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Author: slowduck One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: 401k problems Date: 12/7/2004 3:34 PM
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All:

I hope you can calm me, or at least direct me, because I'm furious.

Here is the situation:

My company recently decided to move our 401k plan provider from Charles Schwab mostly because people were not investing in funds due to the fact that you could not just set up a % for each contribution to go to different funds. For example, you couldn't say I want 25% to go to an index fund, 75% to a EuroPacific fund.

We also had the option for 4 years + to trade stocks in our 401k. As such I settled over the past 4 years on a dividend reinvestment strategy which allows me to buy and hold 8-10 major dividend paying company stocks, and automatically reinvest the dividends. This has proven VERY valuable as I've gotten a nice bump up in my value from the dividends and have had very few transaction fees since the dividends are automatically re-invested. Now...I don't have hundreds of shares of these companies, but each on has let me add fractional shares so for example I ended up with 32.35 shares of Microsoft after the last quarterly dividend.

So far so good.

So, we switched. Here is what happened. We got rid of Schwab. We went to 401ktrax which lets you purchase 10 different mutual funds. There is no stock trading. For those of us who traded stocks in our 401k we had the following options:

1. Sell our stocks and invest only in mutual funds. We pay for the transaction fees (about $300 for me)

2. Transfer in kind to Ameritrade and pay a $300 yearly fee to continue trading.

I chose option 2 figuring that I don't want to change my long term investment plan.

Well. Turns out that Ameritrade has some serious deficiencies with their corporate services. None of which were made clear to me when I had to make the choice above.

1. I cannot hold fractional shares with Ameritrade as I could with Schwab. This means that for every stock where I had fractional shares, they got liqudiated during the transfer in kind (the fractional shares were liquidated).

2. This also means that unless I hold enough stock in any one company so that the dividend each quarter is equal to one full share of stock, I cannot do dividend reinvestment because Ameritrade won't purchase that stock for me. For example, if I have General Dynamics, and they pay a $12 dividend to me...that dividend will be cash only, not drip reinvested in GD...because it isnt' enough to buy one full share. This means I have to purchase 4-5 times the stock shares for each company I currently hold to get dividend reinvestment..AND...i can't have fractional shares anyway...so only SOME of the dividend will be going into the stock. The rest to cash. NOT a good foolish strategy.

3. The result here is that if the dividends all go to cash, I have to wait until I have enough to buy one more share of a particular stock, and THEN have to pay a transaction fee to purchase it. NOT FOOLISH. Otherwise I have to wait until I have a larger sum of money to purchase more stock to ensure that the Transaction fee is a much lower (more foolish) percentage of the transaction. Here I lose because I am not getting the increasing dividends provided by as standard div reinvestment strategy.

4. All that being said...I STILL CAN'T do dividend reinvestment, because most of the stocks I hold are not on Ameritrade corporate services list for dividend reinvestment. I don't hold some bizarre stocks, I have very solid, large, standard companies. GD, G, MSFT, etc.

These are the stocks that I do dividend reinvestment in. The are long term plays for me with a very foolish (in my opinion) strategy for my 401k.

401ktrax, the new provider of our 401k program says that Ameritrade is the ONLY stock trading company we are allowed to use for our 401k.

Seems to me that my company has effectively FORCED me into abandoning my 401k strategy and adopting a lame "buy mutual funds selected by the company" strategy. I will not rely on someone in my company selecting mutual funds for me. I barely trust mutual fund management companies as it is.

What can I do? I feel so angry that I'm considering stopping all contributions to my 401k and just putting it all in a roth IRA or something. Not foolish...I dont' think...

Help, I need some talking down from the ledge!!

Slowduck
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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43437 of 76398
Subject: Re: 401k problems Date: 12/7/2004 3:44 PM
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What can I do? I feel so angry that I'm considering stopping all contributions to my 401k and just putting it all in a roth IRA or something. Not foolish...I dont' think...

Does your company match your contributions at all? If not, I would seriously consider stopping the 401k and using the Roth IRA and a taxable account with a low-fee online broker.

If they do offer contributions, I may be inclined to switch over to the mutual funds (assuming that they offer a good index fund) and contribute only enough to receive the full match. After that, I would max the Roth IRA and invest anything else in a taxable account.

While the advantage of tax deferred investing is appealing, it does not make sense if you are investing in things that do not fit your strategy or plan, even more so if there is no matching contribution from the employer. And with the lower capital gains taxes right now, the taxable accounts are not as negative as they once were.

Just something to consider...

dt
does not have a 401k as it is not offered but does have a SIMPLE-IRA

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Author: slowduck One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43438 of 76398
Subject: Re: 401k problems Date: 12/7/2004 5:32 PM
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DT,

Thanks for the response...

A couple of questions and notes:

1. My employer does NOT match funds at all. And currently has no plans to do so.

2. I was under the impression that I could only contribute $2000 per year in an IRA.

3. Isn't a ROTH IRA an account with Taxable $$? What is the disadvantage to not having money taken out of my paycheck before taxes here? We are talking $12,000+ per year...

