Is it Impostor Syndrome or Just ADHD Reality?

Another interview, another scrunching up my face in horror at something all too honest that I say as I’m asked about my experience and weaknesses. But let’s be real – if I were a hiring manager for most of these jobs I would not hire me. The few that don’t see this during the interview process – the only ones who would ever offer me an opportunity – are inexperienced in hiring or somehow unable to see the truth. It’s not just impostor syndrome, I’m just not that intelligent or reliable. Occasionally I have a brilliant idea and execute well, but most of the time I just get super anxious and waste time because I’m too scared to make decisions. Sometimes I come to work late because I’m depressed and have trouble getting out of bed. I can’t multi-task because having too many things to do at once and too many decisions to make equals one very stressed out and unproductive me. This thread really says it all.

So how am I supposed to convince anyone to hire me? I just look around at all of my peers in the business world and most of them just have their shit together. Some are really smart and able to get stuff done like superheros. Others are just able to execute really well, communicate goals and exceed them. All of this, others say, one can learn to do. Anyone can be on top of their shit. Anyone can learn process and get stuff done. Anyone can make decisions, test ideas and pick the best ones to continue with. Anyone can do this – except I can’t. I just can’t.

I don’t know where to go from here. Even starter interviews for junior-level positions somehow seem to end with “you’re not experienced enough.” That is after 10 years in the workforce. I’m not making this up. And it’s true — I have such a smattering of experiences but no one solid skillset that fits any job description. Ultimately it doesn’t matter anyway because if I did get a job I’d just end up disappointing them. I really don’t know what to do.

I am fortunate in that I have a good amount of savings to survive on for a little while, but eventually I need to get a job. Junior level roles, if I could get one, often require more of the detail-oriented work that I’m bad at due to my ADHD. But senior level roles still require the ability to be detail-oriented and set bigger picture strategy while ensuring the day-to-day gets done.

Interviewing is awful. I’m sure it’s wonderful for people like my friend who are just so good at what they do and know it. Everyone who interviews him falls in hiring love because he’s just professionally perfect, from his Ivy degree to his experience and contributions to all his companies along the way. I’m happy for him, and for my other friends who are doing well professionally, but also jealous, jealous because that will never be me. I can maybe fake it for a month or two but it won’t last.

This is why I think I really should leave business… but I’m not sure what else out there I can do. I feel like somehow I have a bit of intelligence inside my crazy distracted head but that’s worthless with all of this anxiety and inability to execute. To whom this may concern, please don’t hire me, I’m a hot mess.

 

Understanding the Roth IRA Conversion Pro Rata Rule & a Great Trick!

IRAs come in two flavors — traditional and roth. Both have income and contribution limits per year in order to take advantage of their benefits. Roth IRAs require that you pay taxes up front on any income you put into them, but then — this is where the magic happens — your interest grows tax free forever. You can take the total amount out at retirement and not pay any tax on it! You can also pass the total amount onto your heirs without them having to pay taxes. It’s a pretty spectacular deal, especially when you’re in a very low income bracket so you aren’t paying much in the form of taxes up front.

Traditional IRAs, on the other hand, are available for low income earners, often who do not have access to a 401k. With the traditional IRA one would put their money in and not pay taxes on this money up front, but then when they retire and take the money out it’s taxed as income for that year (theoretically your tax bracket would be lower in retirement, but this may not be true.)

Up until recently if you made too much money for an IRA you really couldn’t do anything other than invest in taxable accounts. Traditional IRAs were available but you weren’t able to take the tax deduction up front or when you took the money out in retirement, so the only benefit there was the years of dividends not being taxed and reinvested into your investments. It’s not even that great of a deal because then you’re paying income tax rates on your dividend yields versus dividend rates. Generally traditional IRAs for high income earners are useless.

