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CNN Live Saturday
"Dollar Signs": Making The Most Of You 401(k)
Aired October 11, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RENAY SAN MIGUEL, CNN ANCHOR: On "Dollar Signs" today, making sure your retirement dreams don't become a nightmare. With retirement options coming earlier and life expectancy growing, making sure you're getting the most out of your 401(k) is even more important.
Here are some 401(k) basics for you. You are allowed to put in up to $12,000 a year tax defered. Your moeny, plus company matching funds grow tax deffered. If you cash out any of the savings before the age of 59 1/2 there is a 20 percent tax penalty. There are exceptions to that. Financial hardship or maybe you want to buy a new home.
How much money will you need to retire? Experts say plan on saving 70 to 80 percent of what you spend now. They suggest you save more, if you like to travel, or take on other financial obligations.
It's up to you to make yours a comfortable retirement. That's where a 401(k) comes in. Dee lee, a certified financial planner, and author of the book "Women and Money" joins us. Along with "Forbes" magazine's Chana Schoenberger. Ladies thanks so much for being here. We appreciate your time.
Ms. Lee, let me start with you. Why would you want to go ahead and make any kind of changes to your 401(k)? We're told all the time it's one of those things you put the same amount of money in every month and then forget about it. Why would you want to make the changes?
DEE LEE, AUTHOR: You do put the same amount every month. It's dollar cost averaging. You put a percent of your salary in. We are coming out of a bear market. We are turbing around. So people might have done is burrow into the cash equivalent, maybe into bond funds. So they may want to look at rebalancing their portfolio, you know, contributing to more stock funds right now.
Certainly, the younger you are, the more aggressive you can be with your 401(k) plan because you have time on your side. You may have 20 or 30 years before you actually need these dollars to pull out in retirement.
SAN MIGUEL: Ms. Schoenberger, easier or harder these days to make those kinds of changes?
CHANA SCHOENBERGER, "FORBES": Well, actually, it's always pretty easy. The nice thing about a 401(k) is that you don't really have to worry about trading. You can trade as often as you want because it's tax defered. When we talk about regular savings accounts, we always tell people to think about the tax consequences of trading in and out of funds and out of individual stocks. In this case, you don't have to stress about it.
You should definitely look at your statement every month or every quarter when it comes from your brokerage house, and you should think about where you want to be in.
SAN MIGUEL: We're already getting some phone calls here. Must be a topic people want help on. Now we're going to Gerard in North Carolina. What's your question, please?
CALLER: Hello. Glad to see this topic. I'm 35 years old. I have a 401(k) with two former employers, and I was told that I should take them out from companies that I used to work with, and somebody told me to put them all into one like 1 Roth account. And I was wondering what the course of action should be.
SAN MIGUEL: Ms. Lee, what do you think?
LEE: Well, if you have more than $5,000 in your 401(k) account, your old employer has to allow to you leave it there. But certainly for ease of paperwork, you can either roll them into a rollover IRA, and then you can convert them into a Roth, or you can roll them into your new employer's plan, both of them, and have everything into the 401(k) plan.
What this may allow you to do is borrow the dollars from your old plan. If you put them into a new IRA, the borrowing privilege goes away. Certainly, you should consolidate them and not have your accounts scattered all over the country side.
SAN MIGUEL: Thanks for the call. We go to Patty in New Jersey. What's your question?
CALLER: Hello and thank you for taking my call. My call is very similar to the previous call in that I do have a previous account that I do like to roll over to a new employer. However, my previous employer is where i've lost money. Should I leave it there until I break even before I roll it over?
SAN MIGUEL: Miss Schoenberger, why don't you tackle that one.
SCHOENBERGER: Well, as Dee was saying, for ease of paperwork, and assuming you're a long time from retirement, you have a long time horizon not to worry about here.
So losing a little bit of money would not be the end of the world. You might as well trade out of it, get into your new employer's plan, consolidate everything, and then you can start investing those dollars in growth funds or something else you think will grow a lot before you retire.
SAN MIGUEL: We have an e-mail from John Ripley from Groves Texas. And he writes in, "what do you recommend for a newcomer to the 401(k) system. I've been in it for about 4 months and have 70 percent in growth stock investments and 30 percent in bond, managed income. Is this a good move a young employee with a family?.
