I've recently switch from part time in the private sector to full time in the public sector. I had a 401k with my previous employer. They intend to issue me a check for the amount (just under $5000) in the account. My understanding leads me to believe this is not in my best interest. However, I don't feel anywhere near informed enough to make to call to roll that money over to an IRA or mutual funds or whatever else there is out there. I want to send my son to college and one day retire and, if necessary, afford a nursing home. I'm still fairly young but it seems like building strong in the early years is very smart. I just don't know how to continue or where to turn to find out.
Sheila, My recommendation si to roll the money in your 401K to an IRA. The best way to do that it to open an IRA account at a discount brokerage firm like TD Ameritrade and ask your former employer have a check sent directly from the 401K provider to your new brokerage firm IRA. This is called a trustee to trustee transfer, and it's the cleanest way to roll over money to an IRA. If they won't do that, ask them if they will issue the check to your new brokerage firm FBO (for the benefit of) your name and account number. While there are many sources of information on investing for retirement, I think it would make sense for you to pay a local financial advisor for an hour of his or her time to help you invest the money in your IRA appropriately. With $5,000, it probably doesn't make sense for you to pay an advisor to manage your account on an ongoing basis. But you may want to check in with him once or twice a year to make sure your investments are performing to your expectations. Hope this helps. Feel free to ask any followup questions.
As for your other concerns, if you are still young your best plan for nursing home is a sound retirement plan. As you get older might make sense to consider insurance schemes. And for college, start saving monthly into a 529 plan. Just as with the target date retirement funds, there are similar funds available in college 529 plans from Vanguard and T Rowe Price which are based on the child's age. As per Richs suggestion, to put all this together, invest a couple hours with a financial planner who will work ON AN HOURLY FEE BASIS.
Congratulations on your new full-time job. And I commend you on your questions. If you continue to ask these kinds of questions and implement good financial advice throughout your career you should retire in great financial shape.
You can tell by the answers you have already received that you have some options for your 401(k) distribution. Besides the traditional IRA and ROTH IRA a 3rd may be to roll your 401(k) into your public sector plan. If you are a Federal Government employee with access to the Thrift Savings Plan (TSP) you can roll your 401(k) into either the traditional TSP account or ROTH TSP account. That may be the simplest thing to do because you won’t have to manage both your new TSP account and an IRA. If you are in another public sector plan then you’ll have to check with your HR department to see if a rollover is an option.
Do not allow your ex-employer to send you a check in your name. If they do they will have to withhold 20% and remit it to the US Treasury. You can still roll the check into an IRA or possibly your new employer’s plan but to avoid a taxable distribution on the 20% you will have to come out of pocket to replace the 20% withheld by your employer. For example, if your current 401(k) balance is $5k you would receive $4k and your ex-employer will send $1k to the Treasury in your name. This $1k will be treated as a 2014 Federal income tax deposit in your name so you don’t lose the money but you won’t get it back until next year when you file your return and get a refund. If they do send you a check net of 20% withholding ask if you can send it back and start over again.
I agree with the other advisors that the best way to get your questions answered is to sit down with a fee-only planner. Avoid an advisor who is paid by the products they sell because you may not receive objective advice. Once a planner gets to know you they will likely identify other questions you haven’t thought to ask regarding other financial topics. For example, tax, insurance and inheritance planning (i.e. do you need a Will or a Trust?).
Hope this helps.
Hi Sheila! I love all the answers here and the good advice from the other advisors. So I won't repeat, but will give you one additional resource. LearnVest is an online option for financial advice. Their mission is: to empower people everywhere to take control of their personal finances so they can afford their dreams. They offer access to financial professionals who can answer your questions and help put your long term goals on track, and they are very female friendly. Plans have a one-time set up fee and then a small monthly fee for their ongoing services. Check them out as another route to help answer your questions. Good luck to you!
Rich had some very good points. An alternative would be to open an IRA at Vanguard and have your 401k administrator transfer the funds directly to this account. With $5000, it might be simplest to put the money in a target date retirement account. These are all-in-one fund that have a broad selection of investments and automatically adjusts over time to become more conservative as you approach retirement.
Each account is identified with the year that you expect to retire. For example, the Vanguard Target Retirement 2040 is designed for individuals in the age range of 36 to 40, and who will be retiring in 20 – 25 years. Vanguard funds have some of the lowest fees in the industry, and also are highly rated for their return and management. (Note-I am in no way an affiliated with Vanguard. I just think they have excellent funds and recommend them to my clients.)
Other fund companies have similar target date retirement mutual funds. Whatever mutual funds you choose, make sure it is a no-load fund and has low management fees.