Extremely basic money advice (1 Viewer)

[Hastur]

I was talking to someone today, and our companies 401(k) came up. This person said they were not aware there was an automatic 2% contribution the company made to it. They were very excited, as there was $500 in their account. They immediately withdrew the $500 and spent it on frivolous things(IMO). I told them they should have put it into their Roth IRA. They responded with "I don't know what that is".

This got me thinking. Keeping things as basic as absolutely possible, what financial advice would you want to give to someone who knew nothing about investing. This advice would have to fit on a 4X8 inch piece of paper.

Here is what I came up with:

1.) Go to www.tdameritrade.com and open a "Roth IRA" account.

2.) Set up to have funds electronically deposited automatically each month

3.) Max out the contribution each year($5,500)

4.) Other investment vehicles to consider: EFT's(Exchange Traded Funds) and Index Funds

5.) NEVER borrow/take money from your IRA(be homeless if you have to)

6.) Live below your means

7.) Best investment ever: Yourself(education)

8.) Term Life insurance only!

Additional reading:

Money Makeover by Dave Ramsey

Unconventional Success by David Swensen

Random Walk Down Wall Street by Burton Malkiel

 

[fred_1_15301]

Your company automatically contributes 2% without you having to contribute anything?

 

[GroveDiesel]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

 

[jon_mx]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

 

[GregR]

Extremely basic money advice

 

[GroveDiesel]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

 

[kutta]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

I'm pretty sure you can withdraw any time, but you have to pay a penalty (10%?) and immediate taxes.

 

[GroveDiesel]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

I'm pretty sure you can withdraw any time, but you have to pay a penalty (10%?) and immediate taxes.

Unless that has been changed very recently, that's not the case.

http://budgeting.thenest.com/can-cash-out-401k-am-still-employed-26009.html

One of the rules related to cashing out a 401(k) relates to the employment status of the account owner. You are allowed to cash out a 401(k) while you are employed, but you cannot cash it out if you're still employed at the company that sponsors the 401(k) that you wish to cash out.

 

[Dan Lambskin]

Your company automatically contributes 2% without you having to contribute anything?

Mine contributes 6%

 

[STEADYMOBBIN 22]

I did a credit check last night....

Does anybody know why Capitol One is requesting my info twice a month?

ETA- I haven't had a Capitol One card in 8-10 years.

 

[jon_mx]

I did a credit check last night....

Does anybody know why Capitol One is requesting my info twice a month?

ETA- I haven't had a Capitol One card in 8-10 years.

Sorry. I have been trying to get a Plantinim VISA under your name with a $40k limit, but have yet to be successful.

 

[STEADYMOBBIN 22]

I did a credit check last night....

Does anybody know why Capitol One is requesting my info twice a month?

ETA- I haven't had a Capitol One card in 8-10 years.

Sorry. I have been trying to get a Plantinim VISA under your name with a $40k limit, but have yet to be successful.

Let me know if it ever does and drinks are on me!

 

[shadyridr]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

im pretty sure you can withdraw at anytime with penalties of course.

 

[fred_1_15301]

Your company automatically contributes 2% without you having to contribute anything?

Mine contributes 6%

My company only matches up to 6%. I still have to contribute that much in order for them to match. I didn't even realize that some companies contributed without requiring the employee to also contribute.

 

[GroveDiesel]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

im pretty sure you can withdraw at anytime with penalties of course.

As the link I posted above shows, that's only true if you no longer work for the company that 401(k) was through. If you still work there, your only options are a loan or a hardship withdrawal.

 

[shadyridr]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

im pretty sure you can withdraw at anytime with penalties of course.

As the link I posted above shows, that's only true if you no longer work for the company that 401(k) was through. If you still work there, your only options are a loan or a hardship withdrawal.

my boss just withdrew from his 401k to buy a Corvette he always wanted.Edit: i guess he took a loan. My bad

 

[belljr]

You sure he didn't take a loan?

