Quick, Easy Advice for your 401(k)s and IRAs

Posted on July 7, 2008. Filed under: -- Building Wealth, -- Uncategorized, -- YOUR Retirement | Tags: , , , , , |


 

By Molly Greaves

MY ADVICE ON GROWING IT:

1. First put enough in to make sure that you receive your employer’s full company match. Their match is like getting a 100% return on your money. How else do you get that?

2. Then invest as much as you can in an IRA, in which case I recommend a Roth IRA.  The government sets a limit on how much you can contribute to a Roth. That limit is $5,000 in 2008.  You can contribute the full $5,000 in 2008 as long as your income falls below $101,000 if you’re single, and $159,000 if you’re married filing a joint tax return. 

***Get this…If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have $1.4 million saved by the time she retires at age 65.  That’s just by saving $13.70 a day ($5,000 / 365= $13.70/per day). The BEST part is that the money is all hers — she won’t have to give the IRS a cent of her money because she already paid taxes upfront on her money, and the BEST PART of owning a Roth is that there are NO CAPITAL GAINS taxes!   Whoohoo, is that A BEAUTIFUL CONCEPT. 

3. If after you’ve put $5,000 in your Roth IRA, you can still squeeze more into your savings, congratulations to you. I’d pump your extra stash back into your 401(k) to get that maxed out too. The guidelines for 2008  401k contributions has a  $15,500 limit. And, yes, this is the same amount as in 2007, so don’t be confused. 

MY THOUGHTS ON HOW TO PROTECT AND KEEP YOUR MONEY

1. When you switch jobs, make sure you take your 401k stash with you—assuming you’re in the positive. You’ll be allowed to do what’s called a rollover, which is very simple and doesnt take much time at all, and the payoff is certainly worth your time. 

2. Know when it makes sense to convert to a Roth. You should note that you can ROLL your 401k money  into a new or existing ROTH IRA, and if you do so, the amount you ROLLOVER will NOT be considered part of your $5000 contribution limit.

You’d take your 401k money, and simply pay the taxes on it to get it properly into your ROTH IRA, which would be very simple, and worth doing. Takes just a few minutes on the phone with a friendly investment company like Vanguard, and they’ll get you all set up. It stinks that we have to pay those taxes to get it converted, but that’s what comes along with TAX-DEFERRED accounts. That’s why I LOVE the ROTH.

3. Try to never withdraw money from your retirement accounts, EVER.  AND Try to NEVER pay penalties. STOP SPENDING MONEY YOU DON’T HAVE.

My Thoughts On Cashing Out:

1. Unlike other retirement vehicles, you wont ever be forced to withdraw money from your Roth IRA, so tap this account last so it can stay compounding and growing for you.

2. Spend down your taxable savings first. Let your IRAs and 401(k)s keep on growing.

3. Move to tax-deferred accounts when you can. If you aren’t sure how to do this, seek professional help to make sure you are doing everything the most tax efficient way. I always use Vanguard. http://www.vanguard.com

 

http://www.irs.gov/publications/p590/ch02.html#d0e9113

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One Response to “Quick, Easy Advice for your 401(k)s and IRAs”

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My husband has recently retired. We are possibly moving his 401k into an IRA. Which type do you recommend? We do not need the monthly income immediately. We have a simple lifestyle. We are not heavily in debt.


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