UnThreaded | Threaded | Whole Thread (7) | Ignore Thread Prev Thread | Next Thread
Author: jrhii One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75894  
Subject: Traditional vs. Rollover IRA's? Date: 4/13/2002 12:23 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Background: I'm 27, have significant assets & investments outside my retirement accounts. I used to work at Microsoft, and still have my 401k from there 100% in MSFT. My 401k with my current employer is 100% in a S&P 500 fund. My personal brokerage account is invested in individual stocks.

Given the continued less than steller performance of Microsoft (the company, not the stock, although the stock hasn't done too well either of late...), I'm re-evalutating my interest in keeping my old 401k in MSFT until I have to withdraw from it. I never really have planned on needing to have that money in retirement (that would be unlikely ... I'd have to do a lot wrong with everything else I have).

Anyway, the thought I've had is that even if I want to keep my money in MSFT stock, I could do that just as well in an IRA as I can in their 401k plan. But if I decide I want to sell or do something different with that money, I have a lot more options in an IRA than in the 401k plan (which really has only one other option I would even consider - an S&P 500 fund).

I don't have any IRAs, because with the small amount that can be contributed each year it hasn't seemed worth it. The 401k's with much higher contribution limits are more flexible, and avoiding locking other money up until I'm 60 yrs old generally seems better (so I tend to invest a significant amount monthly into my normal brokerage account).

So (finally) here is the question: Do I have to open a rollover IRA to receive the money from my 401k, or can I rollover into a "Traditional IRA"? And if I have to go into a Rollover IRA, can I decide to make those little $2-3k/yr contributions to that account? (I don't think I care about being able to roll into another employer plan... they usually stink anyway in terms of investment options... if anything I'd like to be able to bring the money from my current employers 401k into the same IRA when I next move jobs...).

If it matters any, my current brokerage of choice is Datek (gulp - not sure what happens with the merger w/ Ameritrade), so I would like to have my IRA account there for simplicity (I also manage custodial accounts for some of my niece & nephew at Datek...)

thanks!
...Jason
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: bigcaat Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34188 of 75894
Subject: Re: Traditional vs. Rollover IRA's? Date: 4/13/2002 2:46 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 6
I used to work at Microsoft, and still have my 401k from there 100% in MSFT.

If you have more than 4% of your total portfolio in that one stock, you'd be best to do anything you can do diversify. Yesterday. Think Enron.

*************
Do I have to open a rollover IRA to receive the money from my 401k, or can I rollover into a "Traditional IRA"?

I'm not sure what you mean by a "rollover IRA." My understanding is that the act of transferring monies from one tax deferred account to another is the "act" of rolling it over. To the best of my knowledge, and I'm sure I'll be corrected here if I'm wrong, but there should be no reason why you couldn't open a traditional IRA, roll your money over to a traditional IRA and then contribute to the same account. At least that's what my husband did a few years back.

*************
I don't have any IRAs, because with the small amount that can be contributed each year it hasn't seemed worth it.
And if I have to go into a Rollover IRA, can I decide to make those little $2-3k/yr contributions to that account?


It's called "compounding." By not utilizing that type of savings and tax opportunity, you're just throwing money away. And for the record, there are a lot of people in the world who struggle and sacrifice to save enough to put those "little $2-3k/yr" contributions in their retirement.

Caat

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: jrhii One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34189 of 75894
Subject: Re: Traditional vs. Rollover IRA's? Date: 4/13/2002 3:15 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
If you have more than 4% of your total portfolio in that one stock, you'd be best to do anything you can do diversify. Yesterday. Think Enron.

Hmmm... I don't agree with that kind of philosophy... that would mean owning more than 25 stocks. Keeping up with the 8 I currently own is enough work, thank-you-very-much.

I also don't have more than 10% of my net worth in any one stock, so I'm not too worried about needing to diworsify...

I'm not sure what you mean by a "rollover IRA."

Read up on IRAs then. There are many types. Most banks/brokerages have Rollover IRAs and Traditional IRAs and Roth IRAs and SIMPLE, and SEP, and... and ... and ...

What is harder to find out is some of the details. I was hoping someone here could answer, but come Monday I can always call someone and find out.

It's called "compounding." By not utilizing that type of savings and tax opportunity, you're just throwing money away. And for the record, there are a lot of people in the world who struggle and sacrifice to save enough to put those "little $2-3k/yr" contributions in their retirement.

It's more complicated than that, and the benefits of an IRA vs. 401k are subtle. I've chosen so far to ignore the IRA in favor of the 401k (which has much higher contribution limits). That doesn't mean there is anything wrong with using an IRA. But a 2k limit vs. 10k limit is pretty significant. Sure I could do both, but I generally don't even max out of the 401k year to year.

I'm pretty confident I'll have more than enough money when I'm 59.5, and I suspect I might want more flexibilty when I'm not so old. As long as my retirement accounts are funded enough that I'm safe, the rest I'd rather invest more accessibly so that I can use it for any number of options beyond just buying stocks... maybe I decide to start a business & need some capitol; maybe I decide to pick up a rental property... or maybe I decide to enjoy some things in life with some of the money between now and 59.5...

So yes, I've choosen to "leave some money on the table" in terms of the tax advantages to afford myself more options today.

