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Old 03-13-2016, 08:58 PM
 
491 posts, read 689,765 times
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Hi I recently left my job with my previous employer that made 401K contributions but didn't necessarily match. I've since left that job to work for another employer (state of california) which does not offer a 401k match.

I now have the option to either cash out (currently total value is about $56K in 401K + $4K in minimum pension plan) or rollover into my new employer's 401K or 457 plan. The new employer does not contribute to the 401K, only the state pension.

Over the past 3 quarters or so, I've not seen my 401K grow, but have seen it shrink at times and then regain its loss, for the most part. I'm worried that I could be risking my 401K getting cut in half at a critical time or not really growing much over the coming years, even though historically it's supposed to be a good bet that 401K's will go up and experience the "magic" of compounding.

I'm wondering if it may be better to cash out the 401K from my old employer (while possibly staring to contribute to a new 401K at new employer, or not), and taking the proceeds (after 10% early withdrawal penalty, 28% higher bracket fed taxes, and state taxes) for business ventures with the hope/expectation that the returns will exceed what I'd get with a passive 401K left open for the next 20 years. Let's say I get like $30K net after all the taxes and penalties are factored in. I'm just wondering if it'd be better to cash out and put that money into other ventures or be at the mercy of the markets and keep it in 401K rollover and cross my fingers over the next 20 years or so. OR, I've also heard of self-directed IRA's which I can put the money into and possibly use the funds to invest in real estate ventures? I read there's more paperwork involved with that though.

Let's say I am able to make approximately a starting net profit of $500/mo on some side venture, using this money. If I were to be able to do this indefinitely, or even increase net profits over time by increasing my volume, would I ultimately do better, worse, or same as leaving the $60K in a new employer 401K with no future matches, only my continued monthly personal contribution of maybe 10% /mo (or approx $310)?
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Old 03-13-2016, 09:28 PM
 
Location: Central IL
17,957 posts, read 11,087,022 times
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You're losing a lot if you take it out but don't do a rollover. You're right that in general a stock fund will grow and compound over a 20 year period, even if it is down in the short term. If you're retiring in 20 years you don't want this money entirely out of the market and there is plenty of time for a recovery.

What are these other "ventures" you allude to? When you say "ventures" that sounds riskier than stocks! Perhaps you have some "target" fund available that have a lower percentage of stocks and a higher percentage of bonds which will be a little more conservative while still giving you a decent return? What funds are available with your new employer and what are the expense ratios charged?
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Old 03-13-2016, 10:08 PM
 
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If the risk profile is great, I would definitely go with it since a combo of stock and debt cannot yield a return of 20%. Only yourself can tell.

Have you explored other options? For example, Converting to Roth? You may avoid 10% penalty.

Just for your future reference, if you have extra money, you should fund your Roth first, then 457, 401 at last. Maxing out your tax deferred retirement accounts gives you a nice tool to bump up your retirement savings twice as quick as corporate employees can.
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Old 03-13-2016, 11:00 PM
 
993 posts, read 1,147,664 times
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Roll it to a traditional IRA or Roth or leave it out if you have good investment options at your previous employer's plan. I work for the state of CA and the investment options aren't great. But cashing out is way more foolish. If you need 30k net to begin making $500/mo then take out a loan for 30k. It would be much cheaper.
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Old 03-13-2016, 11:06 PM
 
491 posts, read 689,765 times
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Thanks, I forgot to mention:

1. I make just under $58K annually with the state. If I cashed out the 401K from former employer + the minimum pension benefit I also got, totaling $60K or so. It puts me at roughly $120K income for next year's taxes.

Looking at the tax bracket for 2016, it looks like I pay an additional $13K if I exceed 91K or so in income, because it puts me
in the 28% tax bracket. So it seems that if I were to cash out the former employer's 401K, I would want to cash it out over 2 tax seasons to keep below the 28% bracket's additional taxes?

2. To answer reneeh63's question, the other ventures are not proven. I just feel it's attainable for me to use the funds to buy certain products at a discount and make perhaps a 300-500 profit per month on them on average. Not sure how that would be vs 401k investments. But I feel it gives me some more control over my destiny vs 401K which could go anyway and I'm not sure how it will end up upon my retirement. It too feels like a gamble, but one that is out of my own hands.

