Transfer a 401k or leave it where it is?

[ThisTeetsTaken]

Hey guys the company I left had a 401k program that I contributed to and they matched some of what I put in but the new company I work for does not match but does have a 401k.  Should I leave my old 401k where it is or try to roll it into a new one at my new company?  Will there be penalties for doing that?  Should I just take it all out and pay the penalties/taxes now before an economic collapse and buy land with it?  Thanks in advance.

[Arkansasbeaux]

Let me preface this by saying there are only one or two others that post in this forum that, like myself, actually do this for a living. So here goes the long winded response. First, in regards to pulling out, paying taxes and penalties, and buying land...not only no but HE!! no. Do not try to time the market. There's a reason that the S&P over the last decade plus has done 8% ish and yet the average investor has done about half that. Now, for the moving of the 401k. As long as you are going from one tax deferred account to another, there will be no penalties or taxes. IRA to IRA, 401k to IRA, 401k to 401k, etc. Here's the fun part though as it pertains to 401k plans in general. Fee structures in 401k plans are typically R shares with the occasional company stock. With the exception of index funds such as Vanguard, the R shares can have somewhat high fees. Moving it to another 401k could simply be the same thing. Plus, you are limited to the investment options in the plan. Having said that, fees are not the end all be all as some will tell you. It's not what the cost is...it's what you get for that cost. As an example, over the last 15 years (which includes the lost decade of 2000-2010), every equity fund from American Funds that was around during that time beat it's benchmark (which means NET of all fees they beat index funds)...every one! There are other fund companies with similar results. Franklin, Invesco, etc. So, I typically advise to roll it over to an IRA as you will get much more in terms of advice and investment options. There are the occasional exceptions to this though. Choose one quality fund family so that you will get a breakpoint (basically a bulk discount) on the initial cost to purchase the funds. These are known as A shares. There will be no back end charge on them ever, not to mention anytime you move those shares around within the fund companies funds, there is no charge (aka exchange). Diversify according to your long term strategy and your overall risk tolerance and stay the course. You don't jump off an airplane just because there is turbulence. Then again, you could always buy gold or Iraqi Dinar (this is an ongoing joke on this forum so please do not do either of those). That is about as detailed as I can get on here without knowing a lot more about your age, time horizon, risk tolerance, what you want to accomplish with the money, etc. Please feel free to ask me anything though. Either directly on here or via PM.

[ThisTeetsTaken]

Let me preface this by saying there are only one or two others that post in this forum that, like myself, actually do this for a living. So here goes the long winded response. First, in regards to pulling out, paying taxes and penalties, and buying land...not only no but HE!! no. Do not try to time the market. There's a reason that the S&P over the last decade plus has done 8% ish and yet the average investor has done about half that. Now, for the moving of the 401k. As long as you are going from one tax deferred account to another, there will be no penalties or taxes. IRA to IRA, 401k to IRA, 401k to 401k, etc. Here's the fun part though as it pertains to 401k plans in general. Fee structures in 401k plans are typically R shares with the occasional company stock. With the exception of index funds such as Vanguard, the R shares can have somewhat high fees. Moving it to another 401k could simply be the same thing. Plus, you are limited to the investment options in the plan. Having said that, fees are not the end all be all as some will tell you. It's not what the cost is...it's what you get for that cost. As an example, over the last 15 years (which includes the lost decade of 2000-2010), every equity fund from American Funds that was around during that time beat it's benchmark (which means NET of all fees they beat index funds)...every one! There are other fund companies with similar results. Franklin, Invesco, etc. So, I typically advise to roll it over to an IRA as you will get much more in terms of advice and investment options. There are the occasional exceptions to this though. Choose one quality fund family so that you will get a breakpoint (basically a bulk discount) on the initial cost to purchase the funds. These are known as A shares. There will be no back end charge on them ever, not to mention anytime you move those shares around within the fund companies funds, there is no charge (aka exchange). Diversify according to your long term strategy and your overall risk tolerance and stay the course. You don't jump off an airplane just because there is turbulence. Then again, you could always buy gold or Iraqi Dinar (this is an ongoing joke on this forum so please do not do either of those). That is about as detailed as I can get on here without knowing a lot more about your age, time horizon, risk tolerance, what you want to accomplish with the money, etc. Please feel free to ask me anything though. Either directly on here or via PM.

