Help a Reader: What to Do with Savings

Here's a question from a reader:

I'm a 25 year old, hard working chica trying to get and stay fiscally responsible. I bank with Washington Mutual and keep about $500 bucks in there at a time. Mostly for paying my bills (student loans, credit cards, IRA, netflix, etc). I have $100 a month automatically withdrawn from my account for the Roth IRA. I also have my Roth IRA through Washington Mutual. I have $1200 in that account and $900 dollars in a Traditional IRA with them which they were supposed to rollover into my Roth IRA which they haven't done. I also have $2700 in savings through HSBC online (woo-hoo emergency fund).

My plan all along has been to turn the traditional IRA into a Roth IRA and when I get to the $3000 magic number to move it to Vanguard. With WaMu's recent trouble I'm wondering whether a) my IRA is covered by the FDIC and b) if it's not if I should use some of my emergency fund money to flush out the IRA account and move it to Vanguard now and basically jump ship with WaMu. There are plenty of credit unions I could use in the area.

More information: I fund my 401k at work at 5% (i'm hoping to get to 10% by January) with a 4% match. I have $189 in student loans (which I've paid for a year in advance (I round out the payments if its $74 I send $80), I put 10% of my income into savings and have $65 in minimum credit card payments($3800 in credit card debt) a month although I've been sending $300 a month in an effort to pay it off.

What would you suggest she do?

Comments

[Kevin]

Correct me if I'm wrong, but I believe it depends on "what" is in your IRA - securities like stocks or mutual funds would be covered by the SIPC, CDs or cash would be covered either by SIPC or FDIC. Either way you should be covered.

You might also try other fund families that allow you to invest a small amount each month - $50 or 100 - and build the Roth up that way until you meet Vanguard's minimum. That's what we did with my wife's Roth - used T. Rowe Price as kind of an interim investment. They also allow you to add amounts any time, for example if you receive a gift or bonus or something like that.

[Tim]

I agree with Kevin that your WaMu accounts are insured.

If you want to move to Vanguard which is a great choice in my opinion, keep the money in T.Rowe Price until you are ready to move. Almost all brokerages have account closure/transfer fees and you'll want to avoid them if possible.

Vanguard has the STAR fund (VGSTX) that only requires a minimum of $1000 so you might look at that fund until you have $3000 minimum to move to other funds.

Good Luck!

[tom]

SIPC covers brokerage failures, but I read it only has $1 billion or so to cover that vs. FDIC which has like $40 billion. If it rises above those levels, I think the tax payers have to pay for the FDIC or SIPC to borrow.

Anyway here is what I think she should do:

1) Move all IRA assets into Vanguard STAR fund. $1000 minimum.

2) Move all IRA assets from STAR fund when you get $3000 into Vanguard Target Date Fund, keep it here until you have enough to create your own asset allocation.

3) Pay off credit card right away.

4) Put excess money into E-fund until it reaches a comfortable level, then some into savings and Roth and up the 401(k) to minimum company match.

Sounds like you are doing great though!

[Tim]

Sorry, I meant keep your money in WaMu until you are ready to move to Vanguard.

[Dar]

It appears that WaMu is under the FDIC umbrella, so her Roth should be covered. Given WaMu's current plight however I would be looking at establishing a new IRA fund elsewhere. I would expect there is a significant delay between the time a bank folds and the time each customer of the bank gets their FDIC-insured funds restored (at the speed of government), and it'd be best to keep those Roth contributions continued, but into a new, uninterrupted fund.

Is it possible to "roll over" a Roth into a Roth established at another bank? If so, hopefully this chica has time to do so before WaMu goes any deeper.

WaMu's stock is now downgraded to "junk":
http://www.king5.com/topstories/stories/NW_091608BUB_wamu_tues_junk_status_JM.800b8fc8.html

[tom]

SIPC covers investments up to $500K if a brokerage fails.

In her case, the IRA investments are covered through SIPC and her checking/savings is covered via FDIC.

The investments are NOT covered via FDIC.

[stocksbondsandrock&roll]

Looks like all my bright ideas have been covered:

1. IRAs are covered by SIPC. No need to panic.
2. Either move to Vanguard STAR now or wait until 3K and move to either Vanguard 500 index, Total Stock Market, or a Target-Retirement fund.
3. Before you keep sinking money into the IRA, pay off the credit card debt. You're already saving 9% of your income for retirement with the 401(k).
4. Once the credit card debt is paid off, go back to funding the IRA and upping your emergency fund 50/50.
5. Sleep well knowing you're ahead of the game at your age.

[Jim]

I believe if an IRA is invested in basic savings stuff then it qualifies for FDIC insurance. FDIC does definitely cover some IRAs, their limit is $250k for IRAs. But if the IRA is for stocks, mutual funds, bonds, etc. then I don't think it will fall under FDIC. Looking at WAshington Mutuals webpage for IRA's it has FDIC insured at the bottom of the page, plus I don't think Wamu has any brokerage services that I'm aware of. So I'm pretty sure Wamu IRA is FDIC insured. You can always call Wamu and ask to be certain.

What is the % on the credit card? If its not a very special interest deal then I'd focus on paying off the credit card. It doesn't make sense to carry a high interest rate credit card balance while you also have money in savings earning relatively low %.

Jim

[Bad_Brad]

In this market, I would recommend being more aggressive paying off your existing credit card debt than investing. I would make that priority #1, because that's probably costing you 15% to 20% interest. Any extra dollars you put there essentially return 15% to 20% in interest savings. You won't beat that "return" in the stock market right now.

Once that's done, then you should switch your retirement investing strategy a bit. I would fund the 401(k) only enough to get the full company match, then divert the rest of your retirement savings to your Roth IRA. And I would convert the traditional to a Roth as soon as possible, because you are best off doing that in a year when your income is low (and for most people your age, your lowest income is today, your income is only going to go up, making this conversion more costly in terms of federal income tax).

Otherwise, it sounds like you're doing quite well overall.

[Kevin]

Update to my previous comment - here's a link to determining what is covered by FDIC vs. SIPC.

http://finance.yahoo.com/banking-budgeting/article/105756/FDIC-Insurance-Protects,-Except-When