Anyone investing their 401k?
- Thread starter Big E
- Start date
That's an overly simplistic analysis to say the least.
401k's > Roth IRA if your employer is contributing or matching funds.
THe most basic plan, and usually best for the average and modest investor, is to contribute to your 401k up to the limit that your employer matches so you are getting the "free" money. Any additional investments that you want to make you then contribute to an IRA.
401k's > Roth IRA if your employer is contributing or matching funds.
THe most basic plan, and usually best for the average and modest investor, is to contribute to your 401k up to the limit that your employer matches so you are getting the "free" money. Any additional investments that you want to make you then contribute to an IRA.
^^^ I'm aware I didn't give a lot of data supporting my statement but I've done research before and theirs a good 10 reason to invest in anything but a 401K plan however dont have any of the info at the moment. All I'm saying is everyone needs to do research when it comes to investing.
But hey, investing in a 401K is better than nothing or in a savings account.
But hey, investing in a 401K is better than nothing or in a savings account.
My employer matches 100% up to 6% of Salary. As long as my investment doesn't drop 50% i am still making money.
People need to research the 401K funds available in their plans. Understanding the breakdown of each fund is important.
I've known for a while market would be in for a long shit over the next 3 years until about 2011. Last summer/fall when the market peaked i re-alllocated most of my balance into bonds and cash investments to weather some of the storm. I kept money in some foriegn funds and funds highly invested in metals. While these investments may not gain much, they won't get pounded like the blue chips and other stocks.
Right now is the calm before the storm. Re-allocate your shit to safer investments soon.
People need to research the 401K funds available in their plans. Understanding the breakdown of each fund is important.
I've known for a while market would be in for a long shit over the next 3 years until about 2011. Last summer/fall when the market peaked i re-alllocated most of my balance into bonds and cash investments to weather some of the storm. I kept money in some foriegn funds and funds highly invested in metals. While these investments may not gain much, they won't get pounded like the blue chips and other stocks.
Right now is the calm before the storm. Re-allocate your shit to safer investments soon.
Should I spend my nest egg for girls I fall in love with on myspace? It'll never die capm savem
The key is to have a diverse investments. 401k are good free money if a company matches. Mutual funds that pay divedents sp? And bonds. They'll balance eachother out, some with steady growth, others with explosive up and downs
I'd say if you have nothing, and not a career... Start mutual funds, you can afford the risk, and as you start to get older dump all your money in 401k that matches
The key is to have a diverse investments. 401k are good free money if a company matches. Mutual funds that pay divedents sp? And bonds. They'll balance eachother out, some with steady growth, others with explosive up and downs
I'd say if you have nothing, and not a career... Start mutual funds, you can afford the risk, and as you start to get older dump all your money in 401k that matches
The Key 401(k) Pitfalls to Avoid
by Suze Orman
It's alarming how off-track so many people are with managing their 401(k). From missing out on company matches to overloading on company stock, they're at high risk of never being able to reach a comfortable retirement because of misguided choices.
This is more common than you think -- surveys that track 401(k) participant behavior consistently show that far too many continue to make the wrong moves. So consider this my personal GPS navigation system for getting you to your retirement destination on time and in good shape.
Don't Say No to Free Money
If your employer coughs up a matching contribution to your 401(k) account, it's a mistake not getting every penny of the free money you're eligible for. And apparently, a good number of people make that mistake. According to Hewitt Associates, 22 percent of 401(k) participants eligible for a company match don't contribute enough to get the maximum amount.
Many companies offer a 50 percent match on your contributions up to a certain limit -- for example, if you contribute $3,000 out of your own salary, your employer will kick in a 50 percent match, which is an amazing $1,500. If I offered you an immediate 50 percent return on an investment, you'd grab it, so don't turn down this offer from your employer.
The only caveat is if you expect to leave your current job in the next year -- most employer matches vest over a few years, meaning the money is deposited in your account on Day 1, but if you leave the company, you may not be entitled to take the company match with you. (Your contribution is always 100 percent yours.) For example, with many plans you might have 25 percent of your match vest each year, so after one year, just 25 percent of the match is yours to keep, and after four years you own it all outright.
Pair Your 401(k) With a Roth IRA
While it's hard to beat the company match on a 401(k), this shouldn't be your only retirement account. If you're eligible to invest in a Roth IRA, it's a perfect companion to a plan with a match.
If you're single and have adjusted gross income (AGI) under $110,000, or you're married and file a joint return with AGI below $160,000, you're eligible to invest in a Roth. The maximum contribution is $4,000 this year, or $5,000 if you're at least 50 years old.
