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401(K) Rollovers

My granddad retired in 1978. He dedicated 43 years of his life to one employer – the phone company. In return, Granddad was rewarded with:

  1. A lifetime pension check
  2. Company-provided health insurance for the rest of his life
  3. Free phone and long-distance service (this was before unlimited cell and texting!)

Apparently, what was good for Granddad wasn’t good enough for my generation – the Baby Boomers. Why don’t WE get “guaranteed” pension incomes? Because of the 401(k) plan!
While employers during Granddad’s generation could afford pension plans (“defined benefit plans”), they were quite costly. Money had to be stuffed away to assure pensions for all their retirees. Also, when pension plans were created, employees weren’t expected to live long past normal retirement age (65) to collect all of this money.

Forced to “ease” out of these expensive plans, someone in the early 1908s created the 401(k) plan, turning control over to the employees by allowing them to team up with Wall Street while the employer would “match” the employees’ contributions.

401(k) Plans Today

Thirty years later, Americans are left with 401(k)’s and uncertainty about their future income. The 401(k) plan took conservative, hard-working savers – who knew nothing about stocks, bonds and mutual funds – and turned them into “speculators.” The mutual fund industry went from millions to trillions!

Instead of relying on employers to take care of their retirement, Americans followed the financial herd and instead made Wall Street rich. No wonder folks are so worried today.
So now what are we supposed to do now?

As a Registered Investment Advisor, each day I sit across the table from consumers who are dazed, confused and lost as to what to do with their 401(k) money. Here’s what I advise them:

  1. Stop treating your 401(k) as the mother of all retirement plans; contribute to it only “up to” the match. If you don’t get a match, I strongly encourage you to see an outside retirement specialist to decide if you should contribute any new money to the plan. There are plenty of better ideas for your money.
  2. Forget the notion that there is some magic to the term “pre-tax.” Rather, think of your 401(k) contribution as “postponing the tax,” because one day, you’ll have to pay the taxes. In fact, the longer you have the plan, the worse it usually gets!
  3. Check with your employer for a copy of the Plan Document to see if there is money that can be rolled out into your own self-directed IRA. In many cases, even if you’re still working with the employer, you can roll out previous 401(k) contributions rolled into this plan, the employer contribution, and in some cases the after-tax portion. Best of all, if you’re 59 ½ or older, some documents let you roll out your “pre-tax” contributions as well.
  4. If you’ve recently quit, been fired, retired…whatever – get your money out of the 401(k) and into a self-directed IRA so you can get some different options and planning opportunities. One word of caution: if you’re not yet 59 ½, there are some cases where leaving some or all of the money in the 401(k) might make sense since money coming out of the plan is not subject to the 10% tax penalty.

So, say goodbye to Granddad’s retirement – stop putting all your hope, and your money, into the 401(k). As a retirement specialist who is actually in the financial trenches, I can assure you there are better options. Clarify where it is you want to go with your retirement and your money; assess where you are in relation to where you want to be; commit to finding other ideas and strategies for your money other than the 401(k); implement a new game plan that helps you use, enjoy and protect your hard-earned money; and finally, work with someone or put yourself under a plan that will allow you to easily monitor your progress.