How to invest in Everwise

Talkin go money

It is only natural to worry about the financial pressures caused by our retirement years. For example, a 401 (k) plan can seem like a godsend to an employee of a company. The 35-year-old program helps workers get into the twilight years by giving them the right to transfer part of their compensation to the 401 (k) account without paying tax. So it's no wonder that the 401 (k) has become the most popular form of employers in the United States.

One of the greatest perks of maintaining a 401 (k) is what investment industry experts like to refer to as an "employer match." "This term refers to the amount of money your company contributes to the retirement account. Most companies cover an employee's contributions, dollar for dollar, up to a certain percentage. As of 2013, most of an employee's contribution to a 401 (k) Contribution can be $ 17,500, although the number could change as it is frequently adjusted for inflation.Employees 50 years and older who are 50 years or older are allowed additional contributions of up to the end of the year to afford $ 5,500.

There is a catch, however. If you start withdrawing money before the age of 59.5, you can face a 10% penalty. A person must start withdrawing money from a 401 (k) by April 1 of the year after he or she hits 70. 5; These withdrawals are known as Minimum Required Distributions (RMDs).

Millions of people depend on this nest egg to help them retire. But what if real life needs to move underground - like making mortgage payments or a child's schooling or credit card debt - and the owner needs to withdraw money from the 401 (k)?

Investment professionals generally think about early withdrawals, but is there always a time when it is wise to get money out of this tax-free investment?

Dealing with Debt

While every investor is different, financial experts point out that many people find themselves in similar situations.

Carol Hoffman of Clear Perspectives Blue Ash, Ohio financial planning company, which manages $ 55 million in client assets, cites an example of someone trying to "pull" funds out of 401 (k). Hoffman's client is married and her husband is on a retirement plan. She has her own pension of about $ 6,000 a month and a 401 (k) of $ 60,000.

What makes the client's situation imperative is that she will leave her employer at a time when she and her husband are facing a daunting financial challenge. This couple, Hoffman notes, "ran into significant debt". “It's largely related to the cost of sending their three children to college as well as the $ 25,000 they've grown into credit card debt.

"We recommended that this client repay the full 401 (k) and pay off debt," said Hoffman. "Little did the client know that the IRS would allow the 401k to retire at the age of 55 after termination of employment."

Hoffman has another caution to offer: "People who have a lot of debt tend to do this repeatedly, so we can only recommend this strategy if we are working with them to plan their spending and increase their savings. .. We cut off their credit cards. "

People who do not stick to the 401 (k) plan may regret neglect. Just before he turned 60, respected New York Times columnist Joe Nocera publicly complained about his predicament in April 2012 when he took stock of his life: "The only thing I didn't cover on my to-do checklist , retirement is planning, "he wrote. "I have no plans to retire. Specifically, I can't afford to retire. My 401 (k) plan to handle my retirement has been in tatters." Unforeseen circumstances like that Divorce and the bursting of the dot-com bubble in 2000 helped cut Noceras 401 (k) in half twice.

Roll over

Some investors want an alternative to a 401 (k) while realizing the tax savings.

Taking the funds from the 401 (k) and "rolling it over" to an individual retirement account (IRA) also offers tax benefits. Hildy Richelson, president of Scarsdale Investment Group, with $ 242 million under management, says, "Individuals should convert their 401 (k) into a self-directed IRA and purchase high quality, custom bonds to fund their retirement. Are able to manage their retirement assets themselves. "

"If you are no longer with your employer but your 401 (k) has never been moved, you should consider transferring the assets to another qualifying account such as an IRA," recommends Philip Christenson, a certified financial analyst based in Plymouth. , Dimensions. "You will likely have a lot more investment opportunities and potentially cheaper options than your old 401 (k) plan offering."

At the same time, Christenson warns investors: "... in some cases your 401 (k) plan may have an investment that you cannot access outside of your plan, such as a guaranteed master account. I have seen this in this low interest rate environment Fund types offer attractive interest rates without losing capital. "

Before people send their 401 (k) funds to an IRA, however, they should consider the potential consequences. "Look at the costs within the 401 (k) fund versus the total cost of an IRA," including consultancy fees and commissions, urges Terry Prather, a financial planner in Evansville, Indiana.

Prather poses another, notable, scenario. "A 401 (k) typically requires a spouse to be named the primary beneficiary of a particular account unless the spouse signs a waiver granted by the plan administrator. An IRA does not require marital consent to identify anyone other than the spouse as the primary beneficiary If a participant is planning to remarry soon and has someone other than the new spouse as the beneficiary - children may form a previous marriage - a direct rollover to an IRA may be desirable. "

Investment advisors emphasize that people should only exit a 401 (k) when they believe it is absolutely necessary and have exhausted all other options. Remember, they state it is mostly a retirement account.

It is wise to seek advice from an investment professional before embarking on such a dramatic course of action. "Many employees who retire or change jobs are entitled to seek advice from financial professionals," noted Wayne Titus III, owner of AMDG in Plymouth, Michigan, who has approximately $ 66 million in client assets. "These can span a range of professions, from insurance agents, brokers, tax advisors, or auditors."

The bottom line

Experts point out that 401 (k) fully invested in stocks can expect an annual return of around 9-10%. They emphasize that alternative investments can offer greater short-term returns. But a 401 (k) should be viewed as a safe haven at all costs. Risk shouldn't be part of the investment equation here.