How do spacey millennials save for retirement?
November 19, 2018 9:32 AM   Subscribe

Hello! I have a couple thousand in an old 401k at a company I no longer work at. I'd like to roll it into....something, where I can keep track of it, and be able to add additional amounts from my paychecks. My current employers do not offer retirement benefits, but I'm finally making enough that I can and should be saving for retirement.

-Are there good articles about what my options are here?

-What do I need to know about minimizing penalties from the rollover? I was a bank teller for a major US bank and I have a bit over 2k sitting in a 401k there. I know I can just leave the money there but I rarely get updates, they send me a tax doc every other year and I'm worried about what happens if I move or forget about it or don't open a random letter updating me that something important happened. I don't have an account number or logins or anything, but I can call the employee hotline and figure things out.

-I want to set it up so money is taken out of my paycheck directly, right? Is there anything else I need to tell my payroll department? I have no idea on how taxes work on stuff like this.

-I come from a long line of people with no executive functioning and I don't have enough money to like, throw money at this problem; the investment banker at my bank is not interested in figuring this out, basically, I am not a big enough ticket.

-I'm mostly just looking not to get fucked on taxes and penalties and have a decent interest rate, not necessarily trying to go after high-risk high-yield investments or whatever. I just want to be able to log into an account and see the number get a little bigger as I sock money away.
posted by Juliet Banana to Work & Money (8 answers total) 32 users marked this as a favorite
 
I am not a financial advisory this is just form my life experiences. You should be able to open an account with a company like Vanguard. They should be able to initiate or assist with the rollover from your old employer. As long as the money is never in your possession, this the money directly transfers from the old account to the new, there should be no tax issues.

As for depositing additional money. Since your current employer does not have a 401K plan, any money you deposit will be post tax. The money from your old employer may be pre-tax, so the two should no be mingled. The company you open your account with should be able to advise on how to move forward.
posted by tman99 at 9:46 AM on November 19, 2018 [4 favorites]


The /r/personalfinance wiki is not a bad place to start.

Were I you, I'd roll the old 401(k) into Vanguard and put it all into the target retirement date fund that matches your age. They'll help you through the process and there are no penalties if you do it right. There are other valid places to put it but Vanguard is a leader in low-fee high quality investing and well known for their customer service.

I want to set it up so money is taken out of my paycheck directly, right?

If your employer offers a 401(k) or similar, then yes. If they don't, you can fund an IRA through automatic withdrawals from your bank account (or possibly through direct deposit if your employer allows it).

I have no idea on how taxes work on stuff like this.

See the above wiki, but in short, in a conventional retirement fund, you pay taxes when you withdraw in retirement, with a Roth you pay the taxes now but withdrawals are tax-free.

have a decent interest rate, not necessarily trying to go after high-risk high-yield investments or whatever.

As long as your time to retirement is measure in decades rather than years, you need to be going after moderately high returns from relatively safe investments, like index funds that follow the whole US market. Again, see the wiki for more information. By putting money into target retirement dates, it will automatically shift into less risky investments as you get closer to retirement to help protect you against a crash.
posted by Candleman at 9:57 AM on November 19, 2018 [4 favorites]


When looking at retirement (tax-advantaged) accounts, one of the first things you should be looking at is fees. That takes a huge chunk of your earnings if you're not careful. Now I'm not a registered financial advisor, but I did work for a fund manager for a long time and attempted the CFA, (but did not think it worth my while to get past the first exam). So with that in mind, here's my recommendations:

1. for the money you already have in your 401, you can do a no fee or penalty rollover into a new IRA account with your manager of choice. I would recommend either Vanguard or Schwab.
2. if you want to take advantage of the Roth tax-free savings, and are willing to pay a little more taxes this year, do a rollover of your 401 into a Roth IRA. Again, both Vanguard and Schwab will let you do this online.

For both, 1 & 2: once you setup your online accounts and pick the funds you want to rollover into (more on this later), they will have you print a form you'll have to sign and mail to your current 401k custodian (not sure if your bank has an online mechanism to rollover -- most do, but you may have to call them to find out). Let your bank know the rollover details, and they will magically transfer your money from their account to your new account.