However for tax benefits, today a higher income earner can do a little trick called a Roth IRA conversion. This occurs when the individual puts up to the year’s limit in a traditional IRA ($5500 currently)  and then immediately converts that to a Roth IRA. Because the individual put in post-tax money and the conversion happened right away, no taxes are owed and basically that higher income individual has gone through a loophole to invest in a Roth. For younger folks in their 20s and 30s the ongoing compound interest and ultimate ability to take out the investments tax free might be better (do your own math to figure out if this makes sense for you.)

The trouble comes when you have multiple IRA accounts. Most often this is from 401k rollovers when you leave a job. A 401k is pre-tax money so if you want to roll that over to a Roth you will have to pay tax on not only the interest earned but also the entire amount of basis. That can be an expensive proposition!

That is where the “pro rata” rule comes in. Understanding how this works is a bit challenging. I’ll try to explain this in simple terms based on my research so it’s accurate and makes sense.

How the Roth IRA Conversion Pro Rata Rule works

At the end of the tax year (not the day you do the conversion) the government will look at all your non-Roth IRA funds to determine how much tax you need to pay. They aren’t nice enough to let you get away without paying taxes on a conversion when there is tax money they could make. Instead they require you to pay pro rata on the amount you convert.

Let’s take an example very near and dear to my heart (so I can finally understand what sort of tax liability I’m looking at here.)

I would like to convert my current IRAs to Roth IRAs before rolling over my high-fee 401k (*or I need to get a new job with a better 401k as I can rollover my 401k to that so I can continue to do Roth conversions year after year.)

Vanguard IRA (from rollover 401k)

$26,987 (all pre-tax)

Sharebuilder IRA

$14,027.47 ($10k is post-tax, $4027.47 is pre-tax)

Due to the pro-rata rule it is not possible for me to rollover just the $10k of post-tax money today.

If I rollover the $10,000 of post-tax money, the pro-rata rule would take my total amount of IRA money $41014.47 to determine how much I actually owe.

To figure this out for yourself, follow the steps listed here.

1. Total up all of your IRAs (non Roth): $41,014.47
2. Total up all of your after-tax dollars in IRAs: $10000
3. Calculate your % of after-tax dollars: 24.38%
4. Determine the taxable amount of your distribution: ($20,000 distributed = $4876 tax free, $15124 taxable(!))
5. Exception for rollovers to a company plan: n/a

In order to take out the full $10,000 of post-tax money, I’d have to convert the entire amount ($41,014.47) and pay taxes on $31,014.47.

Is either scenario worth it? Let’s play this out to the conclusions…

Assumptions:

  • 35 years growth
  • .05% average interest rate
  • 30% federal and 10% state tax in retirement (40% taxes)

1. I do nothing, and leave my $41,014.47 to grow for 35 years until I turn 65 and retire.

  • $226,235 pre-tax
  • Total Value = $135,741 (@40% tax bracket)
  • ((15% tax bracket, in 0% income tax state, low annual withdrawals, would = $192,229))

2. I convert 25% of my IRA plans today

  • Pay tax on $15,124 at today’s tax rates (28% fed, 10% state – $5747.12 in tax)
  • Have $14252.88 remaining to grow tax free forever
  • $78,619 post-tax on conversion
  • + $116068 * 40% tax = $69640
  • Total Value = $148,260

3. Just for kicks, I convert 100% of my IRA today, paying tax on $31,014.47

  • Pay tax on $31,014.47 at 38% rate — $11785.50 in tax paid today
  • $29228.97 remaining to growth tax free forever
  • Total Value = $161,227

4. Additional test thrown in — low income year, 25% tax today

  • Pay tax on $31,014.47 at 25% rate — $7753.61
  • $33260.86 remaining to grow tax free forever
  • Total Value = $183,467

What do these calculations teach us?

  • The value of a Roth Conversion (if you have both deductible and non-deductible IRAs) is determined largely by your current tax rate and your expected tax rate in retirement (oh fun, guessing games.) Apparently people tend to overestimate how much taxes they will pay in retirement (i.e. maybe my 40% estimate is too high. You think?)
  • The conversion for an account that looks like mine MAY make sense if I can hold it for 35 years or longer. But it’s still not a sure bet. (I calculated everything at a 5% return YoY to be conservative.)