 

[shadyridr]

You sure he didn't take a loan?

nope Im not sure. Thought they were the same thing but Im guessing a withdrawal doesnt require you paying back.

 

[Christo]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

im pretty sure you can withdraw at anytime with penalties of course.

As the link I posted above shows, that's only true if you no longer work for the company that 401(k) was through. If you still work there, your only options are a loan or a hardship withdrawal.

my boss just withdrew from his 401k to buy a Corvette he always wanted.Edit: i guess he took a loan. My bad

Don't do this. It's probably the most basic money advice I can give.

 

[GroveDiesel]

Your company automatically contributes 2% without you having to contribute anything?

Mine contributes 6%

My company only matches up to 6%. I still have to contribute that much in order for them to match. I didn't even realize that some companies contributed without requiring the employee to also contribute.

There's two possible "automatic" contributions that could be going on here too. Some companies contribute a flat 2 or 3 percent. This is mostly done to satisfy discrimination testing and allows high compensation employees to contribute the maximum amount allowed by law. If the company doesn't provide that flat percent (often called a safe harbor contribution), then the plan will probably fail the discrimination testing and the highly compensated employees won't be allowed to contribute nearly as much.

The other possibility is that the pan is trying to encourage employees to save for retirement as well as increase their chances of passing discrimination testing by automatically enrolling employees. For instance, I am starting a new job next week and after 30 days they will automatically start taking 3% of my pay and putting it into the 401(k). I can opt out, but most people are too lazy to do so.

They are both ways that companies try to benefit their highly compensated employees by satisfying the discrimination testing rules. One is a guaranteed way to do so using employer contributed money. The other is a bit more up to chance as it just automatically opts in employees at a certain rate for them to contribute and banks on most not opting out.

 

[belljr]

You sure he didn't take a loan?

nope Im not sure. Thought they were the same thing but Im guessing a withdrawal doesnt require you paying back.

no...

a loan you can take out at any time. You pay yourself back with interest with funds taken directly out of your check. However if you leave the company you have to payback immediately.

if you have a hardship you can straight withdrawal with penalty.

if you leave you can rollover to another account without penalty. Leave it where it is.

withdrawal the money with penalty.

I think this laws still apply.

I'm surprised companies put money into a fund without employee Contributing

 

[Tom Hagen]

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Also, there is an income limitation for making Roth IRA contributions so not everyone is eligible.

 

[Juxtatarot]

Your company automatically contributes 2% without you having to contribute anything?

Mine contributes 6%

Mine automatically contributes 10%.

 

[belljr]

They put in an amount equal to 10% of your salary without you putting any money in?

 

[NewlyRetired]

This got me thinking. Keeping things as basic as absolutely possible, what financial advice would you want to give to someone who knew nothing about investing.

See the first post in this thread

https://forums.footballguys.com/forum/index.php?/topic/318298-a-guide-to-savings-and-investing/

 

[Juxtatarot]

They put in an amount equal to 10% of your salary without you putting any money in?

Yes.

 

[belljr]

Wow

 

[NJ]

I'm not sure if there are IRS laws that are specific to all in-service withdrawals (ie while you still work for the company), I think the rules vary by company/plan. Since the purpose of the plan is to get you to save for retirement, a lot of plans won't allow a withdrawal without a documented hardship but I am fairly certain that's not true for all plans. In addition to loans, my plan allows a pre-approved/no paperwork in-service withdrawal of up to 30% of my 401k, I could get it with a few clicks of the mouse, no questions asked. If you want to withdraw any more than that, you have to document a hardship and get approval from the plan administrator.

Maybe the first 30% is still considered a "hardship withdrawal" by IRS guidelines, but I know it does not require any paperwork or approval.

It's a very good plan, they put in 6% without you doing anything and then will match an additional 4% of your contributions.

 

[Juxtatarot]

Wow

But, overall, salaries and wages aren't all that wonderful. Things can even out.

