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401K Questions


RVAbrendan

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Hey ES -

I know we have quite a few financial experts on the website & I'm in need of a little advice. I'm fairly clueless when it comes to 401k's, here's the deal:
 
Created my first 401k with a previous employer. I switched jobs a few months back and the 401k plan currently has about $5000 - I know, not much, but it's only about 2 years old.
 
My current employer doesn't offer 401K (it's a small creative agency...I don't plan on being here very long term). So, what do I do? From the scant research I've done, I have 3 options:
 
1) Keep the money in the old 401k account
 
2) Transfer to an IRA (I've heard not to go Roth...but I'm kind of clueless here too)
 
3) Cash it out (What kind of penalty would I incur?)
 
To be honest, I could use the money to pay off a little debt that would help put me in better financial shape in the (relative) short term. I've read articles stating it's not a good idea to use your 401k as a piggybank, but I figure since it's not much cash, it wouldn't have much of an effect.
 

What do you all recommend I do? Any help is greatly appreciated! (Let me know if you want to see my current investments with my 401k).

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Are you contributing to an IRA at your current job?  With compound interest, it hurts you to leave $5k in an account by itself when you can roll it into a larger account and earn compound interest on that larger amount.

 

I am not currently contributing to an IRA account.

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I'd transfer it to an IRA.  Was the money taken out pre-tax at your old job?  If so, I think you want to transfer into a traditional IRA.  Roth IRA's, the money is contributed after you've paid taxes on it, so it grows tax free.  If you chose a Roth, I believe you'd have to pay the payroll taxes you would have incurred on the $5,000 before you can deposit it.  Others may know better.

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I'd transfer it to an IRA.  Was the money taken out pre-tax at your old job?  If so, I think you want to transfer into a traditional IRA.  Roth IRA's, the money is contributed after you've paid taxes on it, so it grows tax free.  If you chose a Roth, I believe you'd have to pay the payroll taxes you would have incurred on the $5,000 before you can deposit it.  Others may know better.

 

It was taken out pre-tax at my old job. Sounds like a traditional IRA may be the way to go...

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Rollover to a personal IRA, ideally one which has minimal costs such as Vanguard is a good way to go. For example a S&P Index fund has an expense of 0.17% for the amount you are considering. Dependent on your 401k provider you may have fees as high as 1.5-2%

 

https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT

 

You should have a disclosure of what the management fees are for keeping it in the current 401k, and what the sales/transfer fees are, if any. Some funds are back loaded where you pay a sales commission on the end if you haven't held them long enough before you transfer. However they often have high annual fees too so you may be better off paying commission now

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Thank you all for the advice, I really appreciate it.

 

Corcaigh: Would there still be mgmt/sales/transfer fees even if I'm fully vested? I don't think I'm privy to those details unless I'm overlooking them online. You're saying there may be a fee to do the rollover to an IRA?

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Definitely go the IRA route.  That'll give you more control over how the money is invested but you won't get hit with penalties or taxes for cashing it out.

 

There's a good amount of paperwork involved in doing this but any broker should mostly handle that for you.  I had to transfer one a couple of years ago and the broker I was leaving was horribly bad about it (I'd left an old job and my previous employer had cashed out my pension with them-- their whole business model was based on bleeding people with fees because they were too lazy to move).

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You DEFINITELY want to roll it over to an IRA. In point of fact, this is a blessing for you, because while most 401K plans have limited and mostly high cost options, as Corcaigh referenced, IRAs are self-directed so it's easy to pick a provider with a wide variety of low cost options.

I've never had to pay a fee to do this, but you'd have to check your plan to find out for yourself.

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I would recommend you roll it over to an IRA. If you don't already have a broker account (discount broker like eTrade, etc) do a bit of research and see if they have a promo to open a new IRA account. Some offer to add $ to your account for opening a new account. Once you transfer the money to an IRA find a low fee mutual fund to buy. There are plenty out there.

The other options:

cashing out - you will pay 10% penalty PLUS fed & state taxes on the $5k. Open a Roth IRA - must pay fed & state taxes on the $5k. Pretty sure there's no penalty on this type of rollover but u do have to pay taxes. So you would have to deposit the entire $5k in a Roth IRA & then pay fed & state taxes. If you rollover less than $5k you would still pay taxes on the entire $5k put also a 10% penalty on the cash you kept.

There are some other options to get out of paying the 10% penalty but I don't remember all of the parameters. For instance, if you use the money to buy your first house or to pay medical expenses I don't think there's a penalty. But you still pay the taxes.