While you won't get any tax break on the money you invest in a Roth, the contribution grows tax-free, and assuming you follow some simple rules, all of the money will be tax-free when you retire and withdraw it. That's a lot different if you make withdrawals from your 401(k): Every penny will be taxed at your regular income tax rate -- you don't even get to take advantage of the typically lower long-term capital-gains rates.
So if you can Roth, do it! Ideally you can fund a 401(k) to the max as well as invest in a Roth. But if that's too much of a financial challenge right now, use this strategy: If your employer offers a matching contribution to your 401(k), make sure you invest just enough in the plan to qualify for the maximum match, but not a penny more. That should leave you with some extra money to fund the Roth.
And if your employer doesn't even offer a 401(k) match, I would actually make the Roth the first priority. Once you get the Roth funded, you can go back and contribute to your company 401(k).
Sell Your Company Stock
The merits of diversification -- spreading investments prudently among different stocks, bonds, and funds -- are widely understood. But another scary habit reported by the Hewitt folks is that among 401(k) participants who have access to company stock in their plan, the average amount invested in such shares is an insane 25 percent. That's one-quarter of your future retirement riding on one investment, when study after study shows that diversification -- not letting any single stock account for more than 5 to 10 percent of your assets -- offers a far better risk/reward return.
Your company pulling an Enron isn't the only concern here. Your retirement portfolio can take a huge hit if your employer runs into any type of challenge: A lousy product launch, increased competition (domestic and global), an ill-conceived merger or acquisition, or a management change that pulls the company off course. It can happen to any company at any time.
Until recently some workers may have been forced to own company stock -- some employers matched contributions in company stock and didn't allow staffers to sell it and reallocate the money among other plan offerings. But the Enron debacle has made many firms loosen their rules. If you can choose not to receive the match in company stock, or if you at least have the ability to sell the stock quickly once it's in your account, do it. Company stock should never be more than 5 percent to 10 percent of your assets.
And if your employer continues to handcuff you in company stock, make a huge ruckus. Your 401(k) is run for the sole benefit of the participants, and forcing you to load up on company stock is not in your best interests. Tell your company you think they're dropping the ball on their fiduciary responsibility in running the plan. That phrase just might get their attention.
Don't Take the Money and Run
When you leave a company -- because you retire or switch jobs -- you're no longer required to keep your money invested in your old employer's 401(k) plan. You have a bunch of options:
Options 1 and 2 can be O.K. if you're absolutely sure the investing options offered in the plans are the best you can get. But when you stick to an employer's plan, you're typically restricted to the small lineup of funds offered within that plan. If those aren't the best-performing low-cost funds, why stick around?
Option 3 is a ticket for retirement doom. But it seems that almost half of job switchers choose to take the money as cash rather than keep it invested for retirement. It's most tempting when there's "just" a few thousand dollars in the account, but that's actually a huge amount.
Let's say you're 25 years old and have $2,000 invested in your 401(k) when you decide to get a new job. If you cash out that $2,000, you'll pay income tax on it as well as a 10 percent early withdrawal penalty. If you're in the 25-percent tax bracket, that $2,000 just got shaved down to $1,500.
That seems like a big waste to me. Consider what $2,000 today can grow to by the time you're 65. Assuming the money compounds at an average annual rate of 8 percent, you'll have a nice egg in your retirement nest worth more than $43,000.
The far smarter move is Option 4: Do a 401(k) rollover where you move your money directly from your old 401(k) into an IRA at any fund company or discount brokerage. When you fill out the paperwork at the company, you'll be moving the money into -- it's a simple application and the firms are eager to help you -- make sure you opt for the "direct rollover" option. This means that your ex-employer will send your 401(k) money directly to the firm where you have set up your new IRA. The direct route ensures you sidestep a nasty IRS trap that can lead to a hefty tax bill.
Here's an example: Let's say you decide to rollover the $10,000 in your 401(k), but moving the funds directly from the 401(k) to your new IRA account, you tell your old employer to send you the money because you haven't decided where to open the new account. You've just entered the danger zone, my friend.
First, your ex-employer will automatically withhold 20 percent for tax. So your $10,000 is just $8,000. But according to IRS rules, you must invest a full $10,000 into an IRA to avoid any extra tax. So you'll need to come up with the other $2,000 out of your own pocket -- and fast. The rule is that you have to move that old 401(k) money in an IRA in just 60 days -- otherwise, you'll have to pay income tax on the entire amount and a 10 percent penalty if you're under 55 that year. (Yes, 55, not 59 1/2 -- I'll explain that twist in a minute.)