When Does the Roth Conversion Not Make Sense?

I haven’t done all of the calculations, but I assume at some age the roth conversions do not make sense UNLESS you have no taxable money to deal with. If you don’t have many years for the interest to compound and make up for what you paid in tax, then you’ve just paid a lot of money to the government to make less in the end. That’s what they want you to do. That’s what a lot of people who aren’t running the numbers are going to do thanks to this new rule.

When Does the Roth Conversion Make a Lot of Sense?

If you have one year of your life where you happen to not be making a lot of money — maybe it’s a year you went to school or took time off to have a kid — you will be able to do the conversion and pay your income tax on that conversion. If you are single and have no income, your first $36,900 of taxable conversion (or mix of conversion amount and income) is taxed at just 15% (the first $9600 at 10%.) This changes the numbers quite a bit! So say you want to convert $20k with $10k of it non taxable and $10k taxable. You pay $1k on the first $9600 and 15% on the $400 ($60) so you’d pay just $1060 to convert your $20k, leaving you with $18940 to grow tax free forever — if you live in a no income tax state, anyway (most states will charge you income tax so factor this into your calculations as well.) That’s still a pretty great deal, but you’re also losing all of the money you could have made that year and put into your investment accounts, so it’s not worth it to do this unless you are already planning to take the time off. (And if you really want to be tricky move to a state with no income tax and don’t work for a year!)

(Note, married couples can stay in the 15% tax bracket up to $73,800 income including the taxable IRA conversion amount.)

The Best Trick I’ve Found (That is legal, at least for now)

If you have a work-sponsored 401k, find out if it allows you to “reverse rollover” pre-tax IRA investments. If you can do this, take all of your pre-tax IRA investments and move them into your 401k. You will have to keep those investments in the 401k until you change jobs again (and at least for a year) so if the 401k offers crappy, high-fee, high-load mutual funds you’re going to want to run all the numbers in your specific situation. That said, if you have a decent 401k and can rollover your funds into it — you can roll them over and then only pay taxes on  your interest on any post-tax IRA contributions for the Roth conversion. This means that you can save a lot of money and do a few years of IRA conversions to grow your roth (esp if you are a high income earner and are already maxing out your 401k.)

Now that I’ve figured out this is do-able, I’ve immediately decided to rollover my existing crap high-fee 401k into my Vanguard low-fee, no-load Admiral funds IRA account. I’ll let those babies grow until I have a nice 401k at a future job (knock on wood) that lets me roll over my IRA for a while, and I’ll convert at least the $14k of traditional IRA investment plus probably another $5.5k for the current plan year. I will have to run the numbers myself at the time but I think this is probably the best idea.

Even if that doesn’t work out, the actual growth on my pre-tax accounts will still be beneficial and perhaps my actual tax rate in retirement won’t be quite as high as I think it will be. It still might be best just to leave these accounts alone and continue putting $5.5k in a Roth every year that I’m eligible, whether I’m in school and working part-time or unemployed and unexpectedly coming in within the income limits to contribute to a Roth.

Have anything else to add? Think I don’t explain this well?

Leave a comment with your tips and ideas for when a Roth IRA conversion makes sense, and when it doesn’t. Did I get something wrong here? Let me know. Thanks!

 

Phases of Unemployment Mourning

Much like one goes through phases of mourning, there are phases of unemployment. And they’re quite similar. I’m experiencing them right now.

1. Shock

When you lose your job, even if you expected it coming to some extent, the first phase you go through will be shock. You will never be ready to hear the words that you weren’t quite cut out for the position, or that you’re being replaced, or a thousand other reasons why it’s time that you and the company are no longer one. You won’t know what to say or who to say it to. You’ll be in complete and utter shock.

2. Horror

Then reality will sink in and you’ll enter the horror phase. What are you going to do? What will you tell your friends and family? How will you survive on unemployment pay? How will you get another job now that you have this dirty little stamp on your record? Who will want you? Your entire world has been shaken up and you have to figure out what you’re going to do tomorrow, the next day, the day after that, and so on.

