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What are my options & how do I make the best choice for me and my family?

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.

Jan 31, 2014 by Sheila from Lafayette, LA in  |  Flag
5 Answers  |  7 Followers
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5 votes
Rich Winer Level 20

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.

View all 11 Comments   |  Flag   |  Jan 31, 2014 from Woodland Hills, CA
Rich Winer

I would ask friends and family for advisor recommendations. NAPFA will provide you a list of fee-only advisors, however that list will exclude fee-based advisors who may be equally good. The Garrett Planning Network might be a good fit because I believe that the advisors in Sheryll Garrett's network charge a fee for their advice but do not manage assets, so you won't have someone pushing to manage your assets. If you have only $5,000 at this point, you don't need someone to manage your money, just to give you sound advice and be there to advise you, as needed. Good luck.

Flag |  Feb 02, 2014 near Woodland Hills, CA

Thanks again, Rich.

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Flag |  Feb 02, 2014 near Lafayette, LA

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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.

1 Comment   |  Flag   |  Feb 01, 2014 from Bridgewater, NJ

Thanks for addressing some of my smaller concerns so directly. The additional information is appreciated.

Flag |  Feb 01, 2014 near Lafayette, LA

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4 votes

Hi Sheila,

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.

3 Comments   |  Flag   |  Feb 01, 2014 from Woodbridge, VA

Thanks, John. It does seem greatly in my interest to ask good question and act upon good answers. I'm trying.

I'm not a federal employee, but rather a state employee. I don't fully understand their setup yet, but checking with my HR dept. should be a relatively easy thing. Seems like it might be worth at least asking about.

It is very reassuring to know the money isn't gone forever if I don't get everything sorted out by the end of March. I just don't get it for a while. Thank you. That makes me feel like it would best to be quick, but is still more important to get it right.

A good financial planner definitely seems like the way to start. No one has suggested anything else at this point. But you do bring up a very good point that no one else has in I would not have thought about telling a financial planner about my desire to create a Will. I simply wouldn't have thought it was related.

Flag |  Feb 01, 2014 near Lafayette, LA
John A. Frisch CPA/PFS, CFP®, AIF®, PPC

Sheila, your first step is to find a good planner. I agree with the others that NAPFA and the Garrett Planning Network are the best place to look. I'm a member of NAPFA but I've had very good experiences referring families to Garrett advisors. For the reasons Rich mentions I would start with Garrett http://garrettplanningnetwork.com/. You have identified some financial issues that should be explored and you've received other ideas from the advisors on this post. Bottom line is that a good planner will sit down with you, get to know you, and identify the financial issues you should be working on. Don't consider their fee an expense. It's an investment. You'll get your investment back many times over. A couple of additional thoughts; a) find your planner first then ask them about the program your state employer offers. Many times I've seen state plans with sub par investment options. b) if you do get a check from the employer and can't send it back you will have 60 days from the date of distribution from the 401(k) plan to get the distribution amount (all of it including the money the plan withheld and sent to the Treasury) into your new employer's plan or IRA. No exceptions to the 60 day rule. If you don't make it 100% of your distribution will be taxable income and I suspect you are under age 59-1/2 in which case you'll incur a 10% penalty. Best, John

Flag |  Feb 02, 2014 near Woodbridge, VA

Thanks for the continued advice. I have taken care of point a and am taking to avoid point b being an issue.

Flag |  Feb 05, 2014 near Lafayette, LA

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3 votes

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!

1 Comment   |  Flag   |  Feb 03, 2014 from River Hills, SC

Thanks! All alternatives are welcome.

Flag |  Feb 05, 2014 near Lafayette, LA

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2 votes
Andy Tilp, CFP® Level 16

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.

View all 13 Comments   |  Flag   |  Feb 01, 2014 from Sherwood, OR
Andy Tilp, CFP®

Sheila and Colin

I have to say how wonderful it is to hear young adults thinking about the long term, and seeking out knowledge on the subject. I wanted to relate a story that shows the contrast to your actions and to help explain why I am so glad to hear your conversation.

As part of my practice, I occasionally teach a high school financial literacy class. It is basic information needed on how to get a good start once the kids are on their own. I was discussing an upcoming class with my college age daughter one day. Her friend, a brilliant 23 year old fellow student was with her. In the course of our conversation, her friend turned to me and said "I'm financially illiterate". This stopped me cold, but then I guess I wasn't too surprised either. I think most adults don't have a good basis of understanding.

So I just wanted to congratulate you both and encourage you to continue to learn. In 30 or 40 years, after the inevitability of age happening, you will be very pleased.

Flag |  Feb 05, 2014 near Sherwood, OR

I think it's great you're teaching a class to high school students! What I remember from school is how to write a check correctly (once in a blue moon), to always pay my taxes (when you or someone else figures them out so you don't go to jail), and how to make and analysis a budget (Who does that?! There are free programs for that!)

I am incredibly disappointed in my education. I could do a 1040EZ ...for the first couple of years I paid taxes. Then I was lost. I stumbled through setting up my 401k and I'm fairly certain my employer did most of it the work. I am stumbling through acquiring and trying to understand my mortgage. I haven't begun to save for my son's schooling. They didn't teach us how to find and apply for scholarships even. Or to talk Mr. Carsalesman down.

So, I've felt like I have no real choice but try to educate myself. Some of that is reading articles. Some of it is trial and error. I try to avoid that one. A lot of it is trying to ask the right questions to right people and make sense of the answer. That's where you fine folks came in. :-) And apparently, a financial planner.

Flag |  Feb 05, 2014 near Lafayette, LA

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