Treat it as found money to invest. Don't spend it. You'll thank me 20 years from now.

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Thank you all for the advice, I really appreciate it.

 

Corcaigh: Would there still be mgmt/sales/transfer fees even if I'm fully vested? I don't think I'm privy to those details unless I'm overlooking them online. You're saying there may be a fee to do the rollover to an IRA?

 

There are no fees to transfer your 401K to an IRA.

 

The management fees are built into the 401K plan and your IRA plan.  The idea is to find an IRA plan with better management fees than your 401K plan.  Vanguard is a good choice.

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One more note: Definitely DO NOT PUT THE MONEY IN A ROTH IRA.

 

The whole concept of the Roth IRA is that you pay taxes on it now but it grows tax free forever -- great for contributing from your after-tax paycheck.

 

The whole concept behind an IRA is that you DON'T pay taxes on it now, but once you take it out you'll pay taxes on it like it's normal income.  This is great because you might be in a higher tax bracket now than at retirement, so you'd likely pay less tax on it when you pul lthe money out.

 

If you pull the 401K money out right now, you'll get hit not only with taxes, but also the early withdrawal penalties, even if you're trying to put it into a Roth IRA.

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You DEFINITELY want to roll it over to an IRA. In point of fact, this is a blessing for you, because while most 401K plans have limited and mostly high cost options, as Corcaigh referenced, IRAs are self-directed so it's easy to pick a provider with a wide variety of low cost options.

 

As long as he knows what he is doing, if he doesn't he could get conned into an IRA with higher management fees.

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As long as he knows what he is doing, if he doesn't he could get conned into an IRA with higher management fees.

 

I hate plugging stuff, but please note that I'm not making any $ with this (and I do it myself):

 

1) Open an IRA with eTrade

2) Transfer the money there (eTrade was awesome with my IRA even when the other company was horrible)

3) Invest in one of the Vanguard Target Retirement Funds (basically it's a different fund for every retirement year -- they do index stock investing and buy bonds.  They re-balance the money between stocks/bonds as you get closer to retirement to lower your risk.  Very low management costs)

4) Grab a beer and enjoy your life.

5) Watch your money grow.

6) Read 'A random walk down wall st' to understand why you just did the things you did

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I hate plugging stuff, but please note that I'm not making any $ with this (and I do it myself):

 

1) Open an IRA with eTrade

2) Transfer the money there (eTrade was awesome with my IRA even when the other company was horrible)

3) Invest in one of the Vanguard Target Retirement Funds (basically it's a different fund for every retirement year -- they do index stock investing and buy bonds.  They re-balance the money between stocks/bonds as you get closer to retirement to lower your risk.  Very low management costs)

4) Grab a beer and enjoy your life.

5) Watch your money grow.

6) Read 'A random walk down wall st' to understand why you just did the things you did

 

I don't disagree with you.  The average American will roll into  an Edgar Jones or some other firm where anyone who passes their brokers license can sell, because their friend or neighbor recommended them, they will put their money in some American fund which may or may not be right for them, or they will get bad investment advice from the broker.

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Lots of great advice here...I'm going to soak it all in and try to find out the current mgmt fees associated with my current 401K. Sounds like I'll have to do a little research for the right IRA but VanGuard seems competitive.

 

Plz feel free to continue the discussion!!

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Corcaigh: Would there still be mgmt/sales/transfer fees even if I'm fully vested? I don't think I'm privy to those details unless I'm overlooking them online. You're saying there may be a fee to do the rollover to an IRA?

 

It's unrelated to vesting. What I'm saying is that some classes of funds, such as B, have "deferred sales commissions" that could be 5% and decrease by 1% per year. But as noted those funds often have excessive annual management fees of 1.5-2% anyway so getting out sooner rather than later is typically a better option.

 

The fund names often have the fund class in them ... such as FUNDAMENTAL INVESTORS CL B

 

But no, there typically should be no fee associated with transferring from your old 401k to a personal IRA.

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Vanguard is one example of a good place to put your IRA, and I am a big fan because of their focus on minimizing cost and having a huge variety of investing options.

You can do a lot worse than one of the 'target retirement funds' referenced earlier if you're not sure what to invest it.

Here is a link to the Vanguard options.

https://investor.vanguard.com/mutual-funds/vanguard-mutual-funds-list?reset=true&assetclass=bal&WT.srch=1

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