Thank you very much.  I'll have to investigate the new company's plan and see if it is as good as the old one.  I have all of mine in the Vanguard 2040 retirement plan. I'm 38 yrs old.  I'm not sure I'll ever officially retire but I'd like to be able to take my retirement out at age 60.  I'm just over the moderate risk line towards more risk. Thanks again.

[hog.goblin]

First, in regards to pulling out, paying taxes and penalties, and buying land...not only no but HE!! no.

^^^

[HawgWild]

I'm not sure I'll ever officially retire but I'd like to be able to take my retirement out at age 60.  I'm just over the moderate risk line towards more risk. Thanks again.

You'll need to read up on this point as well.

[ThisTeetsTaken]

You'll need to read up on this point as well.

As I understand and it a person can take out their 401k at age 59-1/2 without early withdraw penalty. 

[TheJoeyBucketz]

As I understand and it a person can take out their 401k at age 59-1/2 without early withdraw penalty.

That's correct.

You can actually access it without penalty a few different ways pre 59.5, too. There are a list of acceptable reasons to tap into it. First time home buyers, for one. There is also another way, I think the IRS code that allows it is 72t but I'm too lazy to look it up right now, but you have to be at least 55 (I think) and you have to jump through some hoops as to how you actually access it.

Realistically, there are very few instances where tapping your retirement plan early is your best option. 

[Arkansasbeaux]

Risk is a relative term. Even saying moderate is not entirely accurate. The true measure of risk is how will you react to volatility, corrections, and bear markets. Will you stay with your long term strategy? Will you try to time the markets? Will you be emotional and not logical? Will you add money when it's available and your advisor tells you to? It also coincides with what stage of life you are in (still very much in the accumulation phase. He was right about the 72t being a way to tap it prior to 59 1/2. Also, some 401k plans will allow regular withdrawals at 55 without penalty, although I rarely see them. Having said that, you can do the 72t pretty much anytime. However, once you establish it, you must keep it in place for 5 years or 59 1/2...whichever is LATER. The 72t, in a simplified definition, is taking payments in an equal amount and not changing them. There are some quirks to that though. So if you start drawing 2500 per month and want to change, you're kind of screwed. However, a more advanced way around that is that there is no limit on the number of IRA's you can have. In other words, I can take 500,000 and split it into 5 IRA's each with 100k in them. This gives flexibility on doing a 72t on the first and any others as needed. Only done that for two clients, but it has been done. I would still say to try and get away from the Vanguard if you have the ability, which you do since you no longer work there. Quality active management has shown it can beat the index quite handily over time. Key word is QUALITY! Actively managed funds get grouped together and the abundance of crappy ones make the consistently good ones look bad.

[Arkansasbeaux]

I forgot to mention, if you max out a Roth IRA, in addition to getting the full match on your 401k, you can actually tap into the Roth prior to 59 1/2 without tax or penalty (you don't have to max the Roth for this but it is certainly recommended). This is because the money contributed is after tax. Withdrawals are taken from contributions prior to gains. So as long as you haven't touched the gains portion prior to 59 1/2, they will be tax free. After that age, even the gains are tax free in the Roth. You will have to file a specific form every year and track the basis as well, but it's a way to keep away from taxes and penalties until you can eliminate the penalty part at 59 1/2 in your pre tax accounts.

[Dr. Starcs]

How safe is the Roth in general?

[Arkansasbeaux]

Dr. Starcs, this is one of the most common questions I get about a roth. However, it is also the most irrelevant. Here is why... Imagine you are in an empty house and it is raining outside. As long as you stay inside, you stay dry. But when you go outside you get wet. Well think of an IRA as an empty house and the rain is tax. Anything we do inside of an IRA is shielded from tax until we remove it from the IRA. The difference is HOW the tax is applied. In a Traditional IRA, the money is pre-tax (with the exception on a non-deductible IRA but that's another topic). In a Roth, the money is after tax. So Traditional gets deduction up front but taxes when withdrawing. Roth is funded with after tax dollars so when the time comes, all the withdrawals are tax free (there are a couple of rules to achieve that but they are pretty simple). So safety is actually related to the investment INSIDE of the IRA. Banks will say their IRA's are "safe", but that's because their IRA's are actually CD's inside of an IRA. "Safe" is not an exact thing. Yes, CD's don't go down in value yet they pretty much guarantee a loss. The issue is inflation and purchasing power, which they are not designed to keep up with or exceed. Same applies to cash or money market, which falls into the same category. Equities are more "risky". The risk is more about the volatility than anything, although some individual equities have gone to zero. That's why I am a fan of quality funds as the primary investment vehicle, with some individual equities sprinkled in. That's kind of a long winded response for a message board, but I just want to relay the thoughts as best I can. Typically I am doing it in person, which simplifies the process a bit as you can imagine. Haha. Please feel free to ask anything else. A PM is welcome as well and that applies to anyone on here.