3. As for Bettereducation's reply, I'm not sure I understand fully what you were saying in the first sentence. But as far as your 2nd and 3rd sentences, the Roth would be the IRA that already deducts my taxes ahead of time right, but no 10% penalty as long as I leave it in there until retirement age? Also, is it generally agreed upon that you should fund Roth's first, then 457 and then 401's as a general rule, if you have the option for all 3?
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Old 03-14-2016, 12:37 AM
 
10,076 posts, read 5,687,278 times
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I don't think it is worth it for just $500/month...

Not sure how you feel about dividends and such, it's up to everyone to decide on their own. But I enjoy having part of portfolio in them. I get about 9% dividends/year out of reits. Meaning on $50k, I get $375/month from it. Yes the stock value might go down, but I don't really feel that is "bad". When it is down, I buy more and "lock" in the low dividend to price ratio. $0.30 dividend/share at $16/share. If share price drops to $15 or lower, I still get more or less $0.30/share. I view it as having cash flow similar to having a rental property. I don't use it for capital appreciation but for the flow. But this is just a portion of my portfolio, the rest I keep for total return.

Sure if you think you could get more than that, then go for it... but I like not having any hassle of additional work and still getting $375/month. And to me, it's a bit less risky. But I'm not a business minded person. I like just collecting a check

Anyways, I usually just roll over old 401ks to my broker (I have an IRA with them) and I put the money into VT or reits (whichever keeps my AA)
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Old 03-14-2016, 12:51 AM
 
491 posts, read 689,765 times
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Quote:
Originally Posted by eyeb View Post
I don't think it is worth it for just $500/month...

Not sure how you feel about dividends and such, it's up to everyone to decide on their own. But I enjoy having part of portfolio in them. I get about 9% dividends/year out of reits. Meaning on $50k, I get $375/month from it. Yes the stock value might go down, but I don't really feel that is "bad". When it is down, I buy more and "lock" in the low dividend to price ratio. $0.30 dividend/share at $16/share. If share price drops to $15 or lower, I still get more or less $0.30/share. I view it as having cash flow similar to having a rental property. I don't use it for capital appreciation but for the flow. But this is just a portion of my portfolio, the rest I keep for total return.

Sure if you think you could get more than that, then go for it... but I like not having any hassle of additional work and still getting $375/month. And to me, it's a bit less risky. But I'm not a business minded person. I like just collecting a check

Anyways, I usually just roll over old 401ks to my broker (I have an IRA with them) and I put the money into VT or reits (whichever keeps my AA)

Dividends sounds interesting. I will have to learn more about it.
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Old 03-14-2016, 02:18 AM
 
10,076 posts, read 5,687,278 times
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Well, you might find you don't like them.

My VT outperforms my reit but I still like having it. I don't look to the reits to "get me rich", I leave that part to VT. I just want the REIT because I can use the money with a "predictable" time table. Yes, I could do the same just selling VT, but I still like the reits none the less.

It's almost how I view my job, do I take the pension and stay for decades, or do I take a "riskier" job with higher salary elsewhere? If asked, at least on CD, it seems like a lot would say the same answer

Last edited by MLSFan; 03-14-2016 at 02:32 AM..
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Old 03-14-2016, 08:49 AM
 
Location: New York
1,099 posts, read 1,060,048 times
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Roll it to a traditional IRA via Direct Transfer with one of the major fund companies. Vanguard, Fidelity, etc. Put in money market account...then learn about the investment choices and choose one you feel comfortable with.

Do not cash it out!
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Old 03-14-2016, 08:52 AM
 
Location: NC
7,718 posts, read 9,990,802 times
Reputation: 16287
Each employer has different options for investing your 401K savings. Some employers have a lot of choices while some have just a couple. Some choices may fit your situation (age for example) better than others. So, look at each company's investment options and see which you like best. Let that company be the one who holds your 401K, at least that part of it and at least for now. Do NOT take your money out unless it is life or death. Either let it stay where it is or roll it over to the next employer.
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