You can avoid all of this craziness if you simply instruct your IRA provider to work with your 401(k) plan to have the money moved through a direct rollover. You never touch the money so there's no chance of a tax bill.
Now about that 55 rule. If you're at least 55-years old when you leave your employer -- voluntarily or not -- there are different withdrawal rules. Typically, you'd be hit with a 10 percent early-withdrawal penalty if you took money out of your 401(k) before turning 59 1/2. But a quirk in the law says if you leave your company after turning 55 -- but before you're 59 1/2 -- you can withdraw money and not be hit with the 10 percent penalty.
While it's always best to leave the money untouched for as long as possible to take advantage of compounding growth, this quirk can be a big help if you're out of work earlier than you anticipate and have some cash-flow issues. You could withdraw whatever you need to live on without paying the penalty and then rollover the rest of the money into an IRA. But even though you'll be immune from the 10 percent early-withdrawal penalty, you'll still need to pay income tax on all your withdrawals. There's no way to get around that rule.
by Suze Orman
It's alarming how off-track so many people are with managing their 401(k). From missing out on company matches to overloading on company stock, they're at high risk of never being able to reach a comfortable retirement because of misguided choices.
This is more common than you think -- surveys that track 401(k) participant behavior consistently show that far too many continue to make the wrong moves. So consider this my personal GPS navigation system for getting you to your retirement destination on time and in good shape.
Don't Say No to Free Money
If your employer coughs up a matching contribution to your 401(k) account, it's a mistake not getting every penny of the free money you're eligible for. And apparently, a good number of people make that mistake. According to Hewitt Associates, 22 percent of 401(k) participants eligible for a company match don't contribute enough to get the maximum amount.
Many companies offer a 50 percent match on your contributions up to a certain limit -- for example, if you contribute $3,000 out of your own salary, your employer will kick in a 50 percent match, which is an amazing $1,500. If I offered you an immediate 50 percent return on an investment, you'd grab it, so don't turn down this offer from your employer.
The only caveat is if you expect to leave your current job in the next year -- most employer matches vest over a few years, meaning the money is deposited in your account on Day 1, but if you leave the company, you may not be entitled to take the company match with you. (Your contribution is always 100 percent yours.) For example, with many plans you might have 25 percent of your match vest each year, so after one year, just 25 percent of the match is yours to keep, and after four years you own it all outright.
Pair Your 401(k) With a Roth IRA
While it's hard to beat the company match on a 401(k), this shouldn't be your only retirement account. If you're eligible to invest in a Roth IRA, it's a perfect companion to a plan with a match.
If you're single and have adjusted gross income (AGI) under $110,000, or you're married and file a joint return with AGI below $160,000, you're eligible to invest in a Roth. The maximum contribution is $4,000 this year, or $5,000 if you're at least 50 years old.
While you won't get any tax break on the money you invest in a Roth, the contribution grows tax-free, and assuming you follow some simple rules, all of the money will be tax-free when you retire and withdraw it. That's a lot different if you make withdrawals from your 401(k): Every penny will be taxed at your regular income tax rate -- you don't even get to take advantage of the typically lower long-term capital-gains rates.
So if you can Roth, do it! Ideally you can fund a 401(k) to the max as well as invest in a Roth. But if that's too much of a financial challenge right now, use this strategy: If your employer offers a matching contribution to your 401(k), make sure you invest just enough in the plan to qualify for the maximum match, but not a penny more. That should leave you with some extra money to fund the Roth.
And if your employer doesn't even offer a 401(k) match, I would actually make the Roth the first priority. Once you get the Roth funded, you can go back and contribute to your company 401(k).
Sell Your Company Stock
The merits of diversification -- spreading investments prudently among different stocks, bonds, and funds -- are widely understood. But another scary habit reported by the Hewitt folks is that among 401(k) participants who have access to company stock in their plan, the average amount invested in such shares is an insane 25 percent. That's one-quarter of your future retirement riding on one investment, when study after study shows that diversification -- not letting any single stock account for more than 5 to 10 percent of your assets -- offers a far better risk/reward return.
Your company pulling an Enron isn't the only concern here. Your retirement portfolio can take a huge hit if your employer runs into any type of challenge: A lousy product launch, increased competition (domestic and global), an ill-conceived merger or acquisition, or a management change that pulls the company off course. It can happen to any company at any time.
