Continued from Should I roll over my 401k? Part 2 – Maybe Rollover into Fidelity?)

I believe in the power of low-cost investing in well-managed index funds, as proposed by books such as Random Walk Down Wall Street and Four Pillars of Investing. So here’s what I’m considering if I roll over my 401k to a Vanguard IRA. I would probably merge it will my existing Traditional IRA there, leaving me with a balance of around just over $20k.

Option #1: One Fund
Right now my IRAs only hold one fund: Vanguard Target Retirement 2035 (VTTHX), and my wife’s hold the Retirement 2045 Fund (VTIVX). I did this do get a balance of about 85% stocks, 15% bonds. I feel I should be closer to 90% stocks, so I could put everything in the Traditional IRA into the 2045 fund. That would leave me with the following allocation:
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(Continued from Should I roll over my 401k? Part 1 – Stay put with old 401k?)

I just had a couple of very nice conversations with the customer service reps at Fidelity and Vanguard about rolling over my 401k into an IRA. I’ve always liked dealing with both these solid companies, they have short phone hold times even on their main lines (unlike E-Trade, which sucks), courteous people (again, unlike E-Trade), and they even speak intelligible English (unlike Dell)!

I cleared up some things with Fidelity first. I couple of commenters on my last post suggested simply rolling over my Fidelity 401k directly to a Fidelity IRA, so I explored that a bit. Here are my findings:
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So it’s time to decide whether I should keep my 401k money at the original manager Fidelity, or roll it over to join my IRAs at Vanguard. I have enough in there to be allowedto leave it indefinitely. I’m not considering any other options as I’ve already chosen Vanguard as my retirement broker. Here are the funds I have in my Fidelity 401k right now, with expense ratios (e.r.):

40% in S&P 500 Index Fund (like FSMKX), e.r.=0.10%
20% in Spartan Extended Market Index Fund (FSEMX), e.r.=0.10%
20% in Spartan International Index Fund (FSIIX), e.r.=0.10%
20% in PIMCO Total Return Admin Fund (PTRAX), e.r.=0.68%
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Check out this nifty flash video from Vanguard about the power of compounding. I’ve talked about this a bit and the Rule of 72 before in this previous post, but there’s nothing like a bit of nifty Flash and graphics to drive a point home. Compound interest is awesome, and starting a.s.a.p. is critical. For example, all you need to begin is $1 at Capital One 360, and you can turn it into $26!. Then set up an automatic savings plan with them, and you’re on your way. (Credit for flash to Our Money, Our Future).

Fidelity Investor’s Weekly is a weekly personal finance online newsletter, much like what is available on CNN Money or MSN MoneyCentral. It’s supposed to be for Fidelity members (I am one) but it looks publicly accessible to me! Although many of the articles have a Fidelity slant – you won’t find them recommending a Vanguard fund for sure – there are some good articles from time to time, such as this one: Ten Myths of IRA Investing.
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After hearing a co-worker talk about taking a 401(k) loan to help with the downpayment on his new house, I decided to ask the HR Department about it. Here are the rules for my company, yours may be slightly different.

You can borrow the lesser of 50% of your vested balance, or $50,000. So with my current financial status, that would be approximately $6,000. The interest rate charged is WSJ Prime + 1% at the initiation of your loan (Currently 5.5+1 = 6.5%). But the interest is paid directly back into your account. You can repay it over 20 years if the loan if for your house, and 5 years otherwise.
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I was having lunch with some co-workers recently, and an older co-worker was talking about taking a loan from his 401k plan to help with a downpayment on a new house (an interesting idea for a future post). To my surprise, two of my other coworkers with me, who started work the same time as I, replied “401k? We’re not even enrolled.”. I was totally stunned. I mean, these guys are within a year or two of my age, single, and one of them even lives at home! We’ve all been working at least two years, so even with student loans there’s no way they can’t afford to save some of their current income.
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Now that all of my IRAs are at Vanguard, I can decide whether to convert my $5,000 Traditional IRA to combine with my Roth IRA. After reading up on some pertinent articles at Fool.com and Fairmark.com, here are my thoughts.

Right now I am currently eligible to convert, as my modified adjusted gross income (MAGI) is less than $100,000, after reading this article on eligibility. This will probably not be the case in the future. Also, I have the cash available for the taxes that I will have to pay during the conversion. That way, I won’t have to take the money out of the Traditional IRA, and the $5,000 will then be post-tax instead of pre-tax. Finally, I don’t intend to contribute any more money to a Traditional IRA in the foreseeable future.
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I finally got around to selling the contents of my E*Trade IRA today, in preparation for moving it to Vanguard. My holdings? Just two funds:

Janus Mercury (JAMRX) – Bought in 2001, back when I was young, foolish, and bought things that were trendy and had lots of Morningstar Stars. Sigh.
T. Rowe Price Mid-Cap Growth (RPMGX) – Bought when I was a bit smarter, but still more lucky than smart.