A friend of mine and I used to debate this with our co-workers, but in general I'd rather not live in a cardboard box until I can afford to live in a castle. I'd rather give up a little in the future to enjoy a few pleasures in life today as well. This requires a little care and could easily be done to excess. But within reason I don't think there is anything wrong with enjoying the first 59.5 years of my life.

Now in actuality I'm saving/investing more in my ordinary brokerage account than I am anywhere else right now. So I am still "giving up" a lot now for the future, but I see that future as closer than 32 years away.

...Jason



Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: jrhii One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34190 of 75894
Subject: Re: Traditional vs. Rollover IRA's? Date: 4/13/2002 4:04 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Earlier I wrote:

So (finally) here is the question: Do I have to open a rollover IRA to receive the money from my 401k, or can I rollover into a "Traditional IRA"? And if I have to go into a Rollover IRA, can I decide to make those little $2-3k/yr contributions to that account?

Well, to partially answer my own question, the IRS (Pub 590) says that I don't get to make deductible contributions to an IRA in the first place and in general I don't get to contribute to a Roth IRA either, so that pretty much makes the original question a moot point... just roll the old 401k into a Rollover account and leave it there, not adding to it.

While I could still make non-deductible contributions the benefit of that isn't that great, and is hard to measure thanks to tax laws (i.e. I believe IRA dispersions are income not cap-gains, so in theory if I don't trade that often, then paying 18-20% cap-gains is probably better than investing non-deductible contributions tax-deferred and then paying income tax in retirement (assuming that it is fairly likely that I will still have sizable income in retirement, which currently looks like a pretty safe bet).

Like all retirement planning there are so many variables that it's highly depending on an individuals situtation... tax laws are subject to change, etc., etc. What may look okay today may look bad tomorrow.

...Jason

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: CentexHorn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34200 of 75894
Subject: Re: Traditional vs. Rollover IRA's? Date: 4/13/2002 3:43 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
A "rollover IRA" is simply a traditional IRA that you "roll" your 401(k) into. If you roll a 401(k) into an IRA, you MUST roll it into a traditional IRA 1st, then later you can move it to a Roth. Be aware, however, that there will be some tax involved when you move from a traditional to a Roth.

You must pick the asset allocation YOU are comfortable with in your retirement plans. You can read all the studies and articles and web advice about diversification you want, but in the end it is YOUR money and you invest it where you feel confident.
As far as Microsoft going "Enron", I don't think that will happen. But the Feds could someday manage to make something stick that might affect the value.

Print the post Back To Top
Author: jrhii One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34202 of 75894
Subject: Re: Traditional vs. Rollover IRA's? Date: 4/13/2002 8:01 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
CentexHorn writes:

A "rollover IRA" is simply a traditional IRA that you "roll" your 401(k) into.

Hmm, most of the on-line brokerages have options for a "Rollover" IRA and "Traditional" IRA when going to open an account. Maybe they are really the same thing and that is just to clarify (or confuse :)) the issue for customers?

You must pick the asset allocation YOU are comfortable with in your retirement plans.

I'm pretty confident in how I want to invest my money. Been doing that for a bunch of years now. I'm sure some would say I'm too agreessive, others would say I don't take advantage of all my options, but I do what fits my knowledge, experience, available time, interests and willingness to take risks - it is my money last time I checked! :)

As far as Microsoft going "Enron", I don't think that will happen. But the Feds could someday manage to make something stick that might affect the value.

Actually I think the biggest risk for MSFT holders is the difficulty the company is having in generating real earnings growth. Of course that discussion belongs on the MSFT board, not here.

In any case the stock is no longer on my list of stocks I will blindly hold, which is what motivates me wanting to get the money out of the 401k account and into an IRA type account where I can move it into other investments when/if I think that is needed... I should have done that in Feb 2000 @ >$100/share - I thought about it, but decided not to... hindsight is always 20/20 (although I did sell all my other overvalued "dot-com/tech" type stocks in Feb 2000... no complaints about that decision!)

...Jason

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34213 of 75894
Subject: Re: Traditional vs. Rollover IRA's? Date: 4/15/2002 10:41 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Author: jrhii Date: 4/13/02 3:15 AM Number: 34189
I don't agree with that kind of philosophy... that would mean owning more than 25 stocks. Keeping up with the 8 I currently own is enough work, thank-you-very-much.

This is precisely why mutual funds were created. If you are going to hold your entire portfolio in individual stocks, you should hold 20 or 25 of them to reduce your risks. If you are holding only 50% of your portfolio in individual stocks, you should hold 10 or 12 of them. This all adds up to a recommended 4% to 5% maximum in any one stock.

However, if you know a company very very well, most investors will agree to go up to 10% of your portfolio, but only if it is a well established and stable company.

I hold a considerable amount of my retirement portfolio in individual stocks in order to get a higher dividend than the S&P 500 offers. I also know XOM quite well, and have allowed my percentage to increase to around 10%. I would not recommend doing this for any small high tech company. Too risky!

I also don't have more than 10% of my net worth in any one stock

I think it can be somewhat dangerous to think in terms of net worth when referring to your asset allocations. I feel that all asset allocation calculations should be made based on only your liquid assets (cash, stocks, bonds, mutual funds, etc). I don't think you should ever include your house, car, etc, when determining asset allocation percentages.

RK

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (7) | Ignore Thread Prev Thread | Next Thread
Advertisement