Hi Shay,
You have lots of options for your 401(k). Most of them don't involve
paying any taxes, and the one that does would still be far better than
withdrawing it and paying the 10% withdrawal penalty and taxes.
First of all, since it is more than $5,000, your employer will most
likely let you keep it with them. If you have good, low-cost
investment options, there is nothing wrong with doing that. If,
however, the fees are high, the investment options are poor, or if it
is a small company with uncertain finances, I would suggest rolling
over to an IRA. This gives you complete control over your money.
To do this, you will have to identify where you want to keep your IRA.
Many companies offer IRAs, including banks, brokerages, and mutual
fund companies. The institution you select as the home for your IRA
will give you instructions on how to accomplish the rollover. Choose
one with low costs and investment options you like. If you want to
invest in mutual funds, Vanguard Group (www.vanguard.com) is known for
having low fee mutual funds. Fidelity Investments (www.fidelity.com)
isn't bad, either. You will want to have the money sent directly from
your 401(k) to the new institution so that you do not incur
withholding taxes or penalties. If you put your IRA into a brokerage
account, you can invest in anything ranging from mutual funds to bonds
to individual stocks to money market funds.
If you ever want to have the option of taking the money from the IRA
and putting it back into a new employer's 401(k), then you will need
to keep it separate from any other IRAs that you have in a Rollover
IRA. If that is not of importance to you, then you can combine it
with any other Regular IRA that you have (but not a Roth IRA.
Another option that you have, which is the most beneficial option of
all of them if you are relatively young and have the cash to pay the
taxes, would be to proceed to convert the Rollover IRA to a Roth IRA.
You would have to pay income taxes on the amount in the Regular IRA,
but you will not have to pay the 10% penalty, and all withdrawals from
the Roth IRA once you reach retirement age are tax-free. Roth IRAs
also have other benefits, such as allowing you to withdraw money for a
first-time home purchase (although I generally would not recommend
doing this if you have any other source of funds). The institution
you would be rolling your 401(k) over into can assist you with this
process as well. You have to do the rollover first. The best time to
do that conversion to a Roth IRA would be while you are in school when
your income is low so that you are in a low tax bracket to minimize
your tax payment. If your adjusted gross income is above $100,000,
you can't convert to a Roth IRA.
For more information, visit www.fidelity.com and click on Rollover IRA
on the left-hand side of the page. You can get information from the
web site and/or call an 800 number for live assistance and to receive
publications. You can learn about Traditional and Roth IRAs by
clicking on Retirement Accounts and then Traditional/Roth IRAs from
the Fidelity Investments homepage.
I hope you find the above information useful, and good luck with
investing for retirement.
Wonko |
Clarification of Answer by
wonko-ga
on
09 Jun 2003 13:23 PDT
Generally, there are two costs to consider. First, some firms charge
an annual IRA fee if your balance is less than a certain amount.
Typically, the balance has to be $2500 or more to have the fee waived.
Since you have a much larger amount than that, you shouldn't have any
trouble finding many companies offering you a no fee IRA.
The other cost is any cost associating with the investments you
choose. For example, mutual funds charge a percentage of assets
invested in the fund, and some may charge a sales fee (a load). I
cited Vanguard as a low cost example because their mutual funds charge
as little as 0.18 percent of assets, and are no-load funds if you
purchase them directly from Vanguard, whereas the industry average is
in excess of 1.5%. Fidelity Investments is another well-known
provider of no-load funds, and their expenses are lower than average,
although probably not quite as low as Vanguard's. Over time, fund
costs can add up to a lot, so you are wise to be concerned about them.
If you are investing in individual stocks or bonds, then your only
costs are commissions you pay when you trade them. If you are
investing in CDs, generally there are no costs to speak of (any that
exist are bundled into the interest-rate you are receiving).
So, in summary, with the amount of money would be seeking to roll
over, you should have no difficulty in finding an IRA with no annual
fee. The other costs you may incur will be dependent upon the types
of investments you choose. You can find out about the expenses by
reviewing the prospectus for the investment or looking up the fund on
a site like www.MorningStar.com or www.fidelity.com. Basically, you
should identify what investments you want, and then open your IRA with
that firm, to get the lowest possible cost under most circumstances.
Some firms, like Fidelity, also offer other company's funds in a
"supermarket," some without loads and some with loads.
I hope this clarifies the nature of the costs I was referring to for
you.
Wonko
|
,
0 Comments
)