Financial Advice, 401k's, IRA's, Hiding it under a mattress...

[aparch]

I received a notice from my former employer that I have some options for my 401k Plan. It's been sitting idle plugging along along with the crappy economy since I was let go from this firm last June.

They'd like to know what I want to do with my money: either keep it with them, or take it out.
If I take it out, it's a lump sum where 20% is withheld for Federal Income Tax, with the possibility of another 10% due when I file my taxes. They also provide the paperwork so I can also roll it into an IRA.

There's another two pages of small print explaining the options in much greater detail enclosed with the forms, but I was looking for a more lay-mans terms as to what might be my best option. I have no problem with just "letting it ride," as I've only had it three years (and two hard stock market drops).

I'm 30. And looking for insight into the best options available to me.
"Cash it out and spend it on hookers and blow," is also an acceptable answer.

 

[Twitch Boy]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

Cash it out and spend it on hookers and blow

I'd leave it right where it is. Stock market has been booming this year, and that capital gains tax is a killer. Plus it's nice knowing that you're already setting aside money for retirement.

I'm not familiar with IRAs, so I can't help you there.

 

[FreshFish]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

I received a notice from my former employer that I have some options for my 401k Plan. It's been sitting idle plugging along along with the crappy economy since I was let go from this firm last June.

They'd like to know what I want to do with my money: either keep it with them, or take it out.
If I take it out, it's a lump sum where 20% is withheld for Federal Income Tax, with the possibility of another 10% due when I file my taxes. They also provide the paperwork so I can also roll it into an IRA.

There's another two pages of small print explaining the options in much greater detail enclosed with the forms, but I was looking for a more lay-mans terms as to what might be my best option. I have no problem with just "letting it ride," as I've only had it three years (and two hard stock market drops).

I'm 30. And looking for insight into the best options available to me.
"Cash it out and spend it on hookers and blow," is also an acceptable answer.

The "traditional" option is tor roll it into an IRA, after which all the money managers want to you give it to them while they collect fees for sure while you wonder whether it will go up or down.

There is a third option that no one wants you to know about. It starts by transferring it into an IRA. Then there is an "annuitization" option whereby you can avoid the 10% penalty tax under IRC Section 72(t) in which you can take distributions over life expectancy. They are still subject to income tax, but if you are looking to buy something that requires debt financing, the periodic distributions can be used to offset the loan payments so that you get the use of your money now instead of waiting 35 more years.

Saving "for retirement" is one of the biggest con jobs ever pulled. Of course everyone needs to save! but guess what, if you learn to save throughout your lifetime then you won't need to save "only" for retirement.

 

[unofan]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

leave it where it is or roll it into an IRA. if you cash it out now (without rolling it into an IRA or another qualified retirement plan), you're subject to an early withdrawl penalty.

And FreshFish's commentary not withstanding, there are some great tax benefits for saving strictly for retirement as opposed to just saving in general.

 

[FreshFish]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

there are some great tax benefits for saving strictly for retirement as opposed to just saving in general.

um, when there were high tax brackets and many tax brackets, I'd agree, for the prospect at that time was you'd defer from a high tax bracket during your working years and then withdraw in a low(er) tax bracket in your retirement years.

Since the mid '80s, we've been in a relatively "flat" bracket structure with relatively low rates. Looking at the size of the national debt, and realizing that only super-low interest rates have kept the interest on the national debt from exploding the deficit, it seems inevitable that higher tax rates are in the pipeline. To defer from a relatively low tax environment into a probably higher tax environment doesn't make as much sense.

Probably the very best option for aparch is to roll into an IRA and then pay the tax for a Roth conversion, if he has the money (and if you trust the tax-free withdrawal status of the Roth to remain safe from future legislative poaching).

 

[rufus]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

What are the laws on 401ks if his former company goes belly-up? Is it still his money, and he'll get it no matter, or does it go into a financial black hole?

If there's a chance it disappears, I say roll it into an IRA.

 

[unh_hockey]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

This is an open ended question for those who might have done the research.

What is more beneficial in the long run; a tax deferred plan ( 401k) or an option where you pay taxes and invest thereafter?

 

[FlagDUDE08]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

um, when there were high tax brackets and many tax brackets, I'd agree, for the prospect at that time was you'd defer from a high tax bracket during your working years and then withdraw in a low(er) tax bracket in your retirement years.

Since the mid '80s, we've been in a relatively "flat" bracket structure with relatively low rates. Looking at the size of the national debt, and realizing that only super-low interest rates have kept the interest on the national debt from exploding the deficit, it seems inevitable that higher tax rates are in the pipeline. To defer from a relatively low tax environment into a probably higher tax environment doesn't make as much sense.

Probably the very best option for aparch is to roll into an IRA and then pay the tax for a Roth conversion, if he has the money (and if you trust the tax-free withdrawal status of the Roth to remain safe from future legislative poaching).

With this administration, nothing is safe from taxes.

However, given your company isn't contributing any more (and therefore no company match), I would consider rolling to an IRA. You'll have more options with what to do with your money instead of a whole bunch of set funds that won't be able to make you very much money. Plus, as far as I can see, the 401k is only good for the company match. Max out the match, and then don't put another penny there.

Whether you use traditional or Roth IRA, though, depends on how much money you make. If you're over $95k/$150k (single/married), you can't contribute to a Roth, and have to go traditional.

 

[FlagDUDE08]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

This is an open ended question for those who might have done the research.

What is more beneficial in the long run; a tax deferred plan ( 401k) or an option where you pay taxes and invest thereafter?

