401K questions

[Tommy VanNess]

This has always been the best place for me to ask ordinary questions, so I hope you guys don't mind another.



I was wondering about a 401K plan. My current company doesn't offer one, and I haven't had one for over a year now. I want to open a new account with a reputable firm and roll over my 401K from my previous job. (only about $30K) Can I do that? I have no idea how to go about this and was hoping for some suggestions. Thanks.



Tommy

 

[Thomas Rogers]

I'm pretty sure the legal definition of a 401k is that it be company sponsored.



You can and should roll over your old 401k account balance into an IRA (Individual Retirement Account). You will not pay any penalties or even any fees for this.



Then, going forward you should max out (if possible) your savings into the Roth IRA. I say the Roth instead of the regular IRA because under the Roth all your earnings grow, tax free, and you never pay taxes on them even after you start drawing later during retirement age. Check the limits on Roth contributions, and if you are married, and even if your wife doesn't have a job, you can both contribute up to your yearly, individual max (either 4k or 5k if memory serves). After that, you can contribute to an IRA as well, if you wish, but the growth there will be taxed later in life.



Both the IRA and the Roth IRA are paid into with after-tax dollars, which makes them both different from the 401K which is pre-tax.



So goes my recommendations, and they echo everything I have heard from all the experts on these accounts.



TJR

 

[Bob McDonald]

Generally, 401k's (and I could be wrong) are sponsored by an employer. So, your choice would be to roll the funds from you last employers 401k to a IRA set up through whichever money management firm you care to choose.



Assuming you are currently employed, you will want to ask your current employer if you can contribute to this new self administrered plan through payroll deduction before taxes. If they will, great. If not, you should set up a separate Roth-IRA for after-tax deposits to a retirement plan. You don't want to co-mingle before and after tax deposits or you will end up paying taxes twice when you get around to withdrawing funds.



edit - Looks like Tom was faster on the keyboard that I was, but the idea was the same.

 

[Bradley Bliton]

A 401K is a company sponsored retirement plan. Since your company does not offer a 401k plan you should probably look into doing a 401k rollover into a ira or a roth ira. I have a roth ira with etrade. I like etrade and they do great for me. I chose a roth ira because I can't contribute more than 4000 a year (low ranking in the air force!!). If you can contribute more than 4000 a year and you want to contribute more than that then I suggest a ira. With an ira it is tax deductable. But, you will have to pay taxes when you use it at the age of retirement. Plus if you need to dip into your ira before retirement you can be penalized heavily. I chose the roth ira because it has a lot of better benefits. Starting in 2008 you can contribute up to 5000. If your 58 or older you will be able to contribute an additional 1000. the other benefits of a roth ira is that after 5 years of having you account open you can use it (for house down payment,car,etc) and not be penalized. Also with a roth ira you make your contributions after you paycheck has been taxed. Your roth ira will not be tax deductable since your paying out of your own pocket after taxes but when you decide to use at the age of retirement you wont have to pay taxes on it. If you have any other questions feel free to email me at [email protected]

 

[Tommy VanNess]

Thanks guys, exactly what I was wondering. Thanks usaf1541 for the etrade reccommendation. I thought maybe Fidelity or Charles Schwab or something. I want to retire comfortably of course, but I feel stupid without putting anything towards it now. I will take these under advisement guys. Thanks so much.



Tommy

 

[Jim P]

the comment by TJR about the earnings from a roth ira being tax free is not correct. When you establish a Roth IRA, you put after tax dollars into the account and the earnings accumulate tax free until you start withdrawing the funds after retirement. The principal you deposit into the Roth over time is withdrawn tax free (because you paid tax on the funds before you put the $$ in the Roth) BUT the earnings are taxed as ordinary income in the year which they are received. Your tax rate should be lower due to retirement and lower income from taxable sources.

 

[Thomas Rogers]

Jimp, I have been told by advisors and everything that I have read indicate that under most circumstances the earnings on a Roth can be withdrawn once at retirement age tax free.



The Wiki article seems to say the same thing:

A Roth IRA's main advantage is its tax structure. Contributions are made only from earned income that has already been taxed (and is not tax deductible), but withdrawals up to the total of contributions are federal income tax free, and withdrawals of earnings (anything above the total of contributions) are often free of federal income tax.

I'd like to understand under what conditions Roth IRA earnings are taxed as normal income as maybe you and I are thinking of differing conditions.



TJR

 

[Jim P]

The only way I would even think that the earnings from a Roth IRA would be tax free when distributed would be if the principal was invested in tax free investments, ;such as municipal bonds, etc., Last I heard, uncle sam wants people to save, but they are not that willing to cut or eliminate taxes on income (which is what the earnings from a Roth IRA are). The biggest tax advantage to a Roth IRA is that the earnings grow tax free until distributed to you(you dont have to pay any income tax or capital gains tax on your annual 1040 return) when income or gains are received (especially if actively managed and you incurr or realize short term gains from buying/selling on an active basis). All of this increase is not taxed until you start to receive distributions after retirement, and then that portion recievied above the contributions is treated as ordinary income, and would be taxed at your then current tax rate, which should be lower in retirement since you don't have a 9-5 job MF. Your quote of "often free of federal income", still leaves alot of territory that could subject the earnings to income tax. Remember, financial advisors work off commission for the most part, and they are usually not qualified tax advisors, and they want your business, so they tell you what they want to hear just to get the account. The word "often" in the quote would mean if the investments were structured right to avoid federal income taxes. Remember, the IRS code is the final word on what is considered income, taxable or non-taxable.

 

[Thomas Rogers]

Jimp, respectfully, I have to say, you are simply wrong.