 

[randall146]

The most basic answer to your specific issues is: He shouldn't/may not have taken out the 401(k) money, and telling him to put it into a ROTH was bad advice

The correct advice is:

1) Leave the free company 401(k) money where it is

2) See if the company has any 401(k) matching

3) Maximize the matching amount

4) Ask more questions after doing steps 1-3

 

[Gopher State]

Look for a. Job with a pension, their out their,federal government, etc in four more years my pension wifi equal my current take home pay, without my 401 or social security

 

[randall146]

They put in an amount equal to 10% of your salary without you putting any money in?

Yes.

Do they have opening for criminal defense lawyers in Rhode Island?

 

[NutterButter]

#1 Don't have kids

#2 see #1

 

[randall146]

Look for a. Job with a pension, their out their,federal government, etc in four more years my pension wifi equal my current take home pay, without my 401 or social security

Are you sure about that? Most federal pensions aren't nearly that high. Most are something like you get number of years worked x 1.5% average top 3 years pay. So even if you work a fullish career you're never getting more than 60% or so

 

[belljr]

Yeah the pension here changed a lot

 

[NJ]

According to this, some companies/plans allow in-service, non-hardship withdrawals of 401K, so it would appear there is no federal law preventing it.

http://www.anthonycap.com/blog/service-withdrawals-401k-plans-law-and-plan-rules

 

[GroveDiesel]

According to this, some companies/plans allow in-service, non-hardship withdrawals of 401K, so it would appear there is no federal law preventing it.

http://www.anthonycap.com/blog/service-withdrawals-401k-plans-law-and-plan-rules

Re-thinking this, it is possible that a plan allows for an in-service distribution of money contributed by the employer. That ability though has to be restricted by year's of service, age or both. Some companies may offer that, but it's usually pretty rare.

But it's flat out against the law to allow in-service distributions of employee contributions to current employees until they reach at least age 59 1/2.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/401k-Resource-Guide-Plan-Participants-General-Distribution-Rules

Generally, distributions of elective deferrals cannot be made until one of the following occurs:

You die, become disabled, or otherwise have a severance from employment.

The plan terminates and no successor defined contribution plan is established or maintained by the employer.

You reach age 59½ or incur a financial hardship.

 

[sports_fan]

Many people just don't understand the difference between income and net worth and why you should be more concerned about the latter. They have it backwards. They think if you're earning a good income you're financially successful regardless of how much of it you keep.

 

[jon_mx]

How did that person just withdraw from the 401(k) while still an active employee?

And a Roth may not be the best option for everyone. You need to be pretty certain that your tax rate when you retire will be higher than your tax rate+extra compound interest now. That's definitely not a given.

Probably completely unaware of the taxes and penalties. Just dumb.

Yeah, but unless you're over retirement age, you aren't allowed to just withdraw your retirement funds while still employed unless you have a hardship as defined by the IRS and the plan allows for it.

im pretty sure you can withdraw at anytime with penalties of course.

As the link I posted above shows, that's only true if you no longer work for the company that 401(k) was through. If you still work there, your only options are a loan or a hardship withdrawal.

my boss just withdrew from his 401k to buy a Corvette he always wanted.Edit: i guess he took a loan. My bad

Don't do this. It's probably the most basic money advice I can give.

Yeah. Real stupid. Should have gotten a Honda. Much better investment.

 

[GroveDiesel]

Many people just don't understand the difference between income and net worth and why you should be more concerned about the latter. They have it backwards. They think if you're earning a good income you're financially successful regardless of how much of it you keep.

Yup. Once sat in a courtroom in family court listening to a divorce case where each person was accusing the other of stealing/hiding money. Together they had been making over $150k a year. 20 years ago, that was pretty darn good. And they had a negative net worth with absolutely no assets. They had been renting a huge house, leasing expensive cars, renting high end furniture, etc.

The judge literally made them hand over their credit/debit cards because it was clear both of them had been tapping bank accounts the judge had ordered them to leave alone. Both of them had to ask their lawyers for money just to get out of the parking garage.

It blew my 18 year old mind. I didn't understand how you could be making that much money (especially in Ohio) and have nothing more than clothes to your name?

