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I am 55 years old and in my line of work (which is not very stable in terms of continous employment) , it has become industry norm to require at least 1 full year before you can contribute to 401k .

So, if I leave my present job, I won't be able to contribute for another year with the new company . Then, say if I leave the new job after 11 months , then the next company still is going to require 12 months of work before I am allowed to contribute .

I know government has some exceptions for those who are closer to the retirement age when it comes to IRA contribution . I wish they (government) could also do something about the 401k and waiting period , specially for those 55 and older .
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I am 55 years old and in my line of work (which is not very stable in terms of continous employment) , it has become industry norm to require at least 1 full year before you can contribute to 401k .

Why are jobs not very stable in your line of work? Are the ternminations usually voluntary on the part of the employee? Or do the employers do the terminating?

I know government has some exceptions for those who are closer to the retirement age when it comes to IRA contribution . I wish they (government) could also do something about the 401k and waiting period , specially for those 55 and older .

If the terminations are usually voluntary on the part of the employee, I would say that you have your own solution in hand - quit quitting. Yes, you may get $1 more at the new place, but think about how much that is costing you in the opportunity to invest in a tax-deferred account.

Even if the terminations are usually initiated by the employer, you can still invest in taxable accounts and IRAs. So nothing is stopping you from investing money for your retirement. Sure, you won't get the tax-deferral in the taxable accounts, but you also won't have to pay as much in taxes on the withdrawals in your retirement, and you won't be required to take out more money than you might actually need.

The 401(k) is a benefit that is offered by an employer. The government rules give employers some leeway in implementing that benefit, so that the employer can implement the benefit in a way that they believe will provide the best return for both the employer and their employees. If, because of high turnover, the employer chooses to use the 401(k) benefit to try to encourage long-term employment, that's their option. If the government were to require that employees be eligible beginning Day 1, do you really think that employers in your industry would continue to offer the 401(k) as a benefit?

AJ
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Thank you for the post AJ

I'm already contribute IRA investing ($5000/year) .

I think in terms of incentive the companies can use other methods to keep their employees . 401k is a government approved tax deferred program that government has implemented for people to have incentive to invest for their retirement and I don't think the companies should use it as a tool to take advantage against their employees . I can understand if they don't want to match any money for new employees for certain period of time that would be their right , But in this case we are talking about allowing an employee to contribute .

As you know we live in a society in which people live mainly for today . Trillions of $$$ in debt was not just created by the "government" . There is a Good percentage of people who not only don't have much in their retirment accounts but also are in debt . Investing in 401k would not only be good for the individuals but also for the society as a whole , that's why government created 401k in the first place .

I still think at least those who are closer to the retirement age (let's say 55), should not have to wait one year before they can contribute .

Believe me it is not always the extra $$ that make people to switch jobs If for instance my company loses its contract which is very easy to do , then I be out of job . Then there are other reasons when an employee wants to leave because of abuse or other unfair treatment at work , but has to stay as a prisoner just to be able to keep the 401k . That is not right .
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I'm already contribute IRA investing ($5000/year) .

That's a good start. Are you also investing money that you could be investing in the 401(k) ($15,500/yr) in taxable accounts?

I think in terms of incentive the companies can use other methods to keep their employees . 401k is a government approved tax deferred program that government has implemented for people to have incentive to invest for their retirement and I don't think the companies should use it as a tool to take advantage against their employees . I can understand if they don't want to match any money for new employees for certain period of time that would be their right , But in this case we are talking about allowing an employee to contribute .

Especially for small businesses, it is likely that every employee account that is set up has a cost to the company. That's a real dollar cost in terms of how much the company has to pay an administrator. The company needs to determine if it is worth the cost to allow employees to contribute, if they are going to stay less than 1 year, on average.

As you know we live in a society in which people live mainly for today .

That's not going to be solved by requiring companies to allow employees to contribute to 401(k)s from day 1. It's a culture and attitude change.

Trillions of $$$ in debt was not just created by the "government" .

Oh really? The federal public debt was $5.6 trillion, as of September, 2007. (http://en.wikipedia.org/wiki/United_States_public_debt)

There is a Good percentage of people who not only don't have much in their retirment accounts but also are in debt .

22.3% of the people who are eligible to contribute to 401(k)s do not. (http://www.401k.org/401kdeferrals.html) So without also requiring people to contribute, requiring companies to allow contributions from day 1 isn't going to improve retirement savings by much.

Investing in 401k would not only be good for the individuals but also for the society as a whole , that's why government created 401k in the first place .