3. Excitement

For a short while then you may experience a brief period of excitement. You have so much time on your hands now to do all those things you’ve been putting off! Clean the house. Read a book. Redesign your blog. Go for a run in the middle of the day. See your friends who have young kids and are stay-at-home moms for the time being. You have all the time in the world. And maybe this will work out. Maybe this all happened for a reason.

4. Depression

This is the period you sink into once the excitement phase ends. It could happen very quickly or it could take a while to get here, but as long as you haven’t landed another position in a few weeks, you’ll probably get to this phase. This is the phase where you end up in bed all day, or sitting on the couch flipping through bad daytime television. You’ll watch one too many Price is Right episodes (thank god I don’t have cable.) You’ll apply for hundreds of jobs and go on a few interviews but nothing will pan out. You’ll feel utterly hopeless.

5. Renewal

Maybe suddenly you have a job offer or a few really good potentials. You feel like you’re finally on the right track. The renewal period is the time when you are getting prepared for the next phase of your life. You’re ready to say goodbye to days of applying to jobs and waiting for the world around you to end. You’ll feel inspired again and thrilled to return to the work world!

Should I Rollover My 401k? The Cons

Common financial sense says that you should rollover your 401k into an IRA account as soon as you leave a job. Besides keeping all your financial accounts in one place (so you don’t have a bunch of orphan 401k accounts floating around), fees on typical 401k accounts are painfully expensive (remember in our last post we discussed how after 30 years on a $100k investment every .10 increase in percentage points will cost over $50,000 in fees.)

However, there are some lesser known reasons why you should leave your 401k where it is, at least for the short term.

1. Penalty-Free Retirement at 55 vs 59

The government isn’t ok with you withdrawing funds from your IRA before 59 1/2, but for some reason you’re allowed to withdraw from your 401k at 55. This doesn’t make any rational sense but government rules never do (source)

2. Roth Conversions Get Much More Expensive After a Rollover

A few years ago the government made another rule that doesn’t make any sense — you’re not allowed to contribute to a Roth IRA (i.e. after-tax money that you can take out for free in retirement and that you can pass on to heirs tax free) BUT you are allowed to put money in a traditional IRA, post-tax, and immediately convert this to a Roth IRA tax free. (Did I mention the government makes NO FREAKING SENSE?) However, if you have additional IRA funds, especially ones you haven’t paid tax on yet, you have to pay a pro-rata fee for the percentage you want to convert. I’m going to write a separate post about this pro-rata rule because it’s so complicated I don’t even understand it yet, but basically once you have more funds in traditional IRAs you’re liable for tax on part of them as well if you want to do a Roth conversion, and this can be very expensive and eat into your future earnings (source)

3. Better Creditor Protection

In yet another rule that makes no sense (notice a trend here) 401ks are protected more than IRAs in the case of lawsuits and such. How screwed you are in the case of a personal liability lawsuit depends on what state you live in. For example, New Hampshire and New Mexico have no protection against creditors for your IRA, whereas your 401k can’t be touched. (Say it with me now – this doesn’t make any freaking sense!) In some states, such as Texas, Arizona and Washington, your IRA is treated with the same protection of a 401k , so this rule wouldn’t apply to you (source)

4. Fees Can Be Lower (Though This is Unlikely)

Often the 401k offers access to different funds then you would have access to as an average investor. A lot of articles argue that you could be better off staying with a 401k funds… but make sure to look into the fees of these funds. Mutual funds can cost 1.4% per year or .80%, but those are still high fees compared to a basic Vanguard fund at .10% to .25%. Ask yourself if you really think this fund will perform better than an index fund (hint – it probably won’t, or at least not enough to make up for lost earnings due to fees) (source)

Can you think of any other reasons to keep your 401k at your old employer? #2 and #3 seem to be the best arguments. Tomorrow I’ll share a post that further explains Roth conversions – because they confuse the heck out of me so I need to do some better research, and I’ll share my findings with all of you!