 

[Hastur]

The most basic answer to your specific issues is: He shouldn't/may not have taken out the 401(k) money, and telling him to put it into a ROTH was bad advice

The correct advice is:

1) Leave the free company 401(k) money where it is

2) See if the company has any 401(k) matching

3) Maximize the matching amount

4) Ask more questions after doing steps 1-3

I agree it seems I gave them bad advice on the surface. However, a few details might clear up some things.

This person is 23, makes about $12 an hour, and plans on quitting the job to move to another city.

 

[pecorino]

I was talking to someone today, and our companies 401(k) came up. This person said they were not aware there was an automatic 2% contribution the company made to it. They were very excited, as there was $500 in their account. They immediately withdrew the $500 and spent it on frivolous things(IMO). I told them they should have put it into their Roth IRA. They responded with "I don't know what that is".

This got me thinking. Keeping things as basic as absolutely possible, what financial advice would you want to give to someone who knew nothing about investing. This advice would have to fit on a 4X8 inch piece of paper.

Here is what I came up with:

1.) Go to www.tdameritrade.com and open a "Roth IRA" account.

2.) Set up to have funds electronically deposited automatically each month

3.) Max out the contribution each year($5,500)

4.) Other investment vehicles to consider: EFT's(Exchange Traded Funds) and Index Funds

5.) NEVER borrow/take money from your IRA(be homeless if you have to)

6.) Live below your means

7.) Best investment ever: Yourself(education)

8.) Term Life insurance only!

Additional reading:

Money Makeover by Dave Ramsey

Unconventional Success by David Swensen

Random Walk Down Wall Street by Burton Malkiel

Your first point is to open a Roth IRA (which is a good idea in most cases) but you're supposed to be giving extremely basic advice. And your buddy doesn't even know what a Roth IRA is, let alone where they would plunk the money they eventually put in it. Keep it even simpler:

1) Do not purchase anything on a credit card that you can't pay off immediately

2) Pay off all of your credit cards in full each month

3) Make a budget of money coming in versus money coming out

4) Either save some of that money that's coming in or, if expenses outweigh income, cut spending

Or just read Dave Ramsey.

 

[Michael Brown]

Why term life insurance only? My wife and I have policies today, and 80% of it is term but the other 20% is...whatever the opposite of term is. Permanent? It's more expensive for that 20%, but it never goes up based on age and the amount we pay gets re-invested so that eventually down the line the policy essentially pays for itself. It was set up for me by a friend, so I'd like to think they aren't screwing me. We also overfund the policy for a little extra investing. Are they screwing me?

 

[Doctor Detroit]

Look for a. Job with a pension, their out their,federal government, etc in four more years my pension wifi equal my current take home pay, without my 401 or social security

Are you sure about that? Most federal pensions aren't nearly that high. Most are something like you get number of years worked x 1.5% average top 3 years pay. So even if you work a fullish career you're never getting more than 60% or so

Gopher doesn't work for the Feds, or habla Engrish apparently.

 

[Doctor Detroit]

Why term life insurance only? My wife and I have policies today, and 80% of it is term but the other 20% is...whatever the opposite of term is. Permanent? It's more expensive for that 20%, but it never goes up based on age and the amount we pay gets re-invested so that eventually down the line the policy essentially pays for itself. It was set up for me by a friend, so I'd like to think they aren't screwing me. We also overfund the policy for a little extra investing. Are they screwing me?

If you have whole life insurance, you are almost certainly getting fleeced by fees. No reason at all to combine investments and insurance, they are two very different vehicles. Do some reading, and trust no one that tells you whole life is a good deal. It's a big commission and fee scam.

 

[chauncey]

I've heard in certain high net worth situations whole life is a good choice, maybe Chet can chime in.

 

[Hastur]

I've heard in certain high net worth situations whole life is a good choice, maybe Chet can chime in.

This is correct. Whole life applies to about 2-5% of the population. Same thing with Mercedes Benz. Truly, only about 5% of the population can afford them, but many more go into debt to have one.