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Author: alpine1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76422  
Subject: Young guy with small 401(k) changing jobs... Date: 7/27/2000 9:49 PM
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Hey folks..

I'm 23 and have been contributing to my company's 401(k) since I graduated college a year and a half ago. I've got about $4000 in there now. I'm about to change jobs, including about a 30% raise, but the benefits do not include a 401(k). I'm looking for the best way to continue investing for the long-term. The new job is a two year contract, so after that time I may well be jumping back to a position with a 401(k). Should I move the money into an IRA? What about "cashing out," despite the penalties, and investing in an S&P Index fund? I plan to contribute 5-10% of my salary monthly to whatever strategy I end up going with. Salary is right at $60,000/year. Any suggestions would be much appreciated. Thanks..

Adam
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Author: RandGraham One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23739 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 7/27/2000 10:18 PM
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Should I move the money into an IRA?

Yes. You can move this money into a 'self directed ira'. That is what I recommend. It is important to do a trustee to trustee transfer. Let's say you decide to open a self directed IRA at Vanguard, then whoever is your 401k provider (Let's say for example Fidelity) should write a check to Vanguard. Do not have Fidelity write a check made out to you.


What about "cashing out," despite the penalties, and investing in an S&P Index fund?

Bad idea. If your goal is to put it in an index fund anyway you should open a self directed IRA with the mutual fund company of your choice. (I recommend Vanguard) and have Fidelity write a check made out to Vangaurd.


I plan to contribute 5-10% of my salary monthly to whatever strategy I end up going with. Salary is right at $60,000/year


Well that is good. However w/o a 401k plan or some similar plan offered by your employer, I believe your only choice is to open an IRA. Even if you have a 401k it is advisable to contribute $2000 a year to a Roth IRA. So I would recommend opening two accounts at Vanguard. One being the self directed IRA which you won't be able to contribute to. One being a Roth IRA with $2000 of after tax money. If you want to save more than $2000 a year I think you should look into a discount broker, or even opening a third account at Vangaurd. This third account will be a taxable account but will allow you to buy even more shares of their S&P 500 index fund.

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Author: alpine1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23740 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 7/27/2000 11:04 PM
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RandGraham said:
Well that is good. However w/o a 401k plan or some similar plan offered by your employer, I believe your only choice is to open an IRA. Even if you have a 401k it is advisable to contribute $2000 a year to a Roth IRA. So I would recommend opening two accounts at Vanguard. One being the self directed IRA which you won't be able to contribute to. One being a Roth IRA with $2000 of after tax money. If you want to save more than $2000 a year I think you should look into a discount broker, or even opening a third account at Vangaurd. This third account will be a taxable account but will allow you to buy even more shares of their S&P 500 index fund.

Thanks for the reply. I understand and see the reasoning behind all of this except for one thing. Why wouldn't I be able to contribute to the self directed IRA? I understand the difference (at least I think I do) between the Roth and the "traditional" IRA, but I haven't seen one that I couldn't contribute to, either pre- or post-tax. Is there an IRA I could move this 401(k) to that would allow continuing contributions?

Adam



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Author: rhecker One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23744 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 7/28/2000 8:27 AM
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Why wouldn't I be able to contribute to the self directed IRA? I understand the difference (at least I think I do) between the Roth and the "traditional" IRA, but I haven't seen one that I couldn't contribute to, either pre- or post-tax. Is there an IRA I could move this 401(k) to that would allow continuing contributions?

You would be able to contribute to a traditional IRA right now, but depending on your salary the contributions may not be deductible - in which case it would usually make more sense to contribute to a Roth, since it would be after tax money anyway. RandGraham might have meant that this year, while you're still at your current job participating in its 401k, you are probably not eligible to make deductible contributions, therefore, the traditional IRA would not be as desireable as contributing to a Roth at this point.

What you want to do when you leave your job is to rollover the 401k into a traditional IRA. You can't put it directly into a Roth, but you can further convert that traditional IRA to a Roth at a later time if you choose to. You will then be able to continue making contributions each year. Just keep in mind that once you start making new contributions to this IRA, you can no longer put it back into any employer's 401k plan. Not that I can see why you would want to, since you have more control over you investments when it's in your IRA as opposed to a 401k.

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Author: Ringfinger Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23745 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 7/28/2000 9:07 AM
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Roth is the way to go. Roll over to a traditional, then tramsfer to the Roth. At your age, it is advantageous. You will do fine.

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23827 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 8/1/2000 8:39 AM
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Hi Adam,

Once you roll your 401K into an IRA, if you convert that IRA to a Roth IRA or if you make contgributions to that same IRA that IRA can no longer be rolled back into another 401K.

As long as you never intend to roll backwards into a 401K then contributing to the IRA or converting to a Roth will have no major consequences.

BGP

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Author: WriterStitcher One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23835 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 8/1/2000 1:53 PM
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TMF, correct me if I'm wrong, but I think there is a prohibition against contributing to the IRA that contains the 401(k) rollover. My guess is because the money that went into the 401(k) was not taxed, and any contributions you make later would have been taxed already. Putting tax/non-tax money into the same account can get messy. I have a custodial IRA that I rolled 401(k) money into, and my credit union said I could not contribute anything into that account but I could roll it over later into another 401(k).

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23836 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 8/1/2000 1:58 PM
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Greetings, WriterStitcher, and welcome. You wrote:

<<TMF, correct me if I'm wrong, but I think there is a prohibition against contributing to the IRA that contains the 401(k) rollover. My guess is because the money that went into the 401(k) was not taxed, and any contributions you make later would have been taxed already. Putting tax/non-tax money into the same account can get messy. I have a custodial IRA that I rolled 401(k) money into, and my credit union said I could not contribute anything into that account but I could roll it over later into another 401(k).>>

There is no prohibition to contributing to a rollover/conduit IRA. However, if a person does do so with money that did not come from a qualfied retirement plan of an employer, then the money now in the rollover/conduit IRA becomes ineligible for a later transfer to a new employer's plan that accepts money from an old employer's plan. Beyond that facet, there is no problem with making a contribution. And if that contribution is with after-tax money, that's only a minor hassle when withdrawals from that IRA finally begin years later. And it's relatively painless if one retains the Form 8606 supporting the after-tax contribution(s).

Regards..Pixy

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Author: WriterStitcher One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23839 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 8/1/2000 3:25 PM
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Thanks for the clarification on that, Pixy. Guess I'll leave the specific legal/tax advice to the pros, which I'm definitely not! :-)

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Author: mphipps Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23910 of 76422
Subject: Re: Young guy with small 401(k) changing jobs... Date: 8/4/2000 9:26 PM
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move it to Vanguard S&P 500 Index fund.
But let me add. 60k should very good at your age.
At least to me.
Benefits are important very very very important.

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