My wife has a Fidelity Rollover IRA, and it’s currently around $4.6K. All of it is sitting in FDRXX, which is getting about 5% interest.
She also has a 403(b) with a target date fund, and she’s maxing that out with her employer match.
What should we do with this Rollover IRA? Is it possible to convert it into either a traditional or Roth and put it into something like FXAIX? It just feels like it’s not doing much, but I don’t know what the best move is.
There are a few reasons you might want to convert it or roll it into a 401k/403b (assuming it’s all pre-tax). One reason is if you want to do backdoor Roth conversions, having a traditional IRA can complicate that.
Here are your options:
Leave it as is and just change the investments to something more fitting.
Roll it into your employer’s plan (if they allow it) to keep accounts consolidated and make backdoor Roth conversions easier.
Convert part or all of it into a Roth IRA. You’d have to pay income taxes on whatever amount you convert, so if you’re in a low tax bracket now, it might be a good idea.
The issue isn’t the Rollover IRA itself, it’s the FDRXX inside it. You should switch from that money market fund to a diversified stock fund or a low-cost target date fund.
You could convert the Rollover IRA to a Traditional or Roth IRA and then invest in funds like FXAIX for growth. Just keep in mind the tax impact if you go with the Roth conversion.
I rolled over my old 401k into a Rollover IRA and have it split between FZROX, FSPSX, and FNILX. I’m just letting it grow while also contributing to a separate Roth.
I’m not a big fan of target date funds because the expense ratios tend to be higher than S&P 500 index funds. The average is about 0.3%, but it can go up to 0.5%. If you have a low-cost option like Vanguard’s VTIVX at 0.08%, that’s not bad, but how does it compare to just sticking with an S&P 500 fund?
401k/403b plans usually have a low-cost S&P 500 option with an expense ratio of about 0.015%. Those tend to perform better, too, with returns around 25% in 2023. Just something to consider.