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OK so I'm starting some prelim retirement planning.
I'm going to be setting up either a 401k or Roth IRA...
My main question is security. Obviously these retirement plans have some risk, nothing is guaranteed. I plan to pick a very conservative portfolio with a lot of diverse holdings.
But the kind of risk I'm really worried about is not the stock market normal swings, but the manager of the fund going insolvent.
Let's say my 401k is managed thru a big company like Schwab or Fidelity. What if some rogue management/CEO bleeds the company dry and it goes bankrupt? Does my account stay intact or do I lose all my funds?
Another question I have is about regular deposits. Obviously most of the money will come out via direct deposit from my checking account, but what if I want to make "extra" deposits at the end of the year depending on how well I'm doing? Let's say for example I normally put 3000 every month in the 401k but some years I want to make an "extra" 10 or 20k deposit in November or December prior to the end of the tax year. Do most plans allow that?
There are limits on how much you can contribute each year to a 401k or IRA (either Roth or Traditional), based on age and income. Search for contribution limits and add the type to the search.
The type of fraud you mentioned should not be a problem when using well established institutions.
One risk would be that your employer does not send your money to the trustee (the financial institution) and you would know this when you got your quarterly statement. Thus the fraud would be short lived.
There are also insurance programs in place to help protect you. If the financial institution went bankrupt that would not affect your investments.
Seems to me if you are able to afford $3,000/month plus another 10-20K to invest you are not going to have any money problems. Max out your 401, those big institutions are not a risk, and then invest the rest in a Roth (again the max) and then a traditional brokerage account.
Sounds like you're starting out. Here are some basics.
Think of the following like an envelope, inside the envelope you put whatever investments you'd like (as limited only by your employer in the case of 401K and brokerage in the case of IRA). Each envelope has different attributes:
1. Roth IRA - Tax Free Growth
2. Traditional IRA - Deductible in Current Year - Tax Deferred Growth
3. 401K Plan - Income Exclusion in Current Year - Tax Deferred Growth. (BTW, these are setup in separate trusts, they aren't part of the company you work for. Even if your employer goes broke, this money is beyond them once the contribution is paid which must be done a day or so after each payroll)
The mailing address for these envelopes is you, at age 59.5 at the earliest, or age 74 or so at the latest. Generally the order to utilize them is as follows:
1. Capture any match from your employer in the 401K. Get the free money. If they will match just 2%, then contribute 2% first. Select one of their options for growth because you won't need the money for awhile.
2. Depending on taxes, fill your Roth IRA next. You will be filling it with after-tax dollars, but all of your eventual withdrawals are eventually free money. The arguments at the moment is that taxes are relatively low to what they will be in the future, and if just starting your income is low to what it will be in the future.
3. Next step is to max your 401K - By allowing pretax dollars to fill it you get a nice opportunity for growth.
4. Last step is if you have no 401K you can go with a traditional IRA.
Don't forget HSA accounts if yours can be invested. In my experience this has hardly worked as advertised, but if your company has a competent administrator, this could be a great way of building up a health plan savings.
Some look to eliminate taxes further with FSA accounts, but I find them to be noise.
However, that said, and while there's no tax advantage whatsoever, I would recommend building up a balance in a brokerage account. The problem with all of the above is there's no liquidity or availability as collateral. If an event occurs and all of your money is tied up in retirement accounts and you have to break the bank, you get nailed with not just applicable income tax on top of your regular wage rate, but also a 10% penalty.
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