Thanks for the help,

Slowduck

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43440 of 76398
Subject: Re: 401k problems Date: 12/7/2004 5:51 PM
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1. My employer does NOT match funds at all. And currently has no plans to do so.

IMO, that is a strike against the 401k since they are not really offering any options that appeal to the strategy/plan that you have in place. Only you can weigh the benefits of having more tax deferred money invested in subpar options versus the potential for slightly more in upfront taxes with investments of your choice.

2. I was under the impression that I could only contribute $2000 per year in an IRA.

If you are under the age of 50 (I believe that is the cutoff but would have to check to be sure), you are permitted to contribute $3000 to an IRA for the 2004 calendar year. In 2005, that limit goes up to $4000. If you are over age 50 (again needing to verify that age is correct), you can contribute $3500 for 2004 and $4500 for 2005. If you are married, you can make the same contribution for your spouse.

3. Isn't a ROTH IRA an account with Taxable $$? What is the disadvantage to not having money taken out of my paycheck before taxes here? We are talking $12,000+ per year...

Yes, contributions to a Roth IRA are made with after-tax dollars. However, the big benefit is that those investments will grow tax free! If you were lucky enough to contribute $3000 and turn it into $3 million, you would not pay any taxes on that $3 million as you made your withdrawals.

The Traditional IRA can allow for tax deductible contributions but the ability to deduct the contributions depends on your mAGI and whether or not you are eligible for an employer sponsored plan. For purposes of determining deductibility, one thing I am not certain on is whether or not you have to simply be eligible for an employer sponsored plan or actually enrolled in the plan? Maybe someone here or at Tax Strategies can answer that question.

The disadvantage to not having the money taken out before taxes is that you will be paying more in taxes. Your mAGI will be higher without the $12k tax-deferred investment. How much an impact that will have will depend on your tax rate as well as any other adjustments to your income. Is it more important to you to have the money invested pre-tax or to invest in a vehicle that fits your strategy/plan?

Personally, I do not have a 401k as an option and convinced my employer to offer a SIMPLE-IRA plan. That allows me to contribute $9000 this year with a match from my employer at a percentage of my salary. However, my first year with this employer that plan was not offered so I was only able to make IRA contributions for myself and DW, as far as tax advantaged vehicles are concerned.

If you are not happy with the options, can you talk to your employer? How do other employees feel? If enough people are unhappy, maybe you can initiate an effort to request a change.

dt

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43442 of 76398
Subject: Re: 401k problems Date: 12/7/2004 6:18 PM
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>> 1. My employer does NOT match funds at all. And currently has no plans to do so. <<

Makes it less of a deal. A Roth IRA would almost certainly be better. It also makes taxable accounts with long-term holdings look better, too.

>> 2. I was under the impression that I could only contribute $2000 per year in an IRA. <<

For a long time, yes. Now it's $3,000 for 2004 and $4,000 in 2005 through 2007. It jumps to $5,000 in 2008.

>> 3. Isn't a ROTH IRA an account with Taxable $$? What is the disadvantage to not having money taken out of my paycheck before taxes here? We are talking $12,000+ per year... <<

Keep in mind that with a Roth IRA held according to the rules, all earnings can be withdrawn *tax-free*. So in a sense, the Roth IRA is just a "reverse conventional IRA" -- a conventional IRA lets you put in tax-free income to be taxed when withdrawn, and a Roth lets you put in already-taxed contributions to withdraw tax-free. Both also give you the power of compounding returns without intermediate taxes eating into it.

#29

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43446 of 76398
Subject: Re: 401k problems Date: 12/7/2004 7:20 PM
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dsemmler: "Yes, contributions to a Roth IRA are made with after-tax dollars. However, the big benefit is that those investments will grow tax free! If you were lucky enough to contribute $3000 and turn it into $3 million, you would not pay any taxes on that $3 million as you made your withdrawals."

Unless, of course, the national sales tax (FairTax - 29.87% sales tax) is enacted to relace the federal income, in which case whenever your spend the money you would be paying not insignifcant taxes that would not have been due under the income tax system.

Regards, JAFO



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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43449 of 76398
Subject: Re: 401k problems Date: 12/7/2004 8:38 PM
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If the fees are low, the switch to mutual funds may be the best thing that ever happened to you.

You can't achieve proper diversification with individual stocks- you assume extra "unique (stock specific) risk", but do not achieve higher returns than if you just bought the market as a whole.

If you're only allowed to buy high fee funds, that's a different story.

Nick

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43459 of 76398
Subject: Re: 401k problems Date: 12/7/2004 11:22 PM
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JAFO,

Unless, of course, the national sales tax (FairTax - 29.87% sales tax) is enacted to relace the federal income, in which case whenever your spend the money you would be paying not insignifcant taxes that would not have been due under the income tax system.

Yes, thank you for pointing that out as I did not account for that in my original post.

dt

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