Jan 27

Recently I’ve read articles calling for either reform or dismantling of the retirement accounts known as 401(k). I understand Enough of human nature to know that in times when the market is shooting higher and higher there are those who will lobby for putting the Social Security Trust Fund into the stock market. Now that we are down nearly 50% depending on which index you follow, the finger is pointed at the 401(k) account. The one single point I wish to make today is that all 401(k)s are require to offer multiple investment options, one of which must be a short term bond type fund. So the choice is with the employee as to how to invest. Remember, the 401(k) is just an account designation, it’s the employee who mush choose among the available funds. I’ll revisit this thought on Thursday in my Money Merge Account Analysis series.

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Dec 22

Recently, legislation to suspend the rule for RMDs (Required Minimum Distributions) from retirement accounts for those over 70-1/2 was passed. The wording actually eliminated the penalty for those not making the withdrawal, effectively eliminating the requirement.

One potential benefit of this change for 2009 is that one might consider converting this amount to their Roth IRA. I believe the Roth is a great vehicle for managing one’s tax burden over time, and can be used after retirement to ‘top off’ the current tax bracket. This process slowly shifts money from a tax deferred status to a taxed, but growing tax free status. Something to consider next year.


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Sep 24

I frequently field questions from people asking me to compare the use of a 401(k) account to an IRA, and I’ll discuss this a bit today.


  • No income limits to make deposits
  • Company may offer matching up to some level
  • (Usually) limited choice of investments
  • Fees may be excessive
  • $15,500 deposit limit ($20,500 if 50 in 2008)
  • Loans permitted at reasonable rates

Traditional IRA

  • Income restrictions (single $53K-63K, joint $83K-$103K)
  • No company match
  • Unlimited investment choices, mostly
  • Fees can be controlled, kept to a minimum
  • $5000 deposit limit ($6,000 if 50 in 2008)

For those whose company matches some of their 401(k) deposit, I suggest depositing up to the match. Often, this means that for the first 5-6% of your income, you are matched 50-100%. This is worth doing almost without regard to the rest of your financial situation. Next, unless the 401(k) has truly superior choices (my company offers an S&P index fund for .05% per year. On $100,000, this is a $50/year overhead) I’d suggest going to the IRA and topping it off. As I published some time ago in my 401(k) Ripoff article, some 401(k0 custodians are charging as much as 1.4%/yr for the accounts of small employers. This expense negates much of the benefit of saving tax deferred. Unless you plan to leave an employer with such a high expense 401(k) after a brief time, I’d not deposit more than what it takes to capture the match.

One lesser known benefit of a 401(k) is that if you retire and are 55 or older on your retirement, you may take withdrawal from the account without penalty. This suggests that as you approach retirement, you might decide to pull your IRA money into that final 401(k) account to take advantage of this. Of course it depends on the balances of your various retirement accounts.

After 59-1/2, I favor moving the 401(k) accounts into an IRA as the management becomes easier. Withdrawals may be done on line, the funds moved from the IRA to your cash account, and you can write a check the same day. The choice to convert to Roth is easier, done quickly and with minimal effort. Lastly, I suggest you pay close attention to the beneficiaries on your retirement accounts. It’s too easy to forget that a first spouse is still listed, or that the current beneficiary may have predeceased you. The rules regarding IRA beneficiaries are pretty specific, and must be listed on the account. IRAs do not pass via will. Please read my April 28 post “On my Death, Please Take a Breath“. It’s a sad anecdote about what not to do when inheriting an IRA or other pre-tax retirement account.

As always, please submit a comment if you have any questions on this topic.

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Sep 05

Back in July, I wrote a post “Loving That Roth” where I discussed why the Roth account was a great deal for a select portion of savers. I went on to discuss how few people could save their way into a higher tax bracket and that the use of a Roth 401(k) should be considered very carefully as it would ignore the lower rate most of us will retire into. A fellow blogger posting under the moniker jIM_Ohio shares my view, offering his own brief post last month, “The 15% tax retirement account“. As I look at Jim’s post, I realize its brevity is its strength. I tend to offer much data to support my views and often that obfuscates the issue at hand. To the other extreme, I offer the article, “Thinking About a Roth 401k Think Again” from the Journal of Financial Planning.

The JFP article closes with “Those properties [of Roth compared to traditional 401(k)] indicate that for most moderately affluent wage earners, today’s marginal tax rates and the associated government subsidy for retirement contributions are likely to markedly exceed effective tax rates tomorrow, when that subsidy must be cashed out.”

Anyone interested in the Roth vs Traditional 401(k) or IRA discussion should read the article from JFP, and decide how to approach their own situation. As I’ve stated prior, their are few absolutes in financial matters. When I shared my thoughts in one forum and suggested that Roth was appropriate for maybe 5% of people currently working, I was told that the particular forum only contained a selection of high income people who saved above average, that most of that group would benefit from Roth. It reminded me of surveys that showed that 10% of people believed they were in the top 1% of earners. And all of their children were above average.


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Jul 30

I’ve seen remarks across the blogosphere that the recent FDIC advertisements are a bad sign. I’m not convinced. I think there are many who have no idea how the FDIC protection works, what its limits are, and how to get more coverage. First, here is one of the ads they are running:


The important thing to understand is that non-retirement accounts are insured up to $100K. If you have more cash than this, you should consider splitting it up among more than one bank. In the case of a failure, you may have to wait some time to access your money, so even if you are below the limit, using 2 or 3 banks is a good idea. See the FDIC Website for more details.


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