401K questions......

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  • CHCRandy

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    My daughter is starting a job working for a good size company that offers 401K that matches up to 6% and the company pays 4% whether you contribute or not. It "vests" in 3 years. My questions are...What does vesting mean? Does a person control the investments of a 401K or does your employer control what gets invested in? Should a person contribute the 6% to 401K or invest 6% of earnings on your own? The 6% match seems hard to ignore...but if the investment only returns 5-6% returns per year.....would you be better off going on your own with the 6% and forget the match? Can you take your contributions out of a 401K anytime without penalty or is it locked in for long haul?

    Just a few questions she asked me and I don't have a clue. I have Roth IRA's and have never had a 401K.

    Thanks for any advice you all have.
     

    SSGSAD

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    Vesting means, it belongs to her, all of it .....

    3 years, is VERY fast, for vesting .....

    Have her invest the MAX, that she can afford .....

    YES, she can choose her investments .....

    Not sure, about the match .....
     

    CountryBoy19

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    ALWAYS ALWAYS ALWAYS contribute to maximize the matching. The matching is an instant 100% return on your investment, even if the plans she can invest in make slightly less than you could make with full-control over the investment vehicles the marginal gains will never offset the match. ALWAYS contribute at least up until they stop matching.

    Generally you can control what the funds are invested in to a certain extent. You aren't going to get to choose between every fund out there, but there should be at least 5 funds, maybe as many as 20 funds that she can choose from. Often they are index funds but some are actively managed.

    Lastly,there are ways to get to your 401k without getting hit with penalties. You will sometimes pay income tax depending on how you "get to it" (because the money was put in tax-deferred) but you don't get hit with the 10% penalty. With the exception of the more common, and more widely known ways to get your money from a 401k, there is a lesser known one, which I've heard called the "IRA back-door escape hatch" or something like that. If your daughter ever leaves the company she is eligible to roll-over her 401k into her own personal IRA. She can choose to roll-over into a Roth IRA (paying income tax on the balance at that time). Then after a 5 year waiting period, she is eligible to cash out her contributions (only the amount she contributed to the Roth IRA from her 401k) penalty-free.

    Some of the other known ways to get the money: some 401k's let you take loans against them. For example, I just took a loan again mine to make the other 10% down on our dream house we bought last fall. Mine also lets me take a personal loan as well, I intend to take a personal loan if our old house doesn't sell fast enough and I need a little extra "cushion" of cash. I know that with a Roth IRA you can cash it out for the purchase of a primary residence, but I'm not sure if you can do that with a 401k... there are other ways I'm sure, I just don't know all of them.
     
    Last edited:

    jd4320t

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    She should at least put in how ever much the company will match.

    She may either choose her own investment strategy or pay someone a small fee to do it.

    If she leaves the company before the three years is up she will forfeit the employers contributions.
     
    Last edited:

    CHCRandy

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    She should at least put in how ever much the company will match.

    She may either choose her own investment strategy or pay someone a small fee to do it.

    If she leaves the company before the three years is up she will forfeit the employees contributions.

    Employees contribution or employers contribution?
     

    CampingJosh

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    Employees contribution or employers contribution?

    Employer's contribution could be lost. Her money is always hers.

    Does it vest all at once in three years, or does it partially vest along the way? My wife's new job vests 25% each of the first four years, so that's sometimes called vesting in four years even though she would be able to keep some of it if she were to leave sooner.
     

    amboy49

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    Tell her to invest all she can afford. The sooner she starts the faster it accumulates. Do a little research about what starting at age 20 or waiting till age 40 does. If she waits till 40 she'll never catch up. Tell her to make sure she diversifies her investments - it's never good to have all the money in one thing. If the funds she receives from the company are used to purchase company stock tell her to diversify as quickly as possible.

    Dont ask me how/why I know this !
     

    MrAverage

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    Congrats on your daughter's new job.

    Looks like they've already covered the technical aspects of your questions. Here's by 2 bit investment advice - actually worth less than $0.25. I'm a believer in index funds....US large cap, US small cap, international. They tend to do better than actively managed funds, on average, due to much lower fees. Any good sized company would offer an array of these options. She can round out with some bond or stable funds, but she should be aggressive at her age since she has time on her side. She's just buying lower if the market goes down at this point.