Vanguard Admiral Funds: Rebalancing for Lower Fees

One of the things I realized recently that I’ve been spending more than I have to on fees inside of my IRA accounts. While Vanguard funds are low fee to begin with, did you know that Admiral funds (which require $10k minimum investment per fund vs $3k) still have significantly lower fees?

Fees can significantly eat away at your investments, especially over time in your retirement accounts. I know for a fact my old 401k that I haven’t rolled over is wasting money with some of its funds at .90% fees or higher! I’m holding off on rolling that over in the case I will do a Roth IRA conversion if/when I go to grad school on about $100k of other IRA investments, but for all my other accounts I want to be as fee-efficient as possible.

Expense Fees Add Up Fast!

Here’s a little experiment… (try your own out in this expense ratio calculator) say I invest 100,000 today and plan to keep that money invested for 30 years. I earn an average of 10% each of those 30 years (woohoo.)

If my fund has a low .10% expense ratio then I’ll see a 2.96% reduction of my future value due to fees (costing $51,596.) This sounds like a lot, but it really isn’t compared to the cost of most funds.

Say you have a still relatively low-cost fund at .20% expense ratio. You are then spending 5.83% of your future value on fees ($101,716!)

Some funds have high expense ratios too. If you are investing in a fund that has an expense ratio of .80%, 21.51% of your future value is gone thanks to this fee ($373645.77!!) So you see how a little expense ratio can quickly add up.

After reading a bit more about taxes and what funds to hold in Roth IRAs vs traditional IRAs I decided to shift around funds in my Vanguard accounts. I also changed things up over at Sharebuilder because my $10500 basis Roth over there is significantly underperforming, but I’ll cover those changes in another post.

Also, I read that high-dividend funds make sense in your Roth IRA but not in your traditional IRA. Why?  Because dividends have two purposes — to provide you income today at low(ish) capital gains tax rates, or to compound over time in your investments and to be taken out tax free upon retirement (in a Roth.) Going high dividend in a traditional IRA is silly because you have to pay income tax on it when you retire and take it out — i.e. those proceeds would be cheaper today in a taxable account!

Until today, my Vanguard IRA accounts looked like this:

Traditional IRA

VDAIX / .20%
VHDYX / .19%
VGSIX / .24%
VTTSX / .18%
VGTSX / .22%

Roth IRA

VFIFX / .18%
VTSAX / .05%

Updates to my Portfolio

While there was nothing wrong with this breakdown, per se, I had high-dividend REIT and dividend growth funds in my traditional IRA while I had index growth funds in my Roth. I also had certain funds split between my Roth and Traditional IRA where because I had $10k split between two accounts I couldn’t qualify for the lower admiral fund rates.

Luckily at Vanguard it’s free to trade your funds inside your account, so rebalancing is easy (unlike at Sharebuilder where I’m wasting tons of money trading and will eventually give in and just move my “fun money” to Vanguard.)

I made quite a few (free) trades at Vanguard to fix my portfolio. Here is what I have now, which, as you can see is greatly simplified:

Traditional IRA

VIGAX / growth index fund admiral shares .09% expense
VTIAX / admiral version of VGTSX – .14% expense vs .22%

Roth IRA

VDADZ / dividend appreciation index fund — .10% expense ratio
VGSLX / admiral REIT fund — .10% expense to .24% of VGSIX

I also killed off all of my “target retirement date” funds because I’ve read they are too conservative and at my ripe young age of 30 I want to be aggressive but not stupid (working on the not stupid part.)

Why keep my Sharebuilder account open at all?

Good question! Mostly I keep it open so I can trade precious metals in my Roth IRA (i.e. GLD) since they are taxed at a collectible rate (high tax) unless they’re in an IRA, and I can’t buy gold or silver in my Vanguard fund. I also have some specific REITs which I like to watch to learn more about REITs because they are interesting — especially since I do not actually own any tangible real estate. More on that later.