401k Rollover Answers

It’s never too early to begin thinking about retirement. Did you just start working? Are you a teenager or enjoying life in your twenties? Well then, time is on your side. If you are young and you haven’t put anything into a 401(k) retirement account, start now. No kidding. Start now. If you work for someone else, the company probably offers a 401(k) plan. Start deferring money from your weekly paycheck into this account. Even $20 a paycheck is going to add up over time. Every $20, if allowed to grow for a full 40 years, will mature into the equivalent of about $200.  Are you going to notice that you’re “missing” $20 from each paycheck? Unlikely. Even if you’re in your mid-30s, time is still your friend. That same $20 will become $120, given that you’re likely to retire around age 65.

What does $20 buy you right here and now? A modest dinner out or a first run movie and popcorn. A bottle or two of wine (depending on your taste). A small sack of groceries. What will it buy you in 30 or 40 years? At that point, if your $20 has become $120 or $200, that’s a lot more green to spend however you want. Not a modest dinner out – a nice dinner out. That’s a couple of bottles of really good wine.

A 401(k) retirement account should be the first weapon in your retirement arsenal, and since most companies offer them, it is easy to get started. The money is pre-tax so you are being rewarded for being fiscally responsible. Many companies will match some portion of your contribution, and that’s just free money. Since the company is pooling everyone’s contributions, you are likely to be enrolled in a very good family of funds with very low fees. An added benefit is that you get to choose how the money is invested. Most programs offer a nice variety of funds to pick from. Do you want to invest in technology stocks? Or foreign companies? Maybe you want something a little safer like an index fund. Whatever you decide, the important thing is that you have options. If you are getting in at an early age, time will help you make adjustments for any investment mistakes you may make along the way.

One nice aspect to a 401(k) plan is that federal regulations nearly force you to leave the money invested, unless you want to incur heavy penalties and fees for early withdrawal. While the rules do hamper your ability to move your money outside the plan, it helps to steady your nerves when the stock market rides through several corrections, as we’ve seen in recent months. You’ll be glad to have kept your shares each time the market comes back strong (a pattern it has followed since inception.) And you needn’t worry about changing jobs. The government regulations allow for a 401(k) rollover to another companies’ 401(k) plan. You can even roll the money to an IRA, if you are becoming self-employed.

When you start to see how the money grows, month after month, you might decide to add another retirement account – a Roth IRA. A Roth grows with after-tax dollars so there are no additional taxes on your withdrawals. That’s right – you’ve paid Uncle Sam already for these contributions. This means a Roth IRA works in conjunction with the 401(k). One uses post-tax dollars and the other pre-tax dollars. It’s good to have both of them working for you so that you’ll have options when the time comes to spend that money.  There is a cap on how much you can put in a Roth IRA each year, and some eligibility requirements, but pretty much if you make an average salary, you’ll be allowed to contribute up to $5,000 a year. After you’ve maxed-out your 401(k) plan at work (or at least contributed up to your employer’s match), a Roth IRA is a great next step.

What is so nice about a new 401k retirement plan is that is becomes invisible very quickly. Right now you may not be able to imagine squeezing retirement money from every paycheck. You may be telling yourself you need every penny to survive the week. But if you start contributing to a plan today and stick with it for a few months, you will likely not even notice the money is “gone.” That’s what happens when you pay yourself  first, a habit that will reward you many times over down the road.