Two years ago, I quit my job and moved to another state, and was out of a job for about three months. I rolled my 401k into an IRA at Edward Jones. It was worth about $5,500, and I split it evenly between two stocks: Oracle (ORCL) and Wal-Mart (WMT). As of the beginning of this week, I had about $23,000. Nervous about my vulnerability with all that money in just two stocks, I sold all my holdings in both companies, and Foolishly (or "foolishly", depending on your view) reinvested the whole thing in the current Foolish Four (after much research into the whole concept of the Foolish Four). Now, I have a new job. My new company has a 401k. I am contributing the maximum. Because I have not made any contributions to the IRA, I could roll it into my employers 401k. However, I would rather pursue the Foolish Four strategy. My question is this: If I can only afford to contribute to one account, should I put my money in the IRA (contributions would be limited to $2000, but I could pursue the Foolish Four) or in the 401k (contributions, including employer match, at my current salary are $5,932/year) where my mutual fund choices are poor (only one index fund, equity ratio .6%) and I can't invest in individual equities? Is there perhaps a way to split my extra money between the two? Any suggestions would be greatly appreciated. I am 30 years old, married with one child, my wife doesn't work.
Contribute at least as much as is needed to receive the maximum employer match. After that I would probably go with the IRA choice. It would be hard for me to give up free money (employer match) by not contributing to the plan. Besides you did say they have an index fund available.John
Glad that you posted your question. It speaks to some of the things that I think about in considering 401k versus IRA.First, I would suggest you consider a Roth IRA if you haven't already. At your current income, with family considerations, you may need the extra deduction that a traditional IRA offers. If, however, you're able to do without it, then consider a Roth IRA.Second, consider whether converting (what I assume is a traditional IRA) to a Roth IRA. If, by contributing the maximum (15%) and your employee match yields (you don't specify the %, but usually it's between 2 and 5%) $5K, you earn about $27000. The taxes you might pay on your (fantastic) investments may probit you from choosing this, but if you can, you'll thank yourself when your 59 1/2 and older. You either are in the 15 or 28% tax bracket, probably the 28%, which would shoulder you with significant capital gains payments due following the tax year of your conversion. It may pay for you not to make any retirement account contributions to pay the tax consequences of the conversion in exchange for your upside over the next 30 years.Finally, since you must choose between the two, consider whether you will anticipate having other "hot tips" like Oracle and Wal-Mart or if your $ might better be managed by someone else. If it's the latter -- no shame in that -- roll over your IRA to your 401k and sleep well (but pay a premium for the service) by investing in what your company allows you to select from. I probably would keep the two accounts distinct, however, and invest in the Foolish 4 or indices (given a lack of time to be more thorough, which I get from your message but doesn't match me personally), and hold on tight.Just MHO. Good luck!
Keep the 2 accounts you have and max out the 401k. It will let you reduce your taxable income and you can use the tax savings to fund your rollover IRA (old 401k money) and continue to persue the Foolish 4. As for converting I prefer a Roth to A traditional IRA. I like the fact that the money is tax free and that the principal is always available. You would have a good size tax bill for the rollover so run a calc. and see if it is worth it. Fool on.Robbdoe
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