I’ve been meaning to close this account out for a while, but I was on a fence for a bit since I liked RPMGX a lot, and it is closed to new investors. But I must trust in my belief that no fund can beat the overall market in the long run, and RPMGX has an expense ratio of 0.87% – not astronomical, but not 0.20% either.

(Note: interest rates updated as of 3/7/05)

As interest rates continue to rise, there is again reason to really scrutinize where you park your liquid cash, as that “free” checking account really isn’t free when your money could be earning it’s keep somewhere else. Here is how I handle most of my cash that I want to keep easy access to:

Bank of America
Interest Rate: 0%
Use: Day-to-day expenses, usually Pros: ATMs everywhere for convenient cash withdrawals and check deposits, great reliable online Bill Pay system, free tellers, they take my rolled coins and give me free wrappers, no minimums and free with Direct Deposit.
Cons: 0% interest

Presidential Bank
Interest Rate: 3.00%
Use: Bulk of cash savings (interest rate good up to $25,000)
Pros: Good interest rate, it’s a checking account instead of a savings accounts, so unlimited checkwriting and easy withdrawals with ATM card.
Cons: No local branches, Sub-par Online Banking and Bill Pay, Requires $200 monthly direct deposit and $1000 minimum to avoid fees.

VirtualBank
Interest Rate: 2.60% (for bal. up to $10k)
Use: Emergency Money, Excess from Presidential
Pros: No minimums, decent rate. My favorite is VirtualBank, which allows you to connect 3 banks, and allows you to initiate ACH transfers both in and out to those banks. It allows you to redistribute your money as you see fit, and also can simulate a regular direct deposit from your employer.
Cons: Online only, No local branches, No ATM access, Only 6 transfers out per month without fee.

Edit: Updated Bank Account Comparisons.

I have decided upon Vanguard for my Roth IRA Brokerage. My decision was based upon the following:
1) I want to invest solely in mutual funds, specifically index mutual funds.
2) I want a large selection of no-transaction fee, no-load mutual funds with very low expense ratios.
3) I want minimal fees, especially tricky or hidden ones, from the brokerage.
4) I want it online, with a good web interface.

These points narrowed it down to:
a) Fidelity, a mutual fund behemoth which has a nice selection of in-house funds with expense ratios as low as 0.10%. However, the minimums for those funds are $10,000 each. It also has a great web interface, as I use it for my 401k account.
b) Vanguard, which was a leader in the index fund movement and has an enormous selction, with very low expense ratios. I have no idea what the web interface is like, however.
c) Scottrade, a smaller company which currently has no transaction fees for ANY of it’s mutual funds. However, I have heard through the grapevine that it may start charging soon, as they are currently losing money on each transaction doing this. (Update: They now charge for no-load mutual fund transactions)

Since I already have my 401k at Fidelity and am already invested in many of their mutual funds, and I want to keep my Roth IRA somewhere stable for the long run, I leaned toward Vanguard. After some more research, I saw that many of Fidelity’s index funds have $10,000 minimums, even for retirement accounts. Unfortunately, the max for 2004 IRA contributions is $3k, 2005 is $4k. Thus, Vanguard wins out.

Vanguard has an IRA custodial fee of $10 a year for each fund account having a balance of less than $2,500 to $5,000. I plan to have at least $5,000 total, so I may be exempt from that. Many of it’s funds also have a quarterly $2.50 account maintenance fee for account with less than $5,000 to $10,000. Regarding the account maintenance fee, they say it “is paid directly to the fund and therefore is not considered a load”. So I guess some the $10/year comes back to me, as it pays into the fund. Still, I would be subject to this for at least a year. Not ideal, but it’s better than less my cash sit and shrink from inflation, not to mention $10 is less than one stock trade at most places. So I’m off to Vanguard to open an IRA…

As you may have noticed, my portfolio is defintely cash-heavy. There are two mains reasons for this:
1) I am currently renting and am saving up for a downpayment for a house in the next 2-3 years, and would like to keep the money somewhat liquid.
2) I don’t know that to do with it. I don’t want to be investing in the current trendy idea, and have it bomb right before I find the perfect house. Still…

…earning 2% interest is not going to help my downpayment money grow. I heard you can withdraw money from a Roth IRA to pay for your first home, but after doing some research, I found out that you must wait five years first. I’d like to think I’d be owning my own house by then… However, putting money into a Roth isn’t a bad idea anyways. So, I have decided to fund a Roth IRA. I can put in $3,000 for 2004 and $4,000 for 2005 for both my wife and myself each, as we satisfy the income restrictions this year and the next. Either it stays in there as a great retirement vehicle, or I can pull it out to pay for a house.

Next step: Which brokerage firm to use, and where to allocate my assets – stocks/bonds/REITs/pork futures?