Entries Tagged '401k rollover' ↓

The average investor is at a distinct disadvantage in today’s markets.  Large institutional investors, hedge funds, and other large investment houses all have tools available to them which are not available to the average investor.  These tools allow them to see what is going on in worldwide markets as well as trade out of the spotlight of the public market.  An individual investor can make money mainly by understanding this system, using their wits and learning about available investment options thatmay be new to them.

One example of investment vehicles that is new to many individual investors is exchange traded funds.  Exchange traded funds, or ETFs, are buckets of investments pooled together and then sold as though they are individual stock.  Technically, they are funds made up of combinations of investments, or they track individual investment vehicles, such as commodity futures.  It’s a way for an individual investor to get into certain investment vehicles that might not be available to them otherwise.  As an example, many 401K accounts do not offer ETFs as an investment option.  Usually, a 401K retirement account is run by a fund company and therefore mutual funds are the extent of the investments available for your retirement funding.  Today investing in mutual funds may not always be a good idea.  They can have high fees, inflexible investment requirements and other issues that can cause you to lose money when what you’re trying to do is build your retirement account.  With exchange traded funds on the other hand, you have options available to you to invest in individual shares of vehicles that allow you to diversify your funds.  You can get in and out of an ETF immediately, not at the end of the trading day as with the mutual funds.  In addition the fees are generally much lower for ETFs than for mutual funds.

So how can an individual investor get involved in investing with ETFs?  The easiest way is by opening a self directed IRA account, or a self directed 401K rollover.  These accounts allow you to choose your own investments, and not rely on a pool of investments that are pre-chosen for you by your fund manager.  In addition you can pick and choose investments based on your feeling about the market, and allows you to be more self reliant in your investment choices and decisions.  As we saw in the last economic down turn, the fact that an individual is a professional advisor by no means guaranteed anyone profits in their portfolios.  To the contrary, professional advisors did as poorly in the economic downturn as anyone else.  It was only by learning about the markets and investing on your own behalf that your discount brokerage account will be managed with your best interest at hear and not commissions and fees for your broker.

For the past decade or two, with the growth of IRA retirement accounts and employer-sponsored 401(K) accounts, more and more people are saving for retirement using these vehicles.  It’s widely assumed that Social Security will not provide enough money to live in a style to which many people have grown accustomed, and a way to save tax-free for the future is to open a retirement account.  Subject to IRA tax rules, you can invest pre-tax dollars, or in the case of a Roth IRA, after tax dollars, and have the funds grow until you are eligible to withdraw in retirement. 

Lately however as the stock market has been more volatile, many individual investors are foregoing their IRA contributions because they haven’t learned how to invest for long term growth in any but a bull market.  Many investors think that putting their retirement money in mutual funds is the only option they have to invest, and some individuals with retirement accounts aren’t even sure of the difference between the terms “IRA” and “mutual fund”. Hopefully we can clear up some of the confusion, and offer some ideas for finding good stocks to buy to keep your portfolio growing whether the market goes up or down.

Depending on the type of IRA you have, you may or may not have a good selection of investment choices.  This is also true of 401(K) account plans at most employers.  For example, many people open IRA accounts or retirement accounts with their bank, or an online bank, that restrict the choices available.  This means that there are likely several mutual funds, or particular mutual fund companies, that you can invest in, but you’re prevented from investing in ETFs, individual stocks, currencies, certain types of bonds, and so on.  These banks or employers do not want investors to come back complaining that they lost money in a particular stock, but as we’ve all seen, the potential for losses exists in all investment areas. 

As a result, poor information about investments, as well as the lack of education on the part of investors, are big reasons that people believe they don’t have to know anything about the markets, except to put their money into a so-called “good growth stock usual fund” and leave it there forever until they’re rich at retirement.  That scenario is now officially a pipe dream, and the best advice you can get is to move your money into a self directed brokerage account that gives you real choices and information.  You’ll need to take some time to learn to invest, and take that information into your planning process.  This is the only way you will be able to build a portfolio that can weather the coming economic turbulence.