[hog.goblin]

How safe is the Roth in general?

A Roth is neither safe nor risky.  It's just an empty shell.  I still have people who say, "I've purchased an IRA."  That's really an inaccurate statement.

You fund an IRA (Roth or Traditional).  What you then purchase with that money is safe, risky, etc.

You can open a Roth at the bank and purchase a CD.  That's the ultimate safe  asset, well, except for inflation risk.

But a Roth is one of the efficient tax vehicles you can utilize.

[bjnordin]

I agree that investment success is mostly a function of asset allocation.  There are many studies out there that support the notion that the most efficient thing you can do with your money is build a strategy centered around getting risk mitigated exposure to the market as a whole.  (see research on Modern Portfolio Theory ("MPT").  However, anyone recommending loaded mutual funds either is not educated, or not completely disclosing what conflicts of interest exist.  Recommendations such as these are typical of what a full service broker would say because of the large front end commission on A share mutual fund shares.  It is true that with a long term time horizon, A shares are undoubtedly a better investment than B and C shares.  However, they are no where nearly as cost efficient as investment vehicles like exchange traded funds.  There are many full service brokerage firms like Edward Jones that advocate A shares because they maximize payable commissions, even with breakpoints.  For that reason, you are significantly better off purchasing no load mutual funds or exchange traded funds.  Liquidity and cost efficiency are dramatically improved.  Firms like TD Ameritrade, Charles Schwab, and Scottrade are heavy advocates of these because they don't have a sales guy on the front end paid to get you in high cost mutual fund shares.  Generally speaking, you can build a well rounded asset allocation strategy out for less than $10/trade.  All being said, even with 15 to 20 different funds, you are walking away with an efficient long term strategy for less than $200.

Let me preface this by saying there are only one or two others that post in this forum that, like myself, actually do this for a living. So here goes the long winded response. First, in regards to pulling out, paying taxes and penalties, and buying land...not only no but HE!! no. Do not try to time the market. There's a reason that the S&P over the last decade plus has done 8% ish and yet the average investor has done about half that. Now, for the moving of the 401k. As long as you are going from one tax deferred account to another, there will be no penalties or taxes. IRA to IRA, 401k to IRA, 401k to 401k, etc. Here's the fun part though as it pertains to 401k plans in general. Fee structures in 401k plans are typically R shares with the occasional company stock. With the exception of index funds such as Vanguard, the R shares can have somewhat high fees. Moving it to another 401k could simply be the same thing. Plus, you are limited to the investment options in the plan. Having said that, fees are not the end all be all as some will tell you. It's not what the cost is...it's what you get for that cost. As an example, over the last 15 years (which includes the lost decade of 2000-2010), every equity fund from American Funds that was around during that time beat it's benchmark (which means NET of all fees they beat index funds)...every one! There are other fund companies with similar results. Franklin, Invesco, etc. So, I typically advise to roll it over to an IRA as you will get much more in terms of advice and investment options. There are the occasional exceptions to this though. Choose one quality fund family so that you will get a breakpoint (basically a bulk discount) on the initial cost to purchase the funds. These are known as A shares. There will be no back end charge on them ever, not to mention anytime you move those shares around within the fund companies funds, there is no charge (aka exchange). Diversify according to your long term strategy and your overall risk tolerance and stay the course. You don't jump off an airplane just because there is turbulence. Then again, you could always buy gold or Iraqi Dinar (this is an ongoing joke on this forum so please do not do either of those). That is about as detailed as I can get on here without knowing a lot more about your age, time horizon, risk tolerance, what you want to accomplish with the money, etc. Please feel free to ask me anything though. Either directly on here or via PM.

