401k Question

[Maikeru-sama]

I just had a question about my 401k that I had with my previous employer.

I am going to be starting a new job soon and this job will not allow me to roll my 401k from my previous employer over.

I was just trying to get some type of advice as to what to do with it. Some have said to put it into an IRA or something like that. To be honest, I am thinking about cashing it out and using all of it to pay off my Student Loan Balance as paying off debt is another form of saving money in the future.

Thoughts?

[VeVe]

Leave it where it is for now and don't do anything with it. That should be an option. If not, roll it over to an IRA.

DON"T cash it out and use it to pay bills. You're going to end up getting killed with taxes and a 10% early distribution penalty, likely leaving you with ~50% of the current value. Not at all worth it. In the long run (of course, depending on how much money we're talking about here), it may be cheaper to just pay down the balances over time. The interest paid may be far less than the taxes and fees from cashing out the 401K, not to mention the fact that the investments have the opportunity to grow over time.

Long story short: 99.99999% of the time, cashing out a 401k is the worst thing you could ever do

[AboveAverage]

I just had a question about my 401k that I had with my previous employer.

I am going to be starting a new job soon and this job will not allow me to roll my 401k from my previous employer over.

I was just trying to get some type of advice as to what to do with it. Some have said to put it into an IRA or something like that. To be honest, I am thinking about cashing it out and using all of it to pay off my Student Loan Balance as paying off debt is another form of saving money in the future.

Thoughts?

Why pay taxes on that money? You're going to pay 10% off the bat, plus more on the balance when you have to file for the disbursement. Plus, you risk putting your retirement at risk, and for what, paying off "good debt"? The interest you pay on your student loans is deductable at tax time. Might as well get extra money instead of paying extra money.

You can either leave it where it is, or roll it over to an traditional IRA. You will have to figure out if you want to convert it to a Roth IRA. But I would not play with retirement money...you don't want to depend on nonexistant Social Security.

[jq26]

Agree with VeVe 100%. Cashing would be foolish. IRA would be best imo because you control it. However, leaving it where it is may be fine as long as you aren't overly weighted in any one company's stock.

[AboveAverage]

Talk about slow typing.....

Whatever....

[swirlgirl]

Whatever you decide to do, please watch your investments regularly. You may need to switch your investments so your don't lose too much money.

[tommy32]

Whatever you decide to do, please watch your investments regularly. You may need to switch your investments so your don't lose too much money.

AA or anyone who has the answer how do you claim SL interest on taxes? AND do you have to be in repayment?

[AboveAverage]

AA or anyone who has the answer how do you claim SL interest on taxes? AND do you have to be in repayment?

You get a statement from your lender if you paid on it for that year. And yes, you do need to be in repayment.

[tommy32]

You get a statement from your lender if you paid on it for that year. And yes, you do need to be in repayment.

Cool thanks for the information...

[jq26]

Re: SL interest payments. Your lender should send you a 1098-E that gives you the total interest paid. There are income phase-out levels that you hit where you can't write it off anymore.

[AboveAverage]

Re: SL interest payments. Your lender should send you a 1098-E that gives you the total interest paid. There are income phase-out levels that you hit where you can't write it off anymore.

From the Tommy's past posts...I believe he will probably get 100% of the interest to deduct.

I on the other hand had the phaseout. Out of $102, I was only able to claim $66.

[Maikeru-sama]

Thanks for the feedback. What is the difference between a Roth IRA and a traditional IRA?

Also, would my money be safe and guranteed if I put it in an IRA, given the state of the financial section of the economy at the moment.

[tommy32]

Re: SL interest payments. Your lender should send you a 1098-E that gives you the total interest paid. There are income phase-out levels that you hit where you can't write it off anymore.

Thanks for the information...I don't think I will have a problem with the income part LOL...

[jq26]

Roth means you get taxed upfront. All earnings accrue thereafter tax free. Traditional means you are tax deferred now, but the principal and accumulated earnings are then taxed at ordinary income rates when you make withdrawals (presumably years from now). Which is better depends on your marginal tax rate now, your marginal rate when you retire, and other factors.

Probably not 100% safe unless you are in a money market fund (fed gov't just guaranteed them after two funds "broke the buck"). But that's not what you should care about if you are young and have time to accumulate wealth. You want long term growth. If you are older, then you should be more conservative.

These are the basics. There are a few on this board who can fill in the gaps with details because they do it for a living.

[tommy32]

Jq I am going to start investing in my company's 401k in feb next year, and also do their stock options...my current age is 34...and I never invested any money before. Do I still have enough time left to build wealth as you put it? Most of my life 17-26 was spent in the Army and they did not have a "401k" , and when I ETS'ed from the Army most of the places I worked did not have a 401k, or I did not stay there long enough to invest. Thank You for any Info you or any one else may have...