Actually, the 401(k) plan was created to resolve an ongoing debate between employers and the IRS about deferred compensation plans that were already being implemented. (http://www.ebri.org/pdf/publications/facts/0205fact.a.pdf) It was more about ensuring that the government would eventually get some of the tax revenue that was being deferred than about being good for society.

I still think at least those who are closer to the retirement age (let's say 55), should not have to wait one year before they can contribute .

You always have the option of either finding a job with an employer who does not require their employees to wait a year, or staying more than a year with your employer. But in an industry with a high turnover rate, it is more likely that the employer would stop offering the benefit than bear the cost of creating and administering accounts employees who are not going to be around in a year. So you probably wouldn't even have the opportunity to contribute. Would that really be a better solution?

Believe me it is not always the extra $$ that make people to switch jobs If for instance my company loses its contract which is very easy to do , then I be out of job .

As suggested before, you still have to option to invest outside of retirement accounts. And you have the option of finding another industry. Even at 55, you still can make a career switch.

Then there are other reasons when an employee wants to leave because of abuse or other unfair treatment at work , but has to stay as a prisoner just to be able to keep the 401k . That is not right .

Umm.....the money that the employee contributes to the 401(k) is always their money. They are not a 'prisoner' to 'keep the 401(k)'. If they've been there less than a year, and can't contribute, then the only thing they lose is the opportunity to contribute that much sooner.

Truly unfair and abusive treatment generally has other remedies, but if it's bad enough that the person is suffering from it, the ability/inability to contribute to a 401(k) shouldn't be a deciding factor.

AJ
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I still think at least those who are closer to the retirement age (let's say 55), should not have to wait one year before they can contribute .

Why should age have anything to do with it ? I don't think we should penalize a 25 year old because a 55 year old is closer to retirement. The 25 year old who saves won't have much of a concern at 55.

When you negotiate to accept a new job, do you ever ask about making an exception to the wait ? I worked for an organization that had a 6 month wait(they had a very geneerous match) and when I returned to that organization a few years later, I did negotiate to skip the waiting period.

Consider that there are people who don't have a 401K as a work benefit. it is a benefit and not a right.

rad
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>> That's a good start. Are you also investing money that you could be investing in the 401(k) ($15,500/yr) in taxable accounts? <<

Actually, a 55-year-old could put away as much as $20,500 in a 401K plan.

#29
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Thanks for the replies .

I don't think reducing the wait period for those who are 55 or older would be a punishment for the younger ones . Time is in the favor of the young anyway .

I have already tried to negotiate to reduce the wait period but they said they had a contract with the investment firm and it was out of their hand .

In terms of the cost to the company , I seriously doubt if it would be anything significant . My present 401k may already charging MY account for some administration fees not to mention the mutual fund charges . Every body wants your money , banks, investment institutions, brokers (there is now a broker who don't charge for stock trading, just for you to send your money there ) . I seriously doubt if my company is paying anything significant to the investment institution .
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Incidently when I said it was not just the "government" who created trillions of dollars in debt , I was trying to say that the "government" is nothing but of its individual people who make it . It is more like a cultural thing perhaps .
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Dude, Just SAVE money for retirement!

A tax-free environment would be great, but if that is not available, one moves along to the next option ... a tax sheltered account (401k, 403b, etc.)

Okay, so you are not allowed to contribute the first year ... bummer.

Next alternative ... taxable accounts. Buy-and-hold good dividend paying stocks , then all you pay is the 15% tax on dividends. DRIP (reinvest those dividends in the same investments), and the Capital keeps compounding. An apples-to-apples comparison i.e factoring the taxes at 401k withdrawal time, you may end up with better returns than a 401k plan.



Hohum
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Could you start up a one person contracting or consulting company and work as contractor?

This would open up lots of retirement savings options and might have tax advantages for the employer as well.

Greg
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Thanks for the pointer ,

Bear with me I'm trying to get to understand (apple to apple)how regular investment could be better than tax deferred investment .

Let's say , I have worked some place for several years , then that job is terminated . I can roll over my 401k into Roth IRA or Traditional IRA . If I'm not wrong, I can pay one time taxes to roll the money into Roth which is based on my tax bracket . Then, The money in the Roth can grow tax free with no taxes paid at retirement withraws .

My other options would have been to roll it into traditional IRA , this way I would not have to pay any taxes in front . Then my money would grow with all the compunding you mentioned with no taxes paid annualy either . Then at the retirement age, for withrawing, I would be paying taxes based on two factors . First, is my tax bracket , which if I'm not working should be on the low end . Second, is based on how much money I withraw . The less money I take out , the less taxes I pay because again that would keep me on the low end of the tax bracket .

