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Subject:  Who wants to be a thousandaire? Not me. Help? Date:  4/6/2000  11:16 AM
Author:  Rutabaga2000 Number:  20987 of 107520

If at first you don't succeed...

I'm going to admit my ignorance and take a second stab at this. AND I'm going to include the responses of those Fools who have been nicely offered (free!) help so far. Here's the story:

I have $5000 in 401(k) with a previous employer. My goal is to invest that 5k for the best long term results.

Option 1) I can roll it into a new 401(k) with my new employer. They offer a 50% match up to 6% of my income. In a given year, I could contribute $3900 and my company (bless their little hearts) would contribute $1950. However, my company's 401(k) does not contain an index fund. So I'd probably be choosing among the actively managed Kemper funds that are in the program.

Option 2) I can roll that money into an IRA...probably Roth. I am 26 and expect this money to sit for 25-30 years. My IRA would likely be a Foolish Four portfolio, so I'd only have to make modifications every year and a half.

Here's what I want to know:
1) Which option would you choose with your retirement money at my age?
2) Really important: Why?
3) What kind of return should I expect from these two options: I was theorizing 10% and 17%, respectively.

Below are the Foolish responses I've had so far. Thanks to mphipps, Sacto Fool, and ez2bhard for their advice. Please comment on my ideas and theirs. You'll see that there are differing opinions. Of course, that's what Fooldom is all about! Thanks in advance for all the help!

The Official Rutabaga of the New Millenium


I would IMMEDIATELY roll the 5k out of the previous employers 401k and get it into a Roth. The ability to grow the 5K for 30+ years taxfree is a HUGE benefit to you. You will first have to roll the 401K into a regular IRA and then convert to a Roth IRA, and pay taxes on the converted amount. So make sure you can cover the tax bill with out of pocket expenses.



Let's see if I understand this correctly.

You defer 6%.
You get a 50% match (an additional 3%).
If you put that into an Index Fund you should get 10-12% retrun (0.9% - 1.08%).
For a total combined return of 65% - 68% on your original 6% deferal. (9.9% - 10.08% of your income total, including your original 6%.)

What kind of return were you expecting from the Foolish 4 again?

Sacto Fool

IMHO you have these options to consider. IMO only these make sense. Not in order
1. Roll the money into Roth. 5K is small and if you you can handle the tax bit do . I think you can roll 401k into Roth. But you better checka and make sure. If they withhold 20% when you do it, then don't
2. Roll it over to IRA and invest in S&P 500 index or Technology fund.




I would disagree with your return assumptions. You're assuming you can maintain a 17% return over the long haul with the Foolish Four strategy. The Foolish Four returns go back 25 years, during a period when the stock market has significantly outperformed it's historical average.

Is your 10% return assumption based on an analysis of the Kemper funds offered in the 401K? How have the funds done relative to the Foolish Four and S & P 500 over 5 yrs.? 10 yrs? 15 yrs? I'm aware of several Kemper funds that have outperformed the Foolish Four and S & P 500.

I would use the same return assumptions of 10% for your analysis or, at the very most, give the IRA no more than a 2% advantage.


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