[Maikeru-sama]

Roth means you get taxed upfront. All earnings accrue thereafter tax free. Traditional means you are tax deferred now, but the principal and accumulated earnings are then taxed at ordinary income rates when you make withdrawals (presumably years from now). Which is better depends on your marginal tax rate now, your marginal rate when you retire, and other factors.

Probably not 100% safe unless you are in a money market fund (fed gov't just guaranteed them after two funds "broke the buck"). But that's not what you should care about if you are young and have time to accumulate wealth. You want long term growth. If you are older, then you should be more conservative.

These are the basics. There are a few on this board who can fill in the gaps with details because they do it for a living.

Okay, just a few more questions.

For the Roth IRA, how do I calculate how much my 401K inital balance will be taxed? Also, can I put money into an Roth IRA every paycheck or once I put my initial balance in, do I only make money based on interest?

For the Traditional IRA, would I still have to pay taxes when I start withdrawing when I am retired or do I only pay taxes if I withdraw before being retired?

Also, for both IRAs, do I have access to that money if I have an emergency and really need it?

[Maikeru-sama]

Jq I am going to start investing in my company's 401k in feb next year, and also do their stock options...my current age is 34...and I never invested any money before. Do I still have enough time left to build wealth as you put it? Most of my life 17-26 was spent in the Army and they did not have a "401k" , and when I ETS'ed from the Army most of the places I worked did not have a 401k, or I did not stay there long enough to invest. Thank You for any Info you or any one else may have...

Not an expert, but 34 is still considered young (I just turned 30). You are still very far away from retirement age (I believe is 65 1/2 or something) and 30+ years is considered a long time to accumulate wealth.

[jq26]

First, 35 is young. I'm 31 and I am buying small cap growth and international funds. They are volatile as hell. Down 10% one day, up 8% another. The important thing is the LT growth. Given my 30+ year time horizon they have a higher growth rate over that long period of time. And that's what it is really important as I continue to dollar-cost-average in. They may down 30% this year but up 50% next year. Doesn't both me one bit. I just buy more. Keep in mind that I have a high risk tolerance. You may want to ratchet down your risk depending on your ability to stomach the market.

For the Roth IRA, how do I calculate how much my 401K initial balance will be taxed? Also, can I put money into an Roth IRA every paycheck or once I put my initial balance in, do I only make money based on interest?

There are websites that probably do this for you (it can be complicated- has to do with rates and deductions, etc). If you are in a low tax bracket, the tax won't be too bad. Keep in mind an amount in a Roth is worth considerably more than in a traditional because it forever escapes federal taxation.

Also note that you can't rolover 401k into Roth directly. It must go 401k -> rollover IRA -> Roth conversion.

For the Traditional IRA, would I still have to pay taxes when I start withdrawing when I am retired or do I only pay taxes if I withdraw before being retired?

Pay taxes any time you withdraw money. For some people, they are in such a low tax bracket when they retire (less income typically equals lower marginal tax rates). This doesn't work for everyone.

Also, for both IRAs, do I have access to that money if I have an emergency and really need it?

Yes, but you pay penalties. Not recommended.

[Maikeru-sama]

j6, thanks.

I think you forgot the one quesiton about depositing money into an IRA. Can I take some of my paycheck, which is every 2 weeks and place it in the IRA or is it closed after the first conversion?

[jq26]

Don't intermix the rollover with new money. Either contribute to your new 401k (do that if they off a 401k and they give a match) or start a new IRA.

I'm giving you just general basics here that you can build on. I'd recommend either really taking some time to learn how to do this or having someone do it.

[DHK]

Great information given in this thread!

Also note that you can't rolover 401k into Roth directly. It must go 401k -> rollover IRA -> Roth conversion.

You can since the Pension Protection Act of 2006 was passed. You'll need to check with your 401k plan administrator on how you can do this.

Remember that when you rollover a 401(k) to a new 401(k), you are giving your new employer more control of your money. They tell you which investments are available and if they want, they can change 401(k) providers at anytime - and change the investments WITHOUT YOUR CONSENT!

Either leave it where it is, or roll it to an IRA (or Roth IRA if you won't get into the next tax bracket upon conversion).

If you've separated from your company AND you're over 55 years old, you CAN begin taking distributions from your 401(k) as INCOME without the 10% penalty.

This is a little-known rule. I call it the "age 55" rule. As long as you separated from service AFTER you attained the age of 55, you can access your plan balance (withdrawals) without a 10% penalty. It's STILL a taxable distribution, however.

Just a little more information to add.

[AboveAverage]

Also, for both IRAs, do I have access to that money if I have an emergency and really need it?

Yes, but you pay penalties. Not recommended.

If you have a Roth (though I agree with jq26 on this, I would not recommend this), you can access it with no penalty after 5 years of having a Roth (think the max is $10,000 though) if you're going to use it for a house. There are other conditions too that you can after 5 years.