I guess we need to have a calculator to compare apple to apple investing of tax sheltered investing Vs regular investing to see which one is better ?

mustangs100
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I can roll over my 401k into Roth IRA or Traditional IRA . If I'm not wrong, I can pay one time taxes to roll the money into Roth which is based on my tax bracket . Then, The money in the Roth can grow tax free with no taxes paid at retirement withraws .

Beginning in 2008, you will be able to do this type of one step conversion to a Roth. Until 2008, there is a two step process to get from a 401(k) to a Roth IRA. You must first roll over the 401(k) to a Traditional IRA, then convert from the Traditional IRA to a Roth IRA. Also, be aware that you don't have to convert the entire amount at once - if you want to convert $50k over the course of 10 years, you could convert $5k a year.

My other options would have been to roll it into traditional IRA , this way I would not have to pay any taxes in front . Then my money would grow with all the compunding you mentioned with no taxes paid annualy either . Then at the retirement age, for withrawing, I would be paying taxes based on two factors . First, is my tax bracket , which if I'm not working should be on the low end . Second, is based on how much money I withraw . The less money I take out , the less taxes I pay because again that would keep me on the low end of the tax bracket .

With the caveat that for a traditional IRA, when you reach the age of 70 1/2, you are required to take out a minimum percentage of your account each year, and every year older you get, the minimum percentage increases. So depending on the size of your account and your age, you could be required to take out enough to bump you to the next tax bracket, even if you didn't want to take out that much.

For a Roth IRA, in addition to having no taxes paid on withdrawals, there are no minimum distributions required.

I guess we need to have a calculator to compare apple to apple investing of tax sheltered investing Vs regular investing to see which one is better ?

Currently, long term capital gains rates are lower than ordinary income rates, so as long as you aren't trading frequently in your taxable account, you will pay less tax on the same gain in a taxable account than you would for the same amount as a withdrawal from a traditional IRA or 401(k). Of course, the tax laws are all up to the whims of Congress, so this may change.

AJ
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"Currently, long term capital gains rates are lower than ordinary income rates, so as long as you aren't trading frequently in your taxable account, you will pay less tax on the same gain in a taxable account than you would for the same amount as a withdrawal from a traditional IRA or 401(k). Of course, the tax laws are all up to the whims of Congress, so this may change."

Thank you for all the info .
It appears that Roth is the way to go , but as you mentioned congress could change the rules of the game .
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Thanks aj485-
For elaborating the scenario I was pitching, so nicely (including the caveat that could mess it up).
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I don't think reducing the wait period for those who are 55 or older would be a punishment for the younger ones . Time is in the favor of the young anyway .

As it was for every 55 year old when they were 25 which was right around when 401Ks started to be come available.

I'm 53 and I don't think older people deserve special treatment. They already get it in the form of increased IRA and 401K contributions.

rad
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>> I'm 53 and I don't think older people deserve special treatment. They already get it in the form of increased IRA and 401K contributions. <<

AND they are more likely to receive pensions than younger workers.

AND they are more likely to get their Social Security before it goes belly up or is severely means-tested.

#29
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I would like to see a new product offered that is a combination of those currently available: 401k, IRA, and SEP-IRA combined.

Right now, I can open or contribute to an IRA with $4,000 (another $1,000 if older than 50) for 2007.

Or, I can start or contribute to a 401k with $15,500 (another $5,000 if older than 50) for 2007.

But, if I am self-employed, I can open or contribute to a SEP-IRA with 25% of my self-employment income up to $45,000 for 2007.

It sure would be nice to open an account wherein I could contribute up to 25% of my income.
-- Whether self- or otherwise employed,
-- Age 18 and up
-- With no participation eligiblity gaps due to employment issues (like the OP mentioned) because participation would be based on income dollars and not dates of employment.

GV1965

IRS.gov
FAQ 17.2 Rollover IRA http://www.irs.gov/faqs/faq17-2.html
FAQ 17.3 Roth IRA http://www.irs.gov/faqs/faq17-3.html
FAQ 17.4 Traditional IRA http://www.irs.gov/faqs/faq-kw198.html
FAQ 401k http://www.irs.gov/faqs/faq-kw7.html
FAQ SEP-IRA http://www.irs.gov/retirement/article/0,,id=111419,00.html
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If you're self-employed there's a way to contribute more than 25%. It's called a self-employed 401K.

For an unincorporated business, it's $15,500 plus an additional 5K if over 50 as the employee part and then 20% of net business profits for the employer part. Added together it's better than 25%.

