Q:First off I would like to tell you that I really enjoy listening to you when you take over for Clark and value your advice a lot. Now on to my question:
I am 35 years old and I am will be quitting my current job in August and going into business for myself. I have approximately $40,000 of value in my 401k and want to know if I should leave it in my current plan or roll it over into a IRA. Either way, I plan on opening up a Roth IRA to continue putting away money for my retirement years. I believe I understand that I cannot roll over the 401k to the Roth because of pre- and post- tax issues (I really don’t understand this too well) but could you help me understand what is my best course of action.
A:If your company’s 401(k) plan has been doing well for you, you could leave the funds there. But I’d want more control over them, so think about rolling over the money into a self-directed IRA. Open the account and have the money withdrawn electronically, so you don’t touch it. If you get the cash, it could be construed as a withdrawal, and 20% taxes will automatically be withheld. (you’d get it back, but it would be a pain.)
Select an investment company like Fidelity or Charles Schwab that offers a large number of no-load funds and cheap index funds.
Q: My husband has retired at 62 and has a 401k plan, we want to roll it over but are unsure what would be the best and safest place to put it. We won’t need the money for a few years but need access in case of an emergency.
A: You should roll over the assets in your 401(k) plan to a self-directed IRA. You can open a self-directed IRA at any financial institution, like Fidelity, Charles Schwab, Merrill Lynch, or Vanguard. Have the financial institution do an electronic transfer, so that you don’t “touch” the money. Next, you’ll have to decide which stocks or mutual funds or bonds are the best for you. I recommend you divide up the money between an S&P 500 index fund, a total market index fund, and some sort of bond fund. Be sure to leave some in cash.
Q: I currently have about $900.00 in a 401K program with a company I no longer wok for. My present employment does not offer 401K programs. I am 27 years old and married (my husband does not participate in his 401K). Should I roll my present earnings into a traditional IRA or a Roth IRA? Both are available to me by the same company presently handling my 401K account (Vanguard).
A: If you roll the cash into a Roth IRA, you will pay taxes on it because you will turn a pre-tax retirement account into an after-tax account. Because you are less than 59 1/2 years old, you will also pay a penalty on the cash.
Roll the money into a traditional IRA. Leave it at Vanguard in their S&P 500 Index fund. Since you don’t have retirement options at your new company, make sure you contribute $2,000 to your IRA this year and also open up a Roth IRA and deposit $2,000 in after tax money in to this account (You can invest in another S&P 500 index fund or choose another index at Vanguard).
That will give you a $4,000 head start on your retirement, which is pretty significant — especially at your age.
Jan. 1, 2005
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