What about that asset allocation there, Miss Lee?
LEE: Well, certainly, he's done just that. He's got a 70-30 split. He's got 70 percent in stocks, 30 percent in bonds. But a very young individual could probably go as high as 80 percent stocks and 20 percent bonds.
But it's that balanced portfolio that allows people's losses to be much less during the bear market. Certainly, even if you're under 35, you should be looking 80 to 90 percent tops, in my opinion, having stocks in your portfolio, in your 401(k). So as a beginner, good basic large company growth stocks. Some mid-size, and maybe a little international.
SAN MIGUEL: And always do your homework on the growth and value of the stocks and funds and that kind of thing and what kind of return you can expect with those terms.
This from Mike in Northcross, "I work for a small company out of Irvine, California. My current salary is around $110,000 annually, and I was putting in around 10 percent into my 401(k), but the company asked that I reduce that to around 4 percent stating that I made things top heavy. How can I ad more to my 401(k). Miss Schoenberger, top heavy account?
SCHOENBERGER: I don't know about that. I guess it would depend a lot on what sort of funds you're looking at here.
LEE: Can I jump in?
SCHOENBERGER: Yes, go for it.
LEE: Top heavy means that the higher paid employees are putting in a larger percentage than the lower paid employees. So the company cannot allow that. They're only allowed two percentage points differences between, on the average, of lower paid employees and higher paid employees. In higher paid employees is anyone making over about $87,000. So he can't add any more to his 401(k).
What he may be able to do is set up a Roth IRA and add another $3,000 for this year. And if he has a spouse who's at home, he can set up a spouseal IRA and put another $3,000 in for her. But you cannot put any money into that IRA because the plan will be top heavy and be disqualified by the IRS.
SAN MIGUEL: It does bring up an interesting question, Ms. Schoenberger about, should you always max out your contribution contribution? That's what has always been the maxim on this. Does that still hold?
SCHOENBERGER: Well, personally, I think you should absolutely max out because it's a tax-defered account. I'm of the opinion -- and I did this -- your very first job where you're eligible to contribute to a 401(k), especially if your employer matches for you, you should put in as much as you can afford to.
This is the power of compounding and this is what we're seeing all the time in "Forbes." The more you can put in at a young age, the more that money has the ability to grow for you tax defered.
And IRA's also, if you don't make enough money so that you've gotten yourself out of an IRA, if you make below the limit, you should contribute to an IRA as well. If you're lucky enough to make too much for an IRA, you should definitely put as much into your 401(k) as you can spend from your paycheck.
SAN MIGUEL: How many financial advisers will tell you, hey, it's free money, might as well go for it.
Frank from Baltimore has been patient on the phone waiting. Frank, thanks for your patience. What's your question?
CALLER: Yes, my employer doesn't offer a 401(k). I'm just fresh out of college. He offers a 403(b). What's the difference? Is that something I should start up now? Would that be beneficial to start up now?
LEE: 403(b) is for nonprofit. Usually, it's for hospitals or for schools. What happens is the employer will name a provider, but, certainly, it's similar to a 401(k) plan. The limit is $12,000 for this year. You want to be sure you choose mutual funds and not an annuity, especially at a young age, because some of the annuities have back end surrender charges.
Certainly, a 403(b) plan would be good to get into. You'll find a web site at 403 403by.com, which gives information about 403 plans. Your employer probably will not match, but it's a good way to put away money, tax defered, easy, comes right out of your paycheck each week.
SAN MIGUEL: We're going to take a break. But we'll take more of your calls and e-mails on "Dollar Signs." And you can send us your questions at dollarsigns@CNN.com. Or you can call in 1-800-807-2620. We'll be right back.
(COMMERCIAL BREAK)
SAN MIGUEL: Welcome back to "Dollar Signs." We're talking about how to get the most from your 401(k) savings plan, and we're answering your calls and e-mails on this topic. Let's reintroduce our financial experts. Dee Lee, certified financial planner, author of the book "Women and Money." and Chana Schoenberger from "Forbes" magazine.