When you switch to a self-directed IRA account, whether it’s a rollover 401k, or a new traditional IRA, you effectively open a brokerage account which you alone control. You are still subject to the withdrawal restrictions and penalties that apply to retirement accounts, but you can now invest in any investment vehicle which your broker offers.  This could include individual stocks, currencies, government and corporate bonds, options, mutual funds, ETFs, or any type of similar investment.  With this type of account, the choices for investment are much broader, and allow the investor to make decisions based on their personal financial plan, their own risk tolerance, and other goals that may or may not be fulfilled through the limited choices offered by employer-based plans or certain bank plans.

An important thing to remember is that with a self directed account, you can still invest in conservative investments like bonds and CDs or money market funds, or find good stocks to buy that match your investmnet goals, but you also have the ability to buy and sell holdings as you choose, or select new vehicles that fit your financial goals better. “Self directed” does not equate to “risky”.  It merely means you are now in control of your money and your financial future, which is the best way to make sure your money is working in ways that match your unique defined needs.

When the markets take a nose dive, it makes the financial “advisors” look like they don’t know what they’re doing, because they have been telling people to “stay invested no matter what” – and yet, average investors find themselves treading water, as the increases erode with just a few days massive declines. The problem is that this advice is intended to help everyone except the individual investor. The financial advisors are selling product. They make money when you first invest, and after that, they don’t care much. Except for when they can tell you to invest in something else, and they make money again. Their fortunes are not tied up in whether you make money in the stock market or not. True, you may decide to move your account as a result of bad advice, but the advisors at the next firm you go to have the same motives, the same results, and the same product as the advisor you are seeking to leave.

The only way to really protect your finances is to invest yourself using a self-directed account. Whether you have a self directed individual account, a self directed rollover 401k account, a self directed custodial account, only you have your own best investing interests at heart. Many people who put money into mutual funds and other products – who are not truly “investors” as will be explained below – don’t want to hear that they have to learn how to invest. But the sobering fact is, even if you choose not to invest your own money in a self directed account, and prefer to give your money to someone else to invest it, you need to understand the markets and know how to invest so that you can make sure your broker is doing the right thing. You won’t know that if you don’t understand investing.

I’ve heard people say “I don’t want to know all the details of how to invest in stocks, so I hire a professional.” Well if you have less than a$250,000 to invest, real professsoinals, who operate on a fee only basis, are not going to want to work with you. There is no profit in it for them to have dozens of investors who only have $5,000, $10,000 or even $50,000 to invest. The reason is, they get fees that are high enough that it eats into your returns, and they can’t show you a decent return on your investment after you deduct the costs of using their services. And small investors are more likely not to want to pay fees in the hundreds of dollars to get advice anyway. So if you are rich, you can afford to hire a professional. The rich are not in the position of being concerned about saving what’s left of a very small nest egg.

So where then do you invest if you want to have a self directed account? The idea is, you invest then in vehicles you understand, and that you learn how to trade. In the beginning, this may mean just a money market fund, or a government bond fund, something conservative which is easy to grasp and where you can park your money relatively safely while you learn more. From there you can graduate to investing in index funds, but using ETFs instead of mutual funds, as they are cheaper to trade, have no minimum balance requirements (like the $3,000 minimums you’ll find as some fund companies) and they don’t have the same fees and taxes.

At some point, you may even learn to buy stocks, and there is nothing wrong with doing that, if you learn how to do the research, follow the market, and are ready willing and able to make trades that aren’t just based on emotions, but a solid financial plan. There are plenty of good sources of information about how to invest in stocks, from broker resources, to books, to entire publishing companies that put out nothing but investor information.

The point is you are going to take it slow, at your own pace, to learn about what works for you, and understand how your money is working for you. You are not then at the whim of some advisor and their desire to make money for themselves. You don’t have to be anxious about not knowing what is going to happen to your hard earned money, and what exactly it is invested in. You can relax, and plan your future around a financially stable plan, and know that you have the skill to take care of yourself financially.

A 401(K) account is an employer-based retirement account and is governed by federal regulations and choices your employer makes for you regarding investments and 401(K) withdrawals. For example, there are limits on what you can invest in, limits on loans and withdrawals in both amount and purpose. There are also penalties if you withdraw money under certain circumstances.