Now as for the differences between 401 and IRA: there are a few. a 401 is a employer savings account and you can put in a maximum of $19,000 from your salary pre-tax into it. If you're an executive of the firm, they can contribute an additional $55,000 as part of an employer match (most of us grunts only get a match of 2-5% of your base, but that additional $2000 is totally worth it because it is free money). The IRA only allows a max contribution of $5,500 which may or may not be pre-tax depending on your total salary. The Roth IRA also only allows a max contribution of $5,500 (or less depending on your income).

If your current employer does not have a 401, both Schwab and Vanguard will let you auto-contribute from your paycheck. Keep in mind the contribution limits for IRA. You can (and should) save more in a regular fund account, one that is not tax advantaged.

Finally, how to pick the funds you will be investing in. There's lots of noise around this, but if you're like me and don't want the headache of dealing with retirement portfolio management, take a look at "Lazy Portfolios". This wiki on the Three-Fund portfolio should be a good start.

Let me know if you have any questions and I'd be glad to help out.
posted by Arthur Dent at 9:59 AM on November 19, 2018


How do spacey millennials save for retirement?

Automatically. Ronco rotisserie style. Set it, and forget it.

-Are there good articles about what my options are here?
401(k) Rollovers: A Quick Start Guide
Rolling Over Your 401(k) to an IRA
IRA rollovers and transfers (this one is a little more technical)

I'd like to roll it into....something, where I can keep track of it, and be able to add additional amounts from my paychecks.

You are looking for something called an Individual Retirement Account, or IRA.

-What do I need to know about minimizing penalties from the rollover?

When you do a direct rollover from your 401k company to the IRA company, there will be no taxes or penalties, and also no pieces of paper or phone calls for you to miss, because it is a transaction between two financial companies, after you authorize it.

I want to set it up so money is taken out of my paycheck directly, right? Is there anything else I need to tell my payroll department?

If your payroll department makes this an option, you can. It will be called something like an allotment. If not, you can set up automatic recurring withdrawals from your bank account into the IRA.

I'm mostly just looking not to get fucked on taxes and penalties and have a decent interest rate, not necessarily trying to go after high-risk high-yield investments or whatever. I just want to be able to log into an account and see the number get a little bigger as I sock money away.

It sounds like you're looking for a retirement investment company like Vanguard, or Fidelity, or Charles Schwab.

One possible plan of action:

1) Reestablish access to the 401k account
2) Open an account with a low-cost provider (Like Vanguard, or Fidelity, or Charles Schwab)
3) Do a direct rollover from the 401k to an IRA (may also be called a "Traditional" IRA) in your new low-cost provider
4) Pick a target date fund within the IRA, and purchase it using the money that is now in that account
5) Set up automatic recurring transaction from paychek or your bank into the IRA you have now.

As a note, IRA is a type of tax treatment for the account. You still have to actually purchase an investment after the money is in there.
posted by the man of twists and turns at 10:04 AM on November 19, 2018 [4 favorites]


One thing to look out for. A rollover to an IRA is a withdrawal from your 401(k). This is a non-taxable event in your case because you are simply transferring from one retirement account to another.

But, sometimes on your transfer request form they will ask if you want to have 20% withheld for taxes anyway. You definitely don't want to do that, so answer "No". You want 100% of your withdrawal to go into your new IRA account.
posted by JackFlash at 10:22 AM on November 19, 2018 [1 favorite]


Seconding the "roll it over into an IRA". I did this when I was in your exact situation as a 20-something Gen-X'er (which should tell you something about when this was) and a financial-industry acquaintance told me that this is what I should do. It was the start of the IRA that I have to this day.

In terms of how to make additional contributions to it - I don't even involve my payroll company at my office, I just set up an automatic monthly transfer from my checking account to my IRA and my bank does the rest.
posted by EmpressCallipygos at 10:28 AM on November 19, 2018


You want Vanguard--lowest fees available. Fees are your arch-enemy.

