Advice on 401k
Edgewood, MD · Member since 2014 · 283 posts · 59 votes
I have 22 stock options when it comes to election contributions through my 401 K? I don't know anything about stocks. What factors should I look for when it comes to which stocks I should contribute to?
Low Management Expense Fee (possibly called expense ratio). No "Load" (No Sales Fee either on back end or front end of transaction).
Most employee 401ks have some sort of target year of retirement fund. You want to be more aggressive while younger (more stocks, less cash/bonds/cds) and more conservative as you get older (less stocks, more cash/bonds/cds).
Low Management Expense Fee (possibly called expense ratio). No "Load" (No Sales Fee either on back end or front end of transaction).
Most employee 401ks have some sort of target year of retirement fund. You want to be more aggressive while younger (more stocks, less cash/bonds/cds) and more conservative as you get older (less stocks, more cash/bonds/cds).
Low expense ratio (under or around 1%). I would review the summary of each of the funds you are considering to see their top holdings. The funds within your plan are likely comprised of different sectors - Large Cap, Mid Cap, Small Cap, World Stock, Specialty, Target Date Funds, etc... Select which ones interest you and you believe are poised for a return that meets your risk tolerance. Remember past performance is not a predictor of future performance.
My $.02 is that most employee-sponsored 401K plans have poor investment choices and too many fees. My rec. is to only invest enough to get the full company match, and then invest anything you can above that in a Roth IRA, real estate, &/or other investments of your choosing.
Have you ever thought about investing your 401k in real estate?
Have you ever thought about investing your 401k in real estate?
Yes that's my goal. Unfortunately I have a loan through my 401k that doesn't come off the books until sometime in 2018.
You might want to do more study on investopedia site or the likes on 401k...
Quick things to consider -
What company is the 401k offered through? If it's one of the low fee companies like Vanguard then you are in good shape, but still do more work on fees. If it's not one of those low fee companies you will need to spend more time studying.
Find out what options your company provides, with fee info and type of investment and past performance.
Find out the matching amount.
Know how much you want to contribute to get the 'free' matching company contribution. Definitely contribute to get the maximum matching amount you can afford.
Decide if you want to use target date fund, if your company offers it, and if the fee is less than 1%. (Target date fund usually has a name with a year in it)
If the fees are high, find total market index fund or S&P fund and check their fees. Usually index funds have lower fees but not always true.
Hope that helps.
Henry
Ascensus is the company my 401k is offered through. I work through GE. They match 25% up to the first 6%. I currently contribute 6%. I'll have to answer your other questions sometime this weekend when I'm off. I'm going off of memory right now.
My $.02 is that most employee-sponsored 401K plans have poor investment choices and too many fees. My rec. is to only invest enough to get the full company match, and then invest anything you can above that in a Roth IRA, real estate, &/or other investments of your choosing.
What are the benefits of a ROTH IRA?
Have you ever thought about investing your 401k in real estate?
I'm under the impression that you cannot invest your 401k with your current employer into real estate, and you cannot roll it over into an IRA until your employment ends.
Old 401k's can be rolled over into a SDIRA.
As far as the OP is concerned, most 401k plans offer a fund that matches the S&P500 index. These are usually cheap (.5% expense ratio or lower) and are a great place to park your money, until you read up some more on asset allocation and low-cost investing. Any fund with an ER over 1.0% is a ripoff.
Here's a really good book to read. It'll get you on the right path. Easy read, can finish it in a day or two.
http://www.amazon.com/Little-Book-Common-Sense-Investing/dp/0470102101
Any earnings made on a Roth IRA are tax-free. Meaning if you invest $100 in the Roth and make 20%, the extra $20 in earnings is tax free. The original $100 is deposited with after-tax money. You can also withdraw your original $100 from the Roth at any time, making it more liquid than traditional IRAs or 401ks.
Basically, if you think you're going to make more money in the future (decent bet when you consider inflation), the Roth IRA performs better than the 401k because you buy into the Roth at your currently lower tax bracket.
If you have a 401k with a current employer, it is true that usually you cannot roll it over to an IRA. Unless the plan allows "in service distribution", then you can withdraw (with taxes apply) or rollover the 401k funds while still with the same employer. For this you will need to check with your plan administrator or HR department.
My $.02 is that most employee-sponsored 401K plans have poor investment choices and too many fees. My rec. is to only invest enough to get the full company match, and then invest anything you can above that in a Roth IRA, real estate, &/or other investments of your choosing.
What are the benefits of a ROTH IRA?
Frankie pretty much answered it, though I'll add that your investment options are limited only by a few IRS restrictions, vs. what your company 401k offers. For instance, I'm now doing private lending in my Roth IRA, earning double-digit returns w/ minimal risk.
Put it in an index fund. Avoid ALL managed funds. No fund manager can beat the indexes on a consistent basis.
Look to see if your company-sponsored 401k has a brokerage option.
I was pleasantly surprised to find that mine did.
A brokerage option gives you great flexibility; for instance, my "regular" 401k had about 20 funds to choose from. With the exception of the Vanguard S&P 500 index at a .04% ER, nonE of the other funds really did it for me.