    However, everyone has a different comfort level. Most important is getting into the habit of saving, as several have already mentioned.
     

    Ericpwp

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    Any match is free money. At least contribute up to the max match. You also have to consider that she wouldn't be paying the 25%, or whatever, taxes on it at this point. That sounds like a good company.
     

    Expat

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    You are worried about getting 5% gain. Actually up to the employer match she already has a 100% gain. Try making that anywhere else.
     

    CHCRandy

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    The 4% match means they will match her contributions to her 401k up to 4% of her salary, right?

    They will make a 4% investment whether she does or not, but if she invests 6% they will match up to 6%, but the 4% is separate of that. So if she puts in 6% they will put in 10%.

    Thanks to everyone for your advice.....it is really appreciated.
     

    spec4

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    This is a dream deal in this day and age. She should contribute the max allowed. As others have stated, the match is found money. If she stays with this outfit, she will build a strong base for her retirement. Repeat: Always contribute the max. This from a guy who retired at 59.
     

    aturk

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    Always contribute the maximum, at least up to whatever % that the company matches. My current company does 4%, and I contribute 12%. I was hoping I'd get a large enough raise this year to max it out, but unfortunately they only gave me 1%.

    Sometimes, you don't need to stay at the company the whole time for the money to vest 100%. Sometimes the money just needs to stay in the account for whatever time is indicated.

    I had about 20% gain last year on one of my 401k's last year. Now they are all consolidated into one so hopefully see that dollar figure rise a little faster.
     

    JettaKnight

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    They will make a 4% investment whether she does or not, but if she invests 6% they will match up to 6%, but the 4% is separate of that. So if she puts in 6% they will put in 10%.

    Thanks to everyone for your advice.....it is really appreciated.
    They match another 6% at a full 100%? My last job was 50% up to 6%, (i.e. if I put in $1000, they put in $500 on top of that).

    My current company has a Simple IRA - no vesting period, 100% on first 3%.


    OK, I'll be the wet blanket, CHCRandy, I think you'll at least take my thoughts into consideration. ;)

    You don't always have to invest in a company sponsored 401K; sometimes that "free" money isn't free.


    About half of INGO just fell out of their chairs.

    Here's some reasons why I suggestion considering not investing in a corporate 401K.
    (1) You might, leave before the vesting period is up. At that point, the free money is lost and you're stuck with a pittance in an account you really don't want and then have the headache of trying to transfer it.
    (2) Most 401K's have high fees and a very limited option of mutual funds. Randy, I'm sure you'll agree that's a horrible prospect when trying to make money grow.
    (3) 401K's are income deferment. That's a key point. You're putting your income into that account and will draw income from it when you retire.
    (4) There's a lot of rules on when and how much you need to withdraw from that account once you retire.
    (5) You pay taxes on what you withdraw - the deferred income and interest (i.e. growth).

    For a long time I eschewed a company 401K for these reasons and shoved as much money as possible into a Roth IRA. Why?
    (1) Roth IRA's can be wholly self directed - I can buy and sell as much stocks as I want.
    (2) The money is always under my control.
    (3) The money grows tax free.
    (4) Withdrawing from a Roth IRA is much more flexible.
    (5) When I was young and in a lower tax bracket it made much more sense to pay the taxes up front and let the money grow (and grow and grow) tax free.

    Now that I'm in my 40's, I'm in a much higher tax bracket and have less time for money to grow, so I'm shifting over to investing in the company's Simple IRA - which has big fees and limited investment options. :xmad:
     

    RyanGSams

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    My company is a little different, they put in a dollar amount which is 2.80 per hour worked. Plus I contribute 7 percent to 401k and 4 percent to Roth IRA. The Roth is new and just started last month for us.
     

    JettaKnight

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    FYI, for those under $61,500 AGI (married filling jointly), make sure to claim your tax credit for retirement savings (form 8880). If using software and contributing to a employer sponsored plan this should carry over from your W2. Any contributions to a Roth IRA done independently will have to be manually entered. Potentially, this is a $2000 credit.
     
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