Until recently some workers may have been forced to own company stock -- some employers matched contributions in company stock and didn't allow staffers to sell it and reallocate the money among other plan offerings. But the Enron debacle has made many firms loosen their rules. If you can choose not to receive the match in company stock, or if you at least have the ability to sell the stock quickly once it's in your account, do it. Company stock should never be more than 5 percent to 10 percent of your assets.
And if your employer continues to handcuff you in company stock, make a huge ruckus. Your 401(k) is run for the sole benefit of the participants, and forcing you to load up on company stock is not in your best interests. Tell your company you think they're dropping the ball on their fiduciary responsibility in running the plan. That phrase just might get their attention.
Don't Take the Money and Run
When you leave a company -- because you retire or switch jobs -- you're no longer required to keep your money invested in your old employer's 401(k) plan. You have a bunch of options:
- 1. Keep the money invested in your old employer's plan. (This is allowed if you have at least $5,000 in assets.)
- 2. Move the money to your new employer's plan (not all plans allow this).
- 3. Cash out of the account.
- 4. Do a direct rollover from your old 401(k) into an IRA at a fund company or brokerage where you have complete control of what you invest in.
Options 1 and 2 can be O.K. if you're absolutely sure the investing options offered in the plans are the best you can get. But when you stick to an employer's plan, you're typically restricted to the small lineup of funds offered within that plan. If those aren't the best-performing low-cost funds, why stick around?
Option 3 is a ticket for retirement doom. But it seems that almost half of job switchers choose to take the money as cash rather than keep it invested for retirement. It's most tempting when there's "just" a few thousand dollars in the account, but that's actually a huge amount.
Let's say you're 25 years old and have $2,000 invested in your 401(k) when you decide to get a new job. If you cash out that $2,000, you'll pay income tax on it as well as a 10 percent early withdrawal penalty. If you're in the 25-percent tax bracket, that $2,000 just got shaved down to $1,500.
That seems like a big waste to me. Consider what $2,000 today can grow to by the time you're 65. Assuming the money compounds at an average annual rate of 8 percent, you'll have a nice egg in your retirement nest worth more than $43,000.
The far smarter move is Option 4: Do a 401(k) rollover where you move your money directly from your old 401(k) into an IRA at any fund company or discount brokerage. When you fill out the paperwork at the company, you'll be moving the money into -- it's a simple application and the firms are eager to help you -- make sure you opt for the "direct rollover" option. This means that your ex-employer will send your 401(k) money directly to the firm where you have set up your new IRA. The direct route ensures you sidestep a nasty IRS trap that can lead to a hefty tax bill.
Here's an example: Let's say you decide to rollover the $10,000 in your 401(k), but moving the funds directly from the 401(k) to your new IRA account, you tell your old employer to send you the money because you haven't decided where to open the new account. You've just entered the danger zone, my friend.
First, your ex-employer will automatically withhold 20 percent for tax. So your $10,000 is just $8,000. But according to IRS rules, you must invest a full $10,000 into an IRA to avoid any extra tax. So you'll need to come up with the other $2,000 out of your own pocket -- and fast. The rule is that you have to move that old 401(k) money in an IRA in just 60 days -- otherwise, you'll have to pay income tax on the entire amount and a 10 percent penalty if you're under 55 that year. (Yes, 55, not 59 1/2 -- I'll explain that twist in a minute.)
You can avoid all of this craziness if you simply instruct your IRA provider to work with your 401(k) plan to have the money moved through a direct rollover. You never touch the money so there's no chance of a tax bill.
Now about that 55 rule. If you're at least 55-years old when you leave your employer -- voluntarily or not -- there are different withdrawal rules. Typically, you'd be hit with a 10 percent early-withdrawal penalty if you took money out of your 401(k) before turning 59 1/2. But a quirk in the law says if you leave your company after turning 55 -- but before you're 59 1/2 -- you can withdraw money and not be hit with the 10 percent penalty.
While it's always best to leave the money untouched for as long as possible to take advantage of compounding growth, this quirk can be a big help if you're out of work earlier than you anticipate and have some cash-flow issues. You could withdraw whatever you need to live on without paying the penalty and then rollover the rest of the money into an IRA. But even though you'll be immune from the 10 percent early-withdrawal penalty, you'll still need to pay income tax on all your withdrawals. There's no way to get around that rule.
not so fast
In general, withdrawals from a 401(k) retirement-savings plan are subject to income tax plus a 10-percent “early withdrawal” penalty.
There are some exceptions to the penalty, but the list is short.