This email is from Mr. Pham of Houston, Texas, "what are the pros and cons of contributing higher percentage of a pre-tax income to a 401(k), versus higher percentage of after tax income to term life, or whole life insurance, mutual funds and other investments?
Pham seems to be looking for some options here, Miss Schoenberger.
SCHOENBERGER: The thing about pre-tax income means it reduces the amount of your income that you pay taxes on. So, just in round numbers, if you make $10,000 a year and you contribute $3,000 to your 401(k) you're only paying taxes on $7,000.
This is really elementary, but this is sort of the whole point because that money, that $3,000, will go into your account and it will grow and the earnings will grow, and you won't have to pay taxes on them until you retire.
The whole idea is that maybe when you retire, you'll be in a lower tax bracket. If you aren't in a lower tax bracket, it means you're making money, and that's a good thing too. Not the end of the world.
Versus life insurance? It would really depend on your situation, your age, and what your needs were, who you were going to provide for. But I would vote for the 401(k) pretty much always.
SAN MIGUEL: All right. On the phone is Ron in Illinois. Ron, your question, please.
CALLER: Yes, I'm getting ready to start a second career, and I have a 457 plan with my employer, and I was wondering if there are any penalties if I take some money out of that once I terminate my employment and move on to my second career.
SAN MIGUEL: Miss Lee.
LEE: A 457 plan is similar to a 401(k) plan, but it's usually provided by state, county, or city governments. The one thing about 457 plans in that they're different from 401(k) plans, if you retire or leave your place of work, you can start drawing the monies from the 457 without the 10 percent penalty that's assessed on a 401(k) plan. So you'll be able to get at those dollars, and you'll still owe taxes on them. You'll still owe taxes, but you won't have the penalty.
But you want to be very careful. If you're 55 and start taking these dollars out, the reality is you may live to 85. So the longer they can stay growing tax defered, the better off you are.
SAN MIGUEL: This email is from Dave in Tucson, Arizona. Dave Walker, "How close to retirement should I move my 401(k) investments to a low risk choice like fixed income. I plan to retire in 10 years."
Miss Schoenberger.
SCHOENBERGER: Basically, what you want to do is, starting when you first start your 401(k) plan at the age of, say, 25, 26, you pretty much want to go mostly growth funds and then higher risk investments. And then over time, you want to allocate a larger and larger percentage of funds to something like fixed income.
So someone who's 10 years out should be thinking about a pretty high percentage of fixed income. When you get to, say, 55 or 56, you want to be almost entirely in fixed income. Now this depends on a couple of things. It depends on how long you expect to live. How long you expect to work. When you're going to start drawing down your 401(k). And also whether this 401(k) represents all of your retirement savings or whether it's just gravy for you.
SAN MIGUEL: On the phone now is Claudia from Minnesota on the phone. Your question, please.
CALLER: I've been with the company for 22 years, and I've been on the 401(k) plan. They filed bankruptcy, and now they just terminated our 401(k) plan, and the internal revenue has it. Soon we should be getting papers to fill out for that money?
SAN MIGUEL: Miss Lee, what kind of recourse does she have here?
LEE: Obviously, there's been some hanky-panky because, normally the 401(k) plan is not an asset of your employer. It is held entirely by a provider, an outside provider. So there's been in hanky-panky going on, and, obviously, the company was using the dollars in the 401(k) plan, it sounds like, to continue doing business. So I would wait for the IRS papers.
I certainly would get together with the other employee and have some sort of clout as a group. But, you know, you're probably getting letters now saying this is coming from the IRS, you can be expecting this coming, but certainly there's been a crime committed because they have have -- they are not -- those are...
SAN MIGUEL: OK. We seem to have lost our signal with miss lee there. We'll try to get that back. You know, when he was talking about hanky-panky here, Miss Schoenberger, I have the question to ask you. The mutual fund industry has now been hit by scandal in the financial world and a lot of these 401(k)s, obviously, are dealing with mutual funds as part of their investments.
As an investor and a 401(k) member, and if I'm worried about whether or not some of this has hit my particular portfolio, is there anything I should do here?
SCHOENBERGER: Well, there were only a few of the mutual fund companies that were actually hit by the scandal, and the scandal involved certain trading practices. Hedge funds were trading in and out of them and getting better prices for their shares than ordinary investors were.