Also as the business owner you determine if there is a waiting period or not.
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A reply to to no one specific:

In my experience, companies don't restrict contributions to 401ks as much as they used to. Many are now allowing a higher percentage to be invested monthly as well as allowing a person to invest from day 1, even if the match does not start for one year.

My company recently bumped their allowed amount from 20% to 50% and they have always (at least since I have worked here) allowed a person to invest in the 401k from the start. Our 5% match does not start for one year.
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In terms of the cost to the company , I seriously doubt if it would be anything significant

I disagree. You said yourself that the problem you are having is that there is instability in your industry, and for whatever reason, people are frequently switching jobs, so the fees could very well add up quickly for the employer. Fees can be charged by the participant, and if that's that case and people who have worked there a year and have over $5000 in their plan decide to leave it there, then the employer will continue to be charged fees for all those accounts for people who are no longer employees.

Employers generally have waiting periods so that they can avoid that sort of churn with employees who leave after a very short time, and have an added incentive for people to want to stay.

You may think the fees are insignificant, but you're not the one paying the fees. If it bothers you so much, then stay longer at these jobs or just save that money in a taxable account.
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rad,

As it was for every 55 year old when they were 25 which was right around when 401Ks started to be come available.

Well, not quite for "every 55 year old when they were 25".

FWIW, very few companies offered 401Ks when they "started to be come available" (which would have been 30 years ago according to your calcs). Most companies got on board in the late 80's, and some not until the early 90's. My company didn't offer one until 1990 (when I was 40, not 25).

That leaves a lot less time to accumulate funds.

Just sayin'...

2old
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FWIW, very few companies offered 401Ks when they "started to be come available" (which would have been 30 years ago according to your calcs). Most companies got on board in the late 80's, and some not until the early 90's. My company didn't offer one until 1990 (when I was 40, not 25).

That leaves a lot less time to accumulate funds.


That leaves a lot less time to accumulate funds in a tax-deferred account.

There is no reason that all those folks who did not have access to a 401k in the earlier years couldn't be saving in a taxable account. That's what I did, and when I finally had access to a 401k, I started saving there as well, but one certainly does not preclude the other.
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That leaves a lot less time to accumulate funds.

IRAs were available then, too. And we did start ours in our 20s.

For the truly worried about retirement, there were public jobs with pensions - teaching, state and Federal employment.

When people choose jobs, they might choose based on the salary offered or notice what benefits there are as well.

rad
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That leaves a lot less time to accumulate funds in a tax-deferred account.

Yes, and that was rad's argument that I was responding to--you're now opening another argument altogether.

2old
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IRAs were available then, too. And we did start ours in our 20s.

Now you're jumping to several different arguments. Your original statement that I responded to was specifically about 401Ks being available 30 years ago to every 25 year old.

As for IRA's being available, of course they were, but the contribution limitation was low $1500 IIRC, and the investment choices were limited (mostly CDs). (And just for the record, I started mine in my 20s also.)

As for non-tax-deferred accounts, such as brokerage accounts, keep in mind there were no 'on-line' or 'discount' brokers 25 years ago. One would probably have been better off putting the money in a 1% savings account, at least that way the broker wouldn't have milked you for whatever remained in your account after his losses on the investments. '-)

Or, one could have purchased CDs.

For the truly worried about retirement, there were public jobs with pensions - teaching, state and Federal employment.

Even in today's information-rich environment, do you currently know many 25 year olds who are "truly worried about retirement"? Most of the ones I know have just graduated college and are still sponging off their parents.

2old
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Even in today's information-rich environment, do you currently know many 25 year olds who are "truly worried about retirement"? Most of the ones I know have just graduated college and are still sponging off their parents.



Do 16-year-olds count? I've got two of those, and they have both been saving for their retirement since they were about 12.
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Even in today's information-rich environment, do you currently know many 25 year olds who are "truly worried about retirement"?

No 25 years olds - one turned 26 today and the others are 23 and 20 and all have Roth IRAs. The 26 year old signed up for the retirement program at her job asap - it's a 403B. The others have only Roths available as an official retirement vehicle.

If you are 2old2bs, why are you too young to take personal responsiblity for your finances ? Why make excuses for other people ?

You've picked things apart so let me make clear what I think one more time -

People who are 55 or older do not deserve special privileges for retirement savings.

rad
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Your original statement that I responded to was specifically about 401Ks being available 30 years ago to every 25 year old.

They are not even available today to every 25 year old. Many small employers do not offer them.

foolazis
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