401(K) rollovers are considered an IRA account, technically. They are both investment accounts set up for retirement. However an IRA account can be set up outside your employment, and could be invested in many more types of investment vehicles than a 401(K). Contributions to both a 401(K) and IRA are made before tax, and you pay taxes instead on the money you withdraw when you are retired. You can do a 401k withdrawal and also an IRA withdrawal both before and after retirement age, but if you withdraw before you reach the statutory age limit, there can be penalties and taxes due and owing. They also both have contribution limits, although in a 401(K) you can contribute more than to a traditional IRA account. Confused yet?

When you leave your employer, you have the option to leave the 401(K) behind with the employer’s fund manager, or you can instead do what’s known as roll over your 401(K) to a new brokerage. Your rollover account is often referred to by brokers as “rollover IRA”, because once you roll over into a new account, the new account is not technically a 401(K) account any longer. This instead is a traditional IRA to which you have moved your 401K() fund balances.

A 401k rollover to IRA can benefit you, because the rules get relaxed on the new account. You are not prevented from withdrawing money, as you might have been at your old job. You will still be responsible for paying the taxes and penalties, which can be substantial at nearly 40% of the withdrawal amount; for that reason a 401k withdrawal is never recommended except for emergencies, or if you qualify for an exception such as paying for college (you will still owe taxes). But when you rollover your account, you can now invest as you see fit, and are not limited to the investments your employer has chosen for you. You can also invest your 401k in cash vehicles such as U.S. Treasury notes or T-bills, or money market funds and CDs. The choice is now yours, not your employer’s.

One other reason to roll over is that you can convert into a Roth IRA account when you roll over your 401k. Money you invest in a Roth IRA is invested with after tax dollars, but when you retire, you pay no taxes on the money you take out. This can be a significant savings – you could pay less by paying taxes today instead of in the future when the value of your account has grown. When you covert from a tax-deferred account into a Roth however, you will owe taxes on the money you previously invested with a tax-deferral, so check with your fund manager for conversion details. Right now, there are regulations which allow you to pay the taxes owed over time, so it’s not such a big hit all at once.

Taking your 401k rollover to an IRA makes sense on a number of levels. By moving your retirement funds today, you can gain control over your financial future and improve your returns.

Here at Saving Cash Tips, we’re hosting Part 2 of the Investing Carnival. We’ve been checking out some posts on investing blogs around the web, looking for good ideas about how to invest. Here are some posts we think you’ll find helpful in your investing efforts:

In this tough economy it can be hard to stay focused on saving for retirement. At
Retire Early Guide they teach you effective savings tips so that you can stay on top of saving for your future now! The site covers topics such as paying off your mortgage faster, saving for your childrens education and cutting variable expenses!

Jim Cramer has given me great insight into the stock market through a service he created called Action Alerts Plus which allows us to watch as he makes his own trades through a charitable trust portfolio. Read my review and sign up for a free two week trial.

And here’s some good advice about 401k rollover options: When deciding to leave your current employer, you have more to think about than your new job. If you have invested in the company’s 401k you need to decide what you will do with your retirement funds.  Educating yourself about your rollover options is crucial before taking action.

Ty Coon over at Stock Market Investing Today has started his Poor Man’s Stock Market Investing Challenge. He’s helping people use a stock simulator to learn how to start investing in the stock market.

According to Stock Market for Beginners Guide, for all newbies who wish to make money in the stock market the difference in making big bucks versus losing is the education. To begin it is important to understand how the stock market works and how the stock exchanges operate. Understanding the stock market today will help avoid a few costly mistakes while you are a beginner. It will also help as then you will be a notch above those who venture into the stock market with no knowledge and understanding of the markets.

At 401k Rollover Answers, they’ve pointed out that in this time when many people are facing a job transition, one of the important details that can fall through the cracks is the question of what to do with one’s 401k account. It is a good idea to do some research before deciding what to do with the retirement fund from your old company. This article demonstrates some of the common mistakes people make, from cashing it out early, to forgetting they’ll need to pay back a 401k loan.

Hope you find these Investing Carnival links profitable!