But with my 401k brokerage account, I now suddenly found myself able to invest in a wide variety of low cost Schwab mutual funds and ETFs, with no commission charges. (Schwab is the provider of our company 401k.)
Suddenly my 401k went from "meh" to kick butt.
Put it in an index fund. Avoid ALL managed funds. No fund manager can beat the indexes on a consistent basis.
What is an index fund? And how is it different from a ROTH IRA?
Have you ever thought about investing your 401k in real estate?
I'm under the impression that you cannot invest your 401k with your current employer into real estate, and you cannot roll it over into an IRA until your employment ends.
Old 401k's can be rolled over into a SDIRA.
As far as the OP is concerned, most 401k plans offer a fund that matches the S&P500 index. These are usually cheap (.5% expense ratio or lower) and are a great place to park your money, until you read up some more on asset allocation and low-cost investing. Any fund with an ER over 1.0% is a ripoff.
Here's a really good book to read. It'll get you on the right path. Easy read, can finish it in a day or two.
http://www.amazon.com/Little-Book-Common-Sense-Investing/dp/0470102101
Are you referring to borrowing against my 401k and using the loan as a down payment on a property?
Where do I go to set up a ROTH IRA?
Put it in an index fund. Avoid ALL managed funds. No fund manager can beat the indexes on a consistent basis.
What is an index fund? And how is it different from a ROTH IRA?
Wow, you really don't know much about stock investing. An index fund is just a mutual fund that tracks a particular index such as the S&P 500. Or the Midcap400.
A Roth IRA or Roth 401K plan are tax free vehicles to hold that index fund in. If I were in your shoes I'd pick a Roth all day long as it's tax free when you cash out. As long as you leave it in there for at least 5 yrs. if your co contributes $$ into your account in a Roth it's like getting free money.
index funds are a perfect choice for a 401K plan. Very low expenses and it will beat most actively managed funds out there. There are many index funds out there so maybe you should diversify. Don't just put all your $$ in one index fund that invests in the USA for instance. There's global index funds that can perform and give you a steady return.
Good luck.
Put it in an index fund. Avoid ALL managed funds. No fund manager can beat the indexes on a consistent basis.
What is an index fund? And how is it different from a ROTH IRA?
David, you most definitely need to read the book I posted a link to, "Little Book of Common Sense Investing". It's a good place to start.
An index fund is a mutual fund or an ETF that simply tracks an index, like the Dow Jones or the S&P500. There's no manager picking and choosing individual stocks (an "active" fund). It's purely passive.
A Roth IRA is a type of account. There are basically two different types of retirement accounts (not including your 401k). A Traditional IRA and a Roth IRA. Both do the same thing; they shelter your money from taxes. The question is when do they shelter your tax dollars.
A Traditional IRA takes pre-tax income and puts it into a tax-sheltered account, where it grows tax free until you pull the money out during retirement, at which point it's taxed as regular income at whatever tax bracket you're in at the time. You get an immediate benefit up front by reducing your tax burden today. Assume you make $100k, and put away $5500 into your IRA. You've effectively lowered your current tax burden by $5500, so the IRS only considers you having made $94.5k for the year, which is what you'll be taxed at.
A Roth IRA does the same thing, except you pay the taxes up-front, with the "promise" that it'll be available tax-free for withdrawal during your retirement. So if you made $100k this year, and put in $5500 into your Roth IRA, the IRS will still tax you on the full $100k you made.
I put "promise" in quotation marks because I have serious doubt that the Congress of 30 years from now will keep the promises made last decade. The government has already hinted at trying to tax various other tax-havens over the past few years, and I have little doubt that at the rate we're burning through cash Congress of the future will say "yeah, we made a promise, but so sorry... gonna tax you anyways."
A bird in hand is worth two in the bush; I'd rather have my tax benefit today.
Of course, there are always exceptions to the rule. For instance, if you're already in the lowest tax bracket today, it would make sense to put your money into a Roth IRA. But if you're 20% or higher, parking your money into a Traditional IRA makes way more sense.
As to where do you open up a Roth IRA, any brokerage will do. Vanguard, Schwab, TD Ameritrade are great places to start.
However, that being said, you asked about your company sponsored 401k plan. That's a totally separate type of account, although it acts much like a Traditional IRA; money you put into it today will directly reduce your taxable amount during tax time tomorrow. The big difference is that you can contribute something like $18k annually into a 401k plan, while with an IRA (both Traditional and Roth) you're currently limited to $5500 a year.
Also, many employers offer a match, where they'll contribute a certain amount for every dollar you put in, up to a certain limit. Think of it as free money.
Finally, if you're really in love with the Roth idea, check to see if your company offers a Roth 401k. Operates the same way as a regular Roth IRA, but again, larger contribution limit and usually a company match.
But before you do anything else, go to the library or to Amazon and get the book I mentioned. It's an easy read, and it's a great place for you to start learning.
Has anyone cashed out their company sponsored 401k while taking a 10% early withdrawal penalty? What was your thought process on making that bold move?
@Lane Kawaoka you should probably post your question in the forum separately from this thread. It's not really related the original question asked.
