To direct rollover or not to direct rollover: that is the question

(Spoiler alert: it’s to direct rollover.)

This is going to come a surprise to everyone reading, but it turns out sometimes even I make money mistakes, despite the near-perfection I am (she says, dripping with sarcasm. Because no).

Back in the first half of 2016 I got my second Real Adult job. At this point in life I’d started foraying into the world of reading personal finance blogs, but I certainly wasn’t anywhere near the badass ninja warrior PF blogger level that I am now. However I’d read enough to know that you want low fees with your investments. Past me had had the foresight to start contributing a fairly decent amount of my paycheck to my 401(k) (thank you, past me!), and by that point I’d also had a few months of the 10% employer contribution (thanks for your generous contribution, past employer! There were so many things that needed to change but at least that was awesome!), so I had a few thousand dollars in the account.

I scoured the paperwork for my 401(k) and couldn’t find the fees listed out anywhere but knew it was a really good bet that Vanguard’s fees were cheaper. So I decided to open an account with them and roll the 401(k) over to their keeping. Plus, you know, index funds. There was probably some index fund option within my 401(k) but I hadn’t known enough when setting it up to look for them. Anyway, a call with Vanguard to ask what the rollover process was and a call with the company my previous employer used for their retirement accounts to tell them my new Vanguard account number, and my money was free to find its new home at Vanguard.

Also the company that had been holding my 401(k) took $200 out of the check they wrote to Vanguard for administrative fees or something, so fuck them.

What’s that, that was a handling of the 401(k) rollover worthy of my perfect self? Yeah, it was. But wait.

A few months later I decided to actually do something about my Roth IRA. I had one that I’d opened up a few years earlier because I think my parents had told me it was a good idea, plus it was the only way I could start saving for retirement as a college student since work-study jobs don’t come with 401(k)s (thanks, parents!).

It was with Capital One solely because I had my checking and savings accounts with them, and it was effectively a savings account with the name “Roth IRA” and a $5,500 contribution limit each year. It wasn’t actually invested in anything so I wasn’t making any money there and was getting some pathetically small interest payments every month instead. I couldn’t figure out how to tell Capital One that I actually wanted it invested so mistake number one was letting it languish for years instead of either figuring out how to do that or moving it elsewhere.

(Maybe mistake number one was only haphazardly contributing to it. It had a whole $1,170 when I rolled it over. But not moving it sooner was mistake number two.)

Having already demonstrated my prowess at rolling over my 401(k) to Vanguard, obviously my next move was to open up a Roth account with them and tell Capital One to send the money there. So that’s definitely what I did.

Except it wasn’t. I’d read that you have a window of 60 days to do an indirect rollover and that’s what I decided to do with my Roth IRA, because I’m a strong, independent woman who can handle her own damn rollover or something.

Insert “bitch” jokes here?

Honestly some of it was typical #millennial reluctance to pick up the phone. I fucking hate talking on the phone. I’d already done it for my 401(k) rollover to check that I had various account numbers right between the two companies, and doing it again just didn’t sound like something I wanted to do. You know what did sound fine? Having Capital One transfer me that money and closing my Roth account, and then going over to Vanguard to set up a Roth account and transferring that money from my savings. Easy, straightforward, and best of all, wouldn’t include talking on the phone. Great, right?

Hahaha, nope. I didn’t get on the phone with Capital One (see paragraph above about reluctance to do that) to close my Roth account right away, which turned out to be a good thing because I’d forgotten to account for my paltry interest deposit on the last day of the month. So I then had to make 2 transfers to my regular bank account because I’d gotten paid something like 81 cents in interest the week after I transferred the Roth money out of the account (and then waited another month or two before I actually got around to closing the Capital One account, natch).

After that, transferring the money over was easy and it was done less than two weeks later, well within the 60 day timeframe. But I didn’t think about the implications of an indirect rollover come tax time, which is when I learned why you should really just do a direct rollover without the money coming through your possession, even if it leaves again immediately.

Tax season came this year and all my various documents arrived in the mail and/or popped up for download, including the 1099-R from Capital One for my Roth rollover. It reported a distribution code J, which means “early distribution from a Roth IRA, no known exception (in most cases, under age 59 1/2).” Oy.

I called Vanguard to see if they were holding out on me and were just late sending a form acknowledging I’d opened a Roth with them that I could use for my taxes so I didn’t have that scary “early distribution” hanging over my head. They informed me that they’d be sending a form 5498 to the IRS in May to tell them I’d made that contribution in 2016. That would be too late for my taxes, so I was just going to have to hope I hadn’t screwed myself over and wouldn’t need to pay penalties on the money that wasn’t actually an early distribution but looked like it. The only good thing is that it was only $1,170, not an actual, substantial sum of money (I mean, no lie, $1,000 is a lot of money to me. But it’s not a lot when we’re talking retirement and potential penalties).

Luckily my youthful mistakes did not come around to bite me in the ass. TaxAct flagged my Roth numbers for review multiple times because I was self-reporting that it was an indirect rollover and didn’t have documents to back that up, but it did at least let me report that it was a rollover, which I was worried about not being able to do. The IRS did not come knocking at my door a few weeks later demanding all of my tax refund back for penalties I hadn’t paid, which was good because that money had already been spoken for.

If maxing out my Roth IRA were a thing I were super badass and able to do, I also would’ve screwed myself over for 2016 because my form 5498 from Vanguard reports that I contributed $1,170 to a Roth IRA that year. Which I guess in theory I did when I rolled it over. But I’d actually only contributed $500 to my Roth that year while it was still at Capital One, and the rest of that money had been from previous years. I should’ve been able to contribute another $5,000 if I’d had the money to do so, but Vanguard was convinced that wasn’t actually the case, oops.

It turned out fine for me in the end, but lesson learned: don’t do an indirect rollover. Normally I’m all for everyone handling their money themselves, but in this case, just get on the phone and let the experts there handle it for you.

4 Replies to “To direct rollover or not to direct rollover: that is the question”

  1. Wow! Glad it turned out in the end. I too avoid phone calls like they’re infected with leprosy, but I’ve had to work to get over that as now I’m a freelance writer and have to interview people over the phone a lot now (*shudders*).
    I’ll be doing a series of IRA rollovers out of my Betterment account and into Vanguard pretty soon, so I know which option I’ll be using now! Ain’t no one got time to fuck around with silly fees.

    1. Oh god, I can’t even imagine having to interview people over the phone for my job. No thanks! I’ve heard mixed reviews on Betterment-are you leaving specifically because of the fees?

      Thanks for reading!

  2. Absolutely agree – get on the phone (I also hate phone calls!). They have done it many times, are patient and it makes the process sooo easy. Moved from Betterment to Fidelity. Love Fidelity.

    Also I am another person who left Betterment. Left because of fees and no control. Great way to get started, but eventually you’ll grow out of it.

    1. I’ve heard good things about Fidelity too, so I might’ve looked into them if I hadn’t already been converted by the Vanguard crowd! I’m glad I skipped over the initial robo-advisor start to investing. Fees are especially an issue when you’re just starting out and don’t have much money invested. Seems like I probably came out on top by just opening a taxable account and rolling over my retirement accounts, rollover snafus aside!

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