You don't want to play with retirement money though. And you're 30, so you're still a young man. If you can give at minimum 5%-10% of your salary and then apply raises to it from now until you're 60, you can probably retire assuming you are aggressive. I have both domestic and internetional growth funds in my Roth, and I have a mix of mostly large cap growth, and value, and a mixture of mid-caps and small caps, with 20% going international. It's pretty much aggressive (no bonds or money market funds....straight up stocks). I'm taking a beating right now, but I know this pain is not going to last. I have made no modification to my plan and I rebalance my portfolio quarterly (cause it's automatic, and I'd forget if I had to do it once a year).

You need to read cnnmoney.com or various financial web sites for more information so that you can make your own judgements. But please trust and believe that you don't want to play with your retirement money. And because of your age, go very aggressive and ignore all the stuff with current market volatility. The stock market IS NOT going anywhere. I will get my losses back at some point.

[AboveAverage]

Great information given in this thread!

You can since the Pension Protection Act of 2006 was passed. You'll need to check with your 401k plan administrator on how you can do this.

Remember that when you rollover a 401(k) to a new 401(k), you are giving your new employer more control of your money. They tell you which investments are available and if they want, they can change 401(k) providers at anytime - and change the investments WITHOUT YOUR CONSENT!

Either leave it where it is, or roll it to an IRA (or Roth IRA if you won't get into the next tax bracket upon conversion).

If you've separated from your company AND you're over 55 years old, you CAN begin taking distributions from your 401(k) as INCOME without the 10% penalty.

This is a little-known rule. I call it the "age 55" rule. As long as you separated from service AFTER you attained the age of 55, you can access your plan balance (withdrawals) without a 10% penalty. It's STILL a taxable distribution, however.

Just a little more information to add.

I was of the opinion you needed to be 59 1/2. I had planned to retire at 60 because of that. I would love to retire at 55 as that's when I'll be pension eligible (yes, I said pension....I also have a 457b and a Roth that I will start making contributions on beginning this comming January). The 457b and Roth prevented me from retiring at 55 because I have to wait until 59.5....boo. LOL.

I don't want to depend on social security, as it probably won't exist, and I want to try to get whatever my current income will be in 25-30 years.

Can you please point me in the right direction for this "age 55" rule?

[JustaTexan]

https://www.expertplan.com/enrollabc_4.jsp (scroll to about middle of page)

http://rds.yahoo.com/_ylt=A0oGkwIwz.RIOvAATi5XNyoA;_ylu=X3oDMTEyMnZndHBtBHNlYwNzcgRwb3MDMwRjb2xvA3NrMQR2dGlkA0Y2NTVfOTg-/SIG=121ivd853/EXP=1223041200/**http%3a//www.irs.gov/pub/irs-utl/egtrra_law.pdf (above website says the rule comes from this, but I can't get it to open at work)

[DHK]

I was of the opinion you needed to be 59 1/2. I had planned to retire at 60 because of that. I would love to retire at 55 as that's when I'll be pension eligible (yes, I said pension....I also have a 457b and a Roth that I will start making contributions on beginning this comming January). The 457b and Roth prevented me from retiring at 55 because I have to wait until 59.5....boo. LOL.

I don't want to depend on social security, as it probably won't exist, and I want to try to get whatever my current income will be in 25-30 years.

Can you please point me in the right direction for this "age 55" rule?

The best source is to ask your plan administrator for a copy of the IRS Special Tax Notice regarding your plan. It's a form 402f.

Here's a link for a similar 402f:

http://www.hanford.gov/hr/bennies/RAPIDWEB_BENEFITS_FILES/PENSION_AND_SAVINGS/SPECIAL_TAX_NOTICE402(F).pdf

Look at the bottom of page 4:

Additional 10% tax if you are under age 59-1/2. If you receive a payment before you reach age 59-1/2 and you do not roll it over, then, in addition to the regular income tax, you may have to pay an extra tax equal to 10% of the taxable portion of the payment. The additional 10% tax generally does not apply to (1) payments that are paid after you separate from service from your employer during or after the year you reach age 55, (2) ... (you can read it for yourself).

Again, ask your employer for the IRS Special Tax Notice 402f and you can read it for yourself.

If you were really looking to retire early, you'll want to learn about IRS section 72t regarding systematic withdrawals from retirement accounts. As long as you take out sequentially equal periodic payments per a 72t calculation, you can take distributions from your retirement accounts for the LONGER of 5 years or until you reach age 59 1/2.

I will personally stress that retirement is NOT a "do-it-yourself" project. You can learn a lot by getting the counsel of a licensed financial professional in your state. I would look for a professional who is an expert in the retirement planning process. They will generally have professional certifications like a CFP or ChFC. This will help you work with a professional who generally has a better idea on planning than those advisors who do not have professional credentials.