[bjnordin]

I agree that investment success is mostly a function of asset allocation.  There are many studies out there that support the notion that the most efficient thing you can do with your money is build a strategy centered around getting risk mitigated exposure to the market as a whole.  (see research on Modern Portfolio Theory ("MPT").  However, anyone recommending loaded mutual funds either is not educated, or not completely disclosing what conflicts of interest exist.  Recommendations such as these are typical of what a full service broker would say because of the large front end commission on A share mutual fund shares.  It is true that with a long term time horizon, A shares are undoubtedly a better investment than B and C shares.  However, they are no where nearly as cost efficient as investment vehicles like exchange traded funds.  There are many full service brokerage firms like Edward Jones that advocate A shares because they maximize payable commissions, even with breakpoints.  For that reason, you are significantly better off purchasing no load mutual funds or exchange traded funds.  Liquidity and cost efficiency are dramatically improved.  Firms like TD Ameritrade, Charles Schwab, and Scottrade are heavy advocates of these because they don't have a sales guy on the front end paid to get you in high cost mutual fund shares.  Generally speaking, you can build a well rounded asset allocation strategy out for less than $10/trade.  All being said, even with 15 to 20 different funds, you are walking away with an efficient long term strategy for less than $200.

Hey guys the company I left had a 401k program that I contributed to and they matched some of what I put in but the new company I work for does not match but does have a 401k.  Should I leave my old 401k where it is or try to roll it into a new one at my new company?  Will there be penalties for doing that?  Should I just take it all out and pay the penalties/taxes now before an economic collapse and buy land with it?  Thanks in advance.

[PonderinHog]

I agree that investment success is mostly a function of asset allocation.  There are many studies out there that support the notion that the most efficient thing you can do with your money is build a strategy centered around getting risk mitigated exposure to the market as a whole.  (see research on Modern Portfolio Theory ("MPT").  However, anyone recommending loaded mutual funds either is not educated, or not completely disclosing what conflicts of interest exist.  Recommendations such as these are typical of what a full service broker would say because of the large front end commission on A share mutual fund shares.  It is true that with a long term time horizon, A shares are undoubtedly a better investment than B and C shares.  However, they are no where nearly as cost efficient as investment vehicles like exchange traded funds.  There are many full service brokerage firms like Edward Jones that advocate A shares because they maximize payable commissions, even with breakpoints.  For that reason, you are significantly better off purchasing no load mutual funds or exchange traded funds.  Liquidity and cost efficiency are dramatically improved.  Firms like TD Ameritrade, Charles Schwab, and Scottrade are heavy advocates of these because they don't have a sales guy on the front end paid to get you in high cost mutual fund shares.  Generally speaking, you can build a well rounded asset allocation strategy out for less than $10/trade.  All being said, even with 15 to 20 different funds, you are walking away with an efficient long term strategy for less than $200.

That was definitely worth repeating!   

[Arkansasbeaux]

I appreciate your thoughts, however you completely overlooked something else that I explained. Cost is NOT the end all be all. If you want allocation with low portfolio turnover and super low cost, then just pick up Vanguards Total Market fund. But as I explained earlier, even after A share up front costs and internals, the quality fund companies still beat the index funds like a red headed stepchild. That's not even bringing up the A share cost in regards to break points, which reduces the initial cost considerably. Go to Morningstar and look for yourself. Go back over the last 15 years, and compare them. On a year by year basis, the active funds vs the passive are about evenly split. Yet on the overall return, the difference is quite significant. There's nothing wrong with low cost. And if your only concern is the cost, the ETF's and Index funds are fine. Actually, the almost perfect mix would be about 75% active and 25% passive based off research and history. I'll give you the results. 100k invested 15 years ago in S&P would be worth around 190k today. Total market fund would be about 195k. All equity portfolios from American and Invesco would be about 234k, and from Franklin Templeton would be about 267k. Those numbers include a $3500 A share up front charge as well as the underlying funds internal expenses.