You say:

the only way I would even think that earnings from a Roth IRA would be tax free...

Well, I say, "STOP THINKING!"



Instead, do some research. The MAJOR advantage and differentiator of a Roth IRA is that the withdrawals, earnings or not, are non-taxed, with almost no loopholes and minimal compliance factors.



Please do some research. I just did some again, online, and I keep seeing the following about Roth IRA, and it echoes what I have always heard, read, and been told by tax advisors:

Withdrawals of accumulated earnings are entirely tax-free only if you (1) hold the Roth IRA for a minimum of five years and (2) meet one of the following qualified exemptions:



Reach the minimum age of 59 1/2

Take up to $10,000 for first-time home purchase

Disability

Death

Source: http://www.seninvest.com/article4.htm



Here is another:

The Roth IRA provides no deduction for contributions, but instead provides a benefit that isn't available for any other form of retirement savings: if you meet certain requirements, all earnings are tax free when you or your beneficiary withdraw them. Other benefits include avoiding the early distribution penalty on certain withdrawals, and eliminating the need to take minimum distributions after age 70½.

Source: http://www.fairmark.com/rothira/roth101.htm



So, if you have a Roth for over 5 years and wait to draw on it until after you are 59 1/2 years of age, the law says you can tap those earnings TAX FREE.



TJR

 

[Thomas Rogers]

Also, Jimp says:

Your quote of "often free of federal income", still leaves alot of territory that could subject the earnings to income tax. Remember, financial advisors work off commission for the most part, and they are usually not qualified tax advisors, and they want your business, so they tell you what they want to hear just to get the account. The word "often" in the quote would mean if the investments were structured right to avoid federal income taxes. Remember, the IRS code is the final word on what is considered income, taxable or non-taxable.

I said OFTEN because I try not to use words like NEVER and ALWAYS, because when you speak in absolutes, you are almost always wrong.



I probably should have said "almost always" instead of often.



As for financial advisors trying to sell things and the IRS and the tax codes being the final arbiter, I agree. That's why it's good to understand the laws and the codes.



And the laws and codes of the Roth IRA make it one of the few if not only retirement savings vehicles that is easily tax free if you meet some minimum requirements that most all would meet.



TJR

 

[Jim P]

TJR

We can debate it all day long, but Tommy (who asked a question about IRA") should talk to a competent tax advisor and not act soley on anyone's advice from this board since it deals with his financial situation.



Regarding who is right or wrong, doesn't matter as you will do what you do, and I will do what I do, and each will enjoy or regret the outcome. I will continue to think for myself as I always have, but thanks for the offer anyway.

 

[Thomas Rogers]

Jimp,



Please read this with an open mind because I feel pretty insulted by your last reply.



Yes, I should have also said that Tommy should consider the advise of a tax advisor. That's always implicit so I didn't mention it.



As for the debate. There isn't much of one. You are simply wrong. I say so confidently because unlike you (seemingly) I have gone out and sought and posted legit sources to backup my understanding and statements. I posted several links to backup what I was saying, and you have only gave rhetoric and hyperbole to back up your beliefs about your position.



So, there really is no debate. You are wrong, you just don't seem to want to educate yourself or admit it; for some reason I can't understand.



To completley quash this discussion, let me put the IRS.gov link below about Roth IRA distributions, and quote where it clearly states that generally Roth IRA distributions are NOT income, and therefore NOT taxed:

In general, you do not include in your gross income qualified distributions from your Roth IRA....



A qualified distribution is generally, any payment or distribution made after the 5–taxable–year period beginning with the first year for which a contribution was made to a Roth IRA set up for you, and that is made on or after you reach age 59 1/2, ...

So, as you can see, the above says what I have been saying all along...as a retirement vehicle, the Roth IRA is tax free as far as earnings go as long as you have the account for 5 years or more, and don't draw until after 59 1/2 years old.



To be completely constructive in this discussion I asked you to describe the "conditions under which Roth IRA distributions would be considered normal income" to try to uncover if there were some differences in the basic scenarios that you and I were considering. Since then, I continued to reiterate the scenario I was describing (5 year holdership, 59 1/2 years old when drawing). The tax law indicates that scenario is tax free, and its probably the most common one applicable when talking about a retirement fund. That's why the Roth IRA is WIDELY known as, described as, and touted as a tax-free retirement plan (I don't make this stuff up).



To imply that I will do what I do, and I will enjoy or regret the outcome seems to be your way of saying I am wrong and time will prove such. I have tried to educate and to quote valid sources. I am not debating, but trying to understand why you would say something that is simply not factual, and to educate in the process. A debate requires something that is debateable, that has differences of opinion. I tried to uncover the different scenarios, that might shape the opinions, but that didn't yield anything. I have posted factual, non-debateable laws and tax codes. You haven't.



So, please, if you wish to educate me and wish to help me understand WHY you say I am wrong, please do the same thing that I have done. Simply, politely, tell me exactly HOW I am wrong AND back it up with legit sources. Please do that, or stop with the snide insults like the "time will tell" cautionary.



Even more insulting is saying that you will continue to think for yourself, as if I don't.



Frankly, it seems clear that your idea of thinking for yourself is coming up with your own notion of how things should work, and when given actual, valid evidence to the contrary to dismiss that evidence. Why not review the information?



If that's thinking for yourself, then I guess I'll just read, listen, and learn and not simply stand firmly by my pre-conceived notion of how things should work.



I'm sorry if those last couple of sentences came off as an attack, but c'mon. I've stated the facts, and you still say I am wrong and will regret it.



So, show me where I am wrong, please, and not post another "cop out" post<