For the OP - you can read a lot of books and do a lot of research and the answer will still be the same. Put it in an index fund, preferably with a company that has low fees such as Vanguard. Your 401k probably doesn't have Vanguard as an option because there's a lot shady things that go on when companies decide on who gets to administer the 401k plan and the best thing for the employee - low fees - is not what they base their decisions on. However most 401k plans do have a least one index fund that follows the S&P 500 or a broader index.
Put it in an index fund. Avoid ALL managed funds. No fund manager can beat the indexes on a consistent basis.
What is an index fund? And how is it different from a ROTH IRA?
Wow, you really don't know much about stock investing. An index fund is just a mutual fund that tracks a particular index such as the S&P 500. Or the Midcap400.
A Roth IRA or Roth 401K plan are tax free vehicles to hold that index fund in. If I were in your shoes I'd pick a Roth all day long as it's tax free when you cash out. As long as you leave it in there for at least 5 yrs. if your co contributes $$ into your account in a Roth it's like getting free money.
index funds are a perfect choice for a 401K plan. Very low expenses and it will beat most actively managed funds out there. There are many index funds out there so maybe you should diversify. Don't just put all your $$ in one index fund that invests in the USA for instance. There's global index funds that can perform and give you a steady return.
Good luck.
I know absolutely nothing about stock investing. Excuse me if my questions are very elementary. Thank you and everyone else for your answers and for bearing with me as I try and understand all the information provided.
Put it in an index fund. Avoid ALL managed funds. No fund manager can beat the indexes on a consistent basis.
What is an index fund? And how is it different from a ROTH IRA?
David, you most definitely need to read the book I posted a link to, "Little Book of Common Sense Investing". It's a good place to start.
An index fund is a mutual fund or an ETF that simply tracks an index, like the Dow Jones or the S&P500. There's no manager picking and choosing individual stocks (an "active" fund). It's purely passive.
A Roth IRA is a type of account. There are basically two different types of retirement accounts (not including your 401k). A Traditional IRA and a Roth IRA. Both do the same thing; they shelter your money from taxes. The question is when do they shelter your tax dollars.
A Traditional IRA takes pre-tax income and puts it into a tax-sheltered account, where it grows tax free until you pull the money out during retirement, at which point it's taxed as regular income at whatever tax bracket you're in at the time. You get an immediate benefit up front by reducing your tax burden today. Assume you make $100k, and put away $5500 into your IRA. You've effectively lowered your current tax burden by $5500, so the IRS only considers you having made $94.5k for the year, which is what you'll be taxed at.
A Roth IRA does the same thing, except you pay the taxes up-front, with the "promise" that it'll be available tax-free for withdrawal during your retirement. So if you made $100k this year, and put in $5500 into your Roth IRA, the IRS will still tax you on the full $100k you made.
I put "promise" in quotation marks because I have serious doubt that the Congress of 30 years from now will keep the promises made last decade. The government has already hinted at trying to tax various other tax-havens over the past few years, and I have little doubt that at the rate we're burning through cash Congress of the future will say "yeah, we made a promise, but so sorry... gonna tax you anyways."
A bird in hand is worth two in the bush; I'd rather have my tax benefit today.
Of course, there are always exceptions to the rule. For instance, if you're already in the lowest tax bracket today, it would make sense to put your money into a Roth IRA. But if you're 20% or higher, parking your money into a Traditional IRA makes way more sense.
As to where do you open up a Roth IRA, any brokerage will do. Vanguard, Schwab, TD Ameritrade are great places to start.
However, that being said, you asked about your company sponsored 401k plan. That's a totally separate type of account, although it acts much like a Traditional IRA; money you put into it today will directly reduce your taxable amount during tax time tomorrow. The big difference is that you can contribute something like $18k annually into a 401k plan, while with an IRA (both Traditional and Roth) you're currently limited to $5500 a year.
Also, many employers offer a match, where they'll contribute a certain amount for every dollar you put in, up to a certain limit. Think of it as free money.
Finally, if you're really in love with the Roth idea, check to see if your company offers a Roth 401k. Operates the same way as a regular Roth IRA, but again, larger contribution limit and usually a company match.
But before you do anything else, go to the library or to Amazon and get the book I mentioned. It's an easy read, and it's a great place for you to start learning.
I meant to tell you earlier thanks for the link. I will definitely read the book you provided.
Assume you make $100k, and put away $5500 into your IRA. You've effectively lowered your current tax burden by $5500, so the IRS only considers you having made $94.5k for the year, which is what you'll be taxed at.
A bird in hand is worth two in the bush; I'd rather have my tax benefit today.
If you put $5500 into a traditional IRA or 401k, your tax burden is not lowered by $5500, but $5500 X your marginal tax rate.
As for having your tax benefit today, that's fine, but all your future investment gains will be taxed as ordinary income vs. capital gains potentially outside the IRA. I've done the math, and have decided to convert my trad solo 401K holdings to Roth as I can afford to take the tax hits. I converted a sizable sum last week to fund an apartment acquisition, which will provide a lifetime of tax-free income.