Finally Eligible for 401K at Work - Plus old 401k Rollover Question

[gamegrrl]

I was a late bloomer getting on board with the 401k offering at my old job. When I started that job back in 2008, I was so grateful to have a job, and I needed every penny I was making. I hadn't yet "seen the light" here at myFICO, and everything was a mess... My finances, my scores. Everything.

The last year and a half I worked there, I was finally in good enough shape to get on board with the 401k. I contributed the max amount that they would match. OMG how I LOVE employer match! It was minimal -- maybe 3% or something -- But the money sure added up quickly. And my 401k was earning ridiculous returns!

Fast forward to fall of 2014. I was recruited away for a much higher salary at exactly the same time that my old company was bought out. I had barely enough in my 401k for them to allow me to keep it where it was, so I did. At my new company, I had to work there for at least a year before being eligible to participate in their 401k. We are in the signup period right now, and I'm getting cold feet. Part of me wants to put divert 10% of my income to the 401k. There are NO MATCHING FUNDS in the new company's plan at my new job.

I'm currently putting $300/wk into a savings account. It's basically my emergency fund, and where I go to get the money to buy my $6500 traditional IRA every year. If I put 10% into a 401k, that drops my takehome pay by about $100/wk, but my 401k will grow at the rate of $135/wk. I figure I'll just decrease my weekly savings deposit to $200. Basically, excluding any 401k earnings, it looks like diverting that weekly $100 from savings to 401k will make it worth an additional $1820/year. 

Does this sound like a sensible thing to do?

Also, my old 401k that was with my old company is still sitting there. It's just $10k. The company that bought them out moved the 401ks to their own servicer. The fees are a LOT higher and the returns are a lot lower. I want to get it out of there. I don't have any experience with my new company's 401k or their servicer, so I'm hesitant to just roll it into my new plan, so I'm thinking about rolling it into a traditional IRA instead.

How about this? Sensible?

Frankly, as confusing as all of this stuff is, I can't tell you just how much more fun it is to be trying to figure out this kind of stuff rather than figuring out where I'll find the money for a new set of tires or repairing a chipped tooth. myFICO -- and my new job, of course -- have put me on the path to great things, and I am SO grateful!

[tacpoly]

I haven't looked at your calculations / numbers so I won't address that.  But definitely take your old 401K out and roll it over to an IRA.  The benefit of rolling it over to your own IRA is that you have a lot of more choices with regards to what vehicles (mutual funds / stock / etf / etc...) are available to you.  If you put it into your new company's 401K, you're stuck with their limited offering (which could have high fees).

If your new company is not matching, there is no benefit to putting money into a 401K except to lower your tax bracket, so I would look at putting money into a Roth IRA first.  This can work as an emergency savings account since you can withdraw the amount you put in without penalty.  Then I would put money into the 401K.  Because you say the fees are high, I would only put enough to drop you down to a lower tax bracket.  Whatever extra you have, put into regular savings / money market account and keep regularly adding to it -- you can later use it for emergencies or down payment for a house or a car without needing to dig into your retirement savings accounts.

[gamegrrl]

Thanks for your response! The couple of IRAs I already have are at Navy Federal Credit Union. I just picked based on how much $ I was putting in, and guaranteed rate of return. I believe I'm getting 1.98% on them. I never see anything about choices related to how the IRAs are invested. Is that because they're at NFCU or???

[tacpoly]

In case you didn't notice, I added to my comment above. 

You decide how the money in your IRA is invested.  Depending on who you have the account with, you will have different choices -- but basically any mutual fund, stock, bond, CD, etf, and annuity that you can buy with that firm will be open to you.  You just need to pay attention to fees (ex. you can buy vanguard funds at fidelity but fidelity offers their spartan funds with lower fees so you might consider buying that instead of vanguard).  So call NFCU and ask what investment vehicles are available to you. 

Something to note:  because your IRA is tax-advantaged, it might be a waste to put low yield CD or fed tax-exempt muni bonds in it.  This applies double to a Roth IRA: you want to put the highest growth stuff in there because it won't be taxed when you retire.

[gamegrrl]

One thing I probably should have mentioned is that I will turn 60 this year.

[bada_bing]

Retirement account choices and what investments to put in them are partially driven by

the retirement planning goals. At age 60, you are close enough to retirement to start getting

a clearer picture of what the results will be. I'm not far behind you at age 55. The range of

what my potential retirement will look like financially is a lot narrower than it was 20 years

ago  The future is looking more certain, with both extreme wealth and poverty

no longer in the picture.

A typical recommendation from retirement planner types is to put (100 - your age)% into stock

based investments. From what you've posted it seems you are more conservative in your

allocation than that. That may be a smart choice, just make sure you have evaluated the choice

and it's not just by default.

The best way for a typical retirement investor to get exposure to stocks is through mutual funds and/or

ETF's (exchange traded funds). Arguable the best selection of funds for stock market exposure for the

individual retirement investor are Index funds. Retirement stock market investing doesn't have to be

complicated or confusing. 

My ideas for what you have posted are:

1. Change your traditional IRA contributions over to a Roth IRA account going forward in the future.

2. Since you don't get a company 401K match, I would prioritize the Roth IRA contributions up to the

annual limit and use the 401K for excess savings.

3. Open the Roth IRA account from #1 above at a discount brokerage. Schwab or Fidelity are excellent

choices. Open a traditional IRA account at the same brokerage and roll your existing IRA's and old 401K

over to it. Schwab in particular has a team of Rollover specialists that will handle getting the money

consolidated with little stress on you.

4. The last recommendation is to spend some time researching and calculating. It isn't daunting, but it does

require a few hours of casual study to get good results investing, and more importantly with retirement planning.

Below are a few links that can get you started. With just a very few hours of reading you should have the basics

down. There is a huge amount of investment info posted on the web, a lot of it good. Just be aware there are

genuine differences of opinion on investing and there are also people who are looking to make money off of

serving your retirement investment needs. Best to triple check any new ideas before leaping.

There are lots of free retirement calculators on the web. It can be helpful to plug your numbers into a few to

see where they say you are at. There is a good retirement calculator at Fidelity, but I'm not certain whether

you have to be an account holder to access it.

Set up a My Social security account.

Schwab discount brokerage

Fidelity accounts

Vanguard

What is dollar cost averaging?

What are index funds?

How much exposure to stocks?

[Anonymous]

The Roth/Traditional IRA question should be based on what your tax bracket is now and where it will be in the future. Generally, you're at a lower bracket when you retire than when you're working. Especially as you're 60, I would be putting into a regular IRA now, and paying the taxes when funds are taken out. rather than going the Roth route. I believe you can make catchup payments as well, should those interest you.

I would definitely move your 401k. You don't have to do an IRA with your CU; there are lots of people out there who can hold them for very little in fees. I use Scottrade, but bascially every brokerage has the option. One thing to keep in mind is that you want to do an electronic transfer if possible. The default with most places will be to issue you a check, which will have applicable taxes and penalties taken out. You have to put the full amount (what you had before taxes & penalties) into the new account or you lose the taxes and penalties. This requires have excess cash on hand. You then get those taxes and penalties back when you file your taxes in April. However, doing an electornic bank-to-bank transfer ignores all that and makes it easy for you. You should also be able to roll your old 401K into your new 401K.

One other thing to consider is that you can put up to $18k a year into a 401k, while Roths and Traditional IRAs are limited to something like $5500 per year. So, you can bump up your savings by a lot if you go the 401k route.