[bjnordin]

In my estimation, making an argument to invest in mutual mutual funds because there are at least a few mutual funds that have outperformed the S&P 500 is poor logic.  To me it's kind of like saying we have a good President because he managed to capture Osama bin Laden.  (Please excuse the politics!)  You must look at the bigger picture.  You are correct that cost is not the "be all, end all".  I never stated was the case.  You are losing credibility in stating my case was built upon that tenant.  My contention was that value (what you get for cost) is far better with exchange traded funds or no load mutual funds.  This is not an opinion; it's proven with tons of data.  However, when someone's living and financial existence is tied to justifying what they sell, they will find a way to justify what makes them the most money.  Yes, there are mutual funds that have outperformed the S&P 500.  However, there are very few that do because no mutual fund company has enough consistency or skill to try and time the market or value companies. I had hoped you would recognize that I making generalities, and not speaking to every single situation.  But since you don't seem to recognize that, I will make that clear.  With respect to your example, any one with reasonable skill can be vague and bend numbers to support their statement.  I could choose to do that as well, but won't because my intent is to make a case for "the general rule".  My argument is not an opinion; it is based on many years worth of data and a plethora of research from people far smarter than me.

http://www.businessinsider.com/index-funds-beat-actively-managed-funds-2013-6
http://www.ibtimes.com/active-funds-vs-index-funds-2014-managed-mutual-funds-underperform-passive-funds-1772962
http://paulmerriman.com/10-reasons-brokers-dont-like-index-funds/

[TheJoeyBucketz]

However, when someone's living and financial existence is tied to justifying what they sell, they will find a way to justify what makes them the most money.

Never, ever underestimate this force.

My dad and I run an independent advisory firm. We have been independent my entire career, but pops started with what is now Ameriprise. He says the straw that broke the camels back for him there was when a district manager got up in his face about some of his recommendations. Dad was pushing some low cost product (which of course carried a smaller commission), and the district manager didn't agree. His rationale was that dad did right by his clients, so it is in his clients best interest for him to stay in the business. To that end he should recommend high comp investments, so that dad will make a lot of money so he can stay in the biz and keep doing right by his clients. This cat was dead serious, too.

In today's world of low cost mutual funds and etfs, it is criminal IMO to have a client pay a 5%+ front end load and annual expenses of 1%+. You can do better for your clients than that. Sure some funds have overcome those costs over certain time frames, but that ain't happening consistently. Expenses matter.

[Arkansasbeaux]

Here's the thing...it HAS happened consistently, although only a couple of the fund companies can actually say that. I will agree with the idea that, as a whole, actively managed funds don't outperform net of expenses. However, that's like saying since the average man in America can't dunk a basketball, then no one can. I mentioned three quality companies that have been around a long time and have a proven track record of beating the index over long periods of time. Probably the one with the most proven record is American funds. Their lower than average internal expenses probably help in that regard. But I'm giving you a fact and you can Google it, Yahoo it, or whatever search engine you want to use. So, if you have a fund company or two, and yes I agree they are the exceptions rather than the rule, that has a 30+ year record of consistently beating the index, net of expenses, why would you not want to use that company or their products?


edit: I read through the links you posted and on 2014 I agree index was best. But as I stated earlier, going back to 2000, the one year returns (American vs index for this example) was an even split. So, for long term investors, one year returns are irrelevant given that over that 15 year period, American beat the index handily).

http://www.kiplinger.com/article/investing/T041-C007-S001-don-t-give-up-on-the-american-funds.html

[je100]

Here's a good analysis on the American Funds debate.

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=124718#p2149715

It comes from the Boglehead forum, where most of the folks are passive, Vanguard investors.  The upshot is that American funds have a reputation of a value (instead of growth) tilt for their various equity funds.  As a result, they avoided much of the 2000-2002 catastrophe, which as we know, generally clobbered anything growth.  In other words, a lot - if not all - of their success over indexing can be attributed to those couple of years. 

I've personally not delved too deep into American Funds to verify the analysis.  As a side note, I am a huge Vanguard fan, so take it for what it's worth.

[Arkansasbeaux]

American funds has their own report, which of course should always be taken with at least a grain of salt, that goes back 30 years in comparison to the index. So even without 2000-2002, their results have been great by comparison. At least you are being fair in regards to their success. We can exclude 2000-2002 but the fact is that it happened. I still think a 75% active and 25% passive portfolio is going to perform better over time than an all active or all passive. There's nothing wrong with being a fan of Vanguard. It's not like their funds are bad. I just get frustrated when people, not talking about you, act as if they are the end all be all.

[hawgrunner]

It took me a few years but I finally moved my old 401K to my TSP.