For example, you may escape the penalty if you have reached age 59 1/2 , or if you’ve reached age 55 and have “separated from service” (in other words, if you’ve left your job –– maybe to work some place else or to retire).
But there’s no exception to the penalty for education expenses.
A few other points:
1. Traditional IRAs. Contributions to these accounts are tax-deductible. Therefore, pre-retirement (age 59 and 1/2) withdrawals are subject to taxation (since there is no basis in the contribution). Additionally, there is a 10% penalty on the entire distribution.
Exceptions to the 10% penalty (though not the tax) on early withdrawals are:
• Unreimbursed medical expenses totaling more than 7.5% of AGI
• Distribution not more than medical insurance and you are receiving unemployment
• Disability
• Beneficiaries of the deceased IRA owner
• Distribution received in the form of an annuity
• Distribution not more than qualified higher education expenses
• $10,000 used to buy, build, or rebuild a first home
• Active duty military reservists called up for more than 180 days
• Distribution due to IRS levy
2. Roth IRAs. Contributions to these accounts are after-tax. Therefore, pre-retirement (age 59 and 1/2) earnings are subject to taxation (not the amount contributed, since that is after-tax). Additionally, there is a 10% penalty on these withdrawn earnings.
Exceptions to the 10% penalty are the same as those listed above for Traditional IRAs.
Any basis in Roth conversions takes 5 years to accumulate for the purposes of the penalty and taxes.
3. Defined Contribution Pensions (401(k)s, SEP-IRAs, etc.) Contributions to these accounts are normally pre-tax (with the exception of Roth 401(k) deferrals). Therefore, the taxablity of the distribution is similar to that of Traditional IRAs above. There is also a 10% penalty for pre-retirement distributions.
Exceptions to this 10% include:
• Death
• Disability
• Substantially equal periodic payments
• Made after separation from service if over age 55
• Made under a qualfied domestic relations order
• For medical expenses over 7.5% of AGI
• Reducing excess deferrals and employer contributions
• IRS levy on the plan
• Distributions to first responders
In general, withdrawals from a 401(k) retirement-savings plan are subject to income tax plus a 10-percent “early withdrawal” penalty.
There are some exceptions to the penalty, but the list is short.
For example, you may escape the penalty if you have reached age 59 1/2 , or if you’ve reached age 55 and have “separated from service” (in other words, if you’ve left your job –– maybe to work some place else or to retire).
But there’s no exception to the penalty for education expenses.
A few other points:
- [*]If you withdraw money from an IRA to pay for certain higher-education expenses, you may be able to escape the 10-percent penalty. For this reason, some people arrange to have their 401(k) balances transferred directly to an IRA (through a trustee-to-trustee transfer), then make a withdrawal from the IRA for higher education expenses.
1. Traditional IRAs. Contributions to these accounts are tax-deductible. Therefore, pre-retirement (age 59 and 1/2) withdrawals are subject to taxation (since there is no basis in the contribution). Additionally, there is a 10% penalty on the entire distribution.
Exceptions to the 10% penalty (though not the tax) on early withdrawals are:
• Unreimbursed medical expenses totaling more than 7.5% of AGI
• Distribution not more than medical insurance and you are receiving unemployment
• Disability
• Beneficiaries of the deceased IRA owner
• Distribution received in the form of an annuity
• Distribution not more than qualified higher education expenses
• $10,000 used to buy, build, or rebuild a first home
• Active duty military reservists called up for more than 180 days
• Distribution due to IRS levy
2. Roth IRAs. Contributions to these accounts are after-tax. Therefore, pre-retirement (age 59 and 1/2) earnings are subject to taxation (not the amount contributed, since that is after-tax). Additionally, there is a 10% penalty on these withdrawn earnings.
Exceptions to the 10% penalty are the same as those listed above for Traditional IRAs.
Any basis in Roth conversions takes 5 years to accumulate for the purposes of the penalty and taxes.
3. Defined Contribution Pensions (401(k)s, SEP-IRAs, etc.) Contributions to these accounts are normally pre-tax (with the exception of Roth 401(k) deferrals). Therefore, the taxablity of the distribution is similar to that of Traditional IRAs above. There is also a 10% penalty for pre-retirement distributions.
Exceptions to this 10% include:
• Death
• Disability
• Substantially equal periodic payments
• Made after separation from service if over age 55
• Made under a qualfied domestic relations order
• For medical expenses over 7.5% of AGI
• Reducing excess deferrals and employer contributions
• IRS levy on the plan
• Distributions to first responders