Depends on what you want to do with the money. Do you want freedom in what sort of things you want to invest? Do you think you may need the money in the near future? Do you want to take your chances on what tax rates will be in the future (with this administration they could go all the way up to 25% before 200k/250k, and then 100% after that)? Personally, I max out the company match with a 401k, and then invest post-tax because, given my current single mid-20's status, I may need the money in the future for a serious expenditure, so I need the ability to cash out early.

 

[unofan]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

With this administration, nothing is safe from taxes...
(with this administration they could go all the way up to 25% before 200k/250k, and then 100% after that)

 

[FreshFish]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

This is an open ended question for those who might have done the research.

What is more beneficial in the long run; a tax deferred plan ( 401k) or an option where you pay taxes and invest thereafter?

I've done the research and unfortunately the answer is "it depends on the broader context."

Many 401k plans limit your options to a handful of mutual funds. Many people find better opportunities elsewhere.

The one place where my research is unequivocal: do not join a 401k plan if you have revolving credit card debt. Pay off those credit card balances first.

Another place where the research is pretty strong: make sure you have adequate disability income insurance first. What good is a 401k if you are young and cannot earn a living due to illness or injury?


Finally, it is not necessarly the case that you either defer taxes by using a 401k or pay taxes. Investment real estate includes a depreciation expense which can offset some of the tax bill (though it also reduces your basis). Also, I've been out of the retail end for years, at one time you could purchase investments that generated tax credits (which offset taxes dollar-for-dollar and thus are way better than deductions). You could construct some interesting portfolios of direct participation programs "back in the day" when investment minimums were $5k or so. Not sure any of those are still around any more.

 

[Bakunin]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

What is more beneficial in the long run; a tax deferred plan ( 401k) or an option where you pay taxes and invest thereafter?

It depends on what your income tax rate is when working vs what it is when you retire. Generally speaking, it's a safe assumption to think you'll have a lower income in retirement which likely means a lower tax bracket. That's a check in favor of tax deferred investment. However, Congress may enact higher rates in the future to dig us out of this fiscal mess, so even if you're in a lower bracket, your marginal rate may equal or even surpass what it is now. Unfortunately, none of us has any way of knowing what our marginal rates will be 10, 20, or 30 years from now with any level of certainty. What that means is you should hedge your bets and invest in a tax deferred plan *and* a Roth IRA if you meet the income requirements. That way, you'll have taxable as well as tax-free income when you retire.

As far as 401(k) plans go, yes, you will be limited in your investment options, and yes, you might be subject to crappy expense ratios (anything over 1% is horrible). However, if your employer offers a match, you'd be a complete dumb*** to not take advantage of that. No matter how good your investment options are outside the 401(k), you will not top the rate of return available to you with that matching money.

 

[rufus]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

The wingnut is strong with that one.

 

[FlagDUDE08]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

As far as 401(k) plans go, yes, you will be limited in your investment options, and yes, you might be subject to crappy expense ratios (anything over 1% is horrible). However, if your employer offers a match, you'd be a complete dumb*** to not take advantage of that. No matter how good your investment options are outside the 401(k), you will not top the rate of return available to you with that matching money.

I tried to calculate the return, but I can't divide by zero.

 

[ScoobyDoo]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

I'd probably roll it into a ROTH of some sort and get the taxpaying done now. Taxes are going to go up over the long term. It's a matter of when not if.

Blowing it is the other option. If I were young and single that'd be very tempting.

 

[FlagDUDE08]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

I'd probably roll it into a ROTH of some sort and get the taxpaying done now. Taxes are going to go up over the long term. It's a matter of when not if.

Blowing it is the other option. If I were young and single that'd be very tempting.

Just remember that if your income goes over 95k/150k, that's not an option, and you'd have to go to post-tax investing.

While we're on the subject, any suggestions for a good broker on Roth IRAs? I would like to do stocks; no mutual funds or bonds for at least 5 years.

 

[Bob Gray]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

I'd probably roll it into a ROTH of some sort and get the taxpaying done now. Taxes are going to go up over the long term. It's a matter of when not if.

Blowing it is the other option. If I were young and single that'd be very tempting.

Yah, putting at least some in a ROTH is a nice diversification from other accounts that are taxable down the road. And taxes are likely to go up. Of course if our wild fiscal policy continues, the dollar will eventually devalue and it won't matter much where your dollars are parked. An argument to go blow it while it still has value!

 

[FlagDUDE08]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

Yah, putting at least some in a ROTH is a nice diversification from other accounts that are taxable down the road. And taxes are likely to go up. Of course if our wild fiscal policy continues, the dollar will eventually devalue and it won't matter much where your dollars are parked. An argument to go blow it while it still has value!

Or just put all your cash into the GLD. Once you get up to 100,000 shares, cancel them and take your gold.

 

[LynahFan]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

What are the laws on 401ks if his former company goes belly-up? Is it still his money, and he'll get it no matter, or does it go into a financial black hole?

If there's a chance it disappears, I say roll it into an IRA.

401Ks do not disappear if a company goes belly-up. That is the employee's money, free and clear (tax penalties for early withdrawal notwithstanding). Pensions are what disappear when companies go bankrupt.

I'd still recommend rolling it into an IRA - you'll nearly always have a better range of investment options and lower fees at someplace like Vanguard than you have at whoever is holding your 401k, but I'm sure there are exceptions.

 

[French Rage]

Re: Financial Advice, 401k's, IRA's, Hiding it under a mattress...

Just remember that if your income goes over 95k/150k, that's not an option, and you'd have to go to post-tax investing.

It's at 107k-122k/169k-179k now, those being the ranges where the phaseout starts and ends.

While we're on the subject, any suggestions for a good broker on Roth IRAs? I would like to do stocks; no mutual funds or bonds for at least 5 years.

I use Schwab to do my IRA and regular brokerage account, easy to use and no complaints.