Open an account there, agree to electronic service (thereby getting the $20/year account service fee waived), open a "traditional IRA", tell them you want to do a direct rollover from a prior employer into the target-date retirement fund (*) that most closely matches your planned retirement date. They will generate a form you can send to your prior employer to initiate the transfer. That's pretty much all you have to do, except keep an eye on it to make sure it actually transfers in.

You can contribute up to $5,500 a year, pre-tax, to a traditional IRA. If your company doesn't offer a mechanism for this (sounds like it doesn't), you can easily set up Vanguard to withdraw a fixed amount of money per month from your bank account into your IRA. Then, come tax time, you report those payments on your tax form and they are excluded from the calculation of your income.

With regard to "taking advantage of tax-free Roths," be super clear that if you are taxed at the same rate now as you are at retirement, there's no mathematical difference between a traditional and a Roth IRA. (People hear the words "tax free" and they stop thinking.) With a Roth you are paying the taxes now, with a traditional IRA you will be paying them at retirement time. Will you be paying the same tax rate at retirement? Who knows!!! Part of finance for ordinary people is learning to accept that you can't tell the future reliably. It sounds like you're not making much money right now and so probably aren't paying too high taxes, so if you would prefer to do a Roth instead (exact same process, with one very important exception, see below, and you won't be able to deduct the payments from your income, come tax time), it's not nuts. But you are basically paying the taxes up front--if your marginal tax rate is 10%, you will be able to put $5500 into a traditional IRA vs. $4950 into a Roth for the same immediate cost to you. You will just have to pay taxes come retirement on the $5500, and not on the $4950 (because you already did!). And if you do this now, you will have to pay the taxes on your current savings in this year. Please do not forget that. Your current savings are in a pre-tax 401k. If you want to move them to a post-tax Roth, you have to pay those taxes this year. On only a couple thousand dollars, it may not be too much money, but if you don't have the cash, you don't have it.

(*) The other thing you must must MUST get your head around is that you are apparently still young, so there is no such thing as a "decent interest rate" for your retirement savings. Your investments HAVE TO significantly outperform inflation or you are literally losing money while it sits there. That means you HAVE TO expose yourself to meaningful risk for the corresponding reward. You are not going to use this money for a long time, so if its value goes up or down that means very little to you at that moment. You only need to change this approach as you get close to retirement. Your vision, of an account with "decent" fixed interest, will leave you with nothing but moths at retirement time. A Vanguard target-date retirement fund will diversify your holdings across the range of investments available to you, at a certain predicted risk. The value of holdings in such a fund WILL go up and down, occasionally drastically. But those are paper losses (or gains). This is the best way to try to ensure that you have the funds you need available at retirement. (Not guaranteed. Remember that bit about our not being able to tell the future. Basically all we can do is hedge our bets the best we can.)
posted by praemunire at 11:15 AM on November 19, 2018 [4 favorites]


Spacey millenial checking in. For retirement savings you need mutual funds/index funds /ETFs, which are the three main ways of benefiting from the overall rise in the stock market that will happen in your retirement time frame of >20 years. Risk is a relative term - in the short term, the stock market is risky, but in the long term (20,30y), the ups beat the downs so it's much less risky in terms of beating inflation than things like bonds, CDs or regular "high interest" savings accounts.

If you don't want to take the word of some rando, and you shouldn't, the personalfinance subreddit is great to teach yourself all about it or you can pay a *fee-only* financial planner (not paid commission and not employed by a bank, they WILL lie to you if they can earn money from it) for advice. In general, ETFs are more difficult to buy but have much lower management fees than mutual funds, while index funds are in the middle. I prefer ETFs for that reason but if you don't want to research it, it's far better to buy some random mutual fund from your bank than to leave your money in a regular savings account, where you're constantly losing to inflation even if the account earns a "high" interest rate.
posted by randomnity at 3:33 PM on November 19, 2018


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