#401K

5 Myths about 401(K) Rollovers: What’s the Rush?

5 myths about 401(K) rollovers: Should 401Ks (or 403bs, 457s, or TSPs) always be rolled over? Often, soon-to-be retirees are led to believe their impending retirement forces a deadline or urgency to “do something” about their retirement plan account.  Several understandable myths surround the mystery of what actually happens to your money when leaving your employer. Below are five of them. Myth 1: When you separate from your employer, you must take your retirement plan account (401K/403B/457/TSP) with you. Actually very few employer plans require employees to leave the plan upon retirement. You have a choice to leave the account right where it is.  This includes if you are widowed and your spouse was the employee. More than likely, you can stay with the retirement plan if you want to. The rules for your employer can be verified by checking with your human resources department, or obtaining a copy of your plan’s complete document, usually available at your account’s website. Myth 2: When you separate from your employer, it’s always best to take your retirement plan account with you. Some people might not have the greatest level of fondness for their employer and want to sever ties with anything having to do with the company. While understandable, it’s important to separate facts from feelings about your money.  Due to tighter ERISA and Department of Labor regulations, it’s very unwise for employers to have their employees’ retirement plan limited to only high-fee, high-risk, or self-serving fund options. Chances are that what’s available there is worth taking a more in-depth look. On the question of where you are best served with your retirement funds, here is where you will get a wide range of answers. You can ask friends, family, the internet, co-workers, and even ChatGPT and go in circles. Whether rolling over your retirement plan account is in your best interest depends on a few different factors. Keep reading to myths 3, 4, and 5 to find out more. Myth 3: Retirement plan accounts have no impact on the ability to do a Roth conversion. False. This particularly applies to people who have IRAs outside of their employer retirement plan. If you are considering converting part of an IRA you already own outside of a retirement plan to a Roth, the amount you can convert is subject to an arcane concept called the “pro-rata rule.”  In general, under this rule, the amount you can convert is subject to a ratio that includes all IRAs, but does not include monies in employer retirement plans. Therefore, if you roll over your retirement plan before doing a Roth conversion, you will likely limit the amount of outside IRAs you can convert. For many people retiring in their 60s and delaying Social Security, Roth conversion opportunities abound. It might very well make sense to wait to roll over at least until age 70 so that you can leave the Roth conversion option more open. Conversely, if all of your retirement money is in the employer…

Continue Reading5 Myths about 401(K) Rollovers: What’s the Rush?

401K Decisions by Age Decade – 20s, 30s, 40s, 50s, 60s

How are 401K decisions affected in each age decade? Shortly after the 2008 financial crisis, I saved a Money magazine article on the topic of 401K investing, curious to see if I would change their advice two to three years later.  Now it’s over 10 years later, and most of that advice is still relevant. Following is a synopsis.  For the 20s, 30s, 40s, and 50s, not much has changed.  But for the 60s, note how the article leaned toward armageddon, contingency planning, and worst case scenarios.  There was nothing in the article about staying the course.  It’s interesting to reflect back on the mood at that time. [The following are both direct quotes and paraphrasing of the main ideas of the article.  The sources listed are attributable to Money magazine.] In Your 20s In your 20s, the challenge is that retirement isn’t even on your radar. Debt is accumulating instead, and most 20-somethings can’t see past the goal of getting out of debt first.  According to the Project on Student Debt, 2007 graduates on average who took out student loans left college owing $20,000.  Nevertheless, 20-somethings should pay off high-interest debt like credit card bills and start funding a 401(K). Nearly half of all twenty-somethings with a 401(k) plan turn down the company match by not contributing the full qualifying amount – essentially free, tax-deferred money. What can you do? Start brown-bagging lunch. For someone making $30,000 a year, setting aside $35 a week is all it takes to sock away 6% of salary. An additional pitfall at this stage is job-hopping. When switching employers, many are tempted to pull out their 401(k) savings. But, while $5,000 may not seem like a whole lot of money, if invested, that amount will be substantial by the time you retire. In Your 30s By this decade, just being enrolled in the retirement plan isn’t enough. How the money is invested begins to take on more importance. According to a survey by investment advisor Financial Engines, 40% of all 401(k) participants make investing mistakes that impede their portfolios’ growth.  The two most common mistakes are: 1)  investing too conservatively in cash, therefore not beating inflation; 2) investing too narrowly in a single stock (typically, the employer’s). To catch up, learn to diversify according to “asset allocation.” Embrace both stocks and bonds. Combining the two will bring a cushion against market drops. If your 401(k) has a Roth feature, and you believe your income taxes will be higher in retirement, use that feature to invest after-tax dollars now for tax-free withdrawals later. Once you have your portfolio fine-tuned, revisit it on a regular basis but no more frequently than quarterly to “rebalance” to your original mix. If you start managing your investments early,  you can reap rewards down the line. In Your 40s Too many claims on the paycheck becomes a common problem for forty-somethings. Even though you are entering your peak earning years, major expenses like college tuition loom. When the AARP…

Continue Reading401K Decisions by Age Decade – 20s, 30s, 40s, 50s, 60s