In terms of a 401(k), generally, 401(k) plans are held with a very big, very safe providers, like a Vanguard or a Fidelity. Those are the big ones, and there's a number of others as well. But you probably don't have to worry so much about these things.
What you have to worry about, when choosing mutual funds -- and first of all, your menu of choices is determined by your employer and by the plan that you're in. So, you may only have five or six funds to choose from, depending on what kind of plan you have. But of those, depending on what you want to do and what you should be most concerned about is expense ratios. You want to be sure you're not paying a lot of expenses to the people who manage these funds for you. As we were saying before, the more money that remains in your 401(k) plan, the less money that is being paid to these fund managers to fix it for you, the money you're going to have in retirement because those dollars can grow.
SAN MIGUEL: We're going to stick with you miss schoenberger, until we get Miss Lee back.
Mel Nutter of San Diego, California writes in, "I have noticed a lot of tergeted retirement funds lately. It seems like a good idea, because they automatically reallocate and diversify your money based on your retirement date. What's your opinion regarding these investment vehicles?"
SCHOENBERGER: Well, in general, what we preach at "Forbes" is we're all about index funds, because they're very cheap and because it gives you exposure to the entire market. But if you are looking for something more actively managed and you don't feel that you have the wherewithal or the desire to rebalance yourself -- some of the callers today have said that they're going to be rebalancing their assets based on how close they are to retirement -- if you feel you can't do this, then yes, one of these funds might be for you. You want to look at expense ratios, and you also want to look at what they're investing in. That's pretty important.
SAN MIGUEL: Just to clarify here and to give "Forbes" a plug, index funds are those that mirror the performance of a certain, like the S&P 500 or things like that, correct?
SCHOENBERGER: That's right . And these days, you can get those right on the exchange. Or can actually buy shares in something like the spiders. I love these. I have them. And these are shares that track the performance of the S&P 500.
SAN MIGUEL: We go to a phone call from Sam in Chicago. Your question, please.
CALLER: Yes. My question is I was working out in California for a firm that went bankrupt. Last tax year, I received a letter from the -- my 401(k) plan holder that the plan was terminated although it was over $5,000, and they sent me a check for the amount less the 20 percent penalty.
I was not employed for -- I was out of being employed for 18 months although now I am working for -- as a contractor in Chicago. And I'd like to know whether I should write to the IRS and ask for the 20 percent penalty back due to hardship, or whether I should request that it gets reinstated.
I'm not sure which is the best for me. And my other question is 401(k) plan versus life insurance. I have a non-term life, $250,000 and I'm not currently contributing to a 401(k) and would like to know should I start doing that as opposed to doing my -- contributing to life insurance?
SCHOENBERGER: In terms of your first question, I am not a tax expert, and you would definitely want to ask a tax expert that sort of question. But my guess is that, if you took the money out because the plan was terminated, the 20 percent probably had to go directly to taxes, and you probably won't see it again. I'm sorry. You should definitely ask someone that and not me.
As to your second question, I'm not really sure what to tell you about life insurance, but in terms of a 401(k), if you're now employed and you have the ability to contribute to a 401(k) plan, you should. You definitely ought to. And the insurance concerns would be based, again, on who the beneficiaries are and what you you want to do with that life insurance plan.
SAN MIGUEL: We're going to give Miss Schoenberger a chance to catch her breath and try to get Miss Lee back on the satellite. We're going to have more of your calls and emails after the break. So stay right there.
(COMMERCIAL BREAK)
SAN MIGUEL: Turning retirement dreams into reality takes plenty of planning and money. Today's "Dollar Signs" is showing you how to get the most out of your 401(k) retirlt savings. We're taking your phone calls and e-mails on that. Chana Schoenberger with "Forbes" magazine. She's helping us answer these questions. We want to apologize to Dee Lee, certified financial planner and author of the book "Women and Money." She was joining us from Boston, we started having satellite trouble from there, and she won't be able to rejoin us. We do apologize to her and our viewers. We will try to get her back on for a future show.
Miss schoenberger, I'm sorry you are it. You're going to have to carry the burden. But we appreciate you sticking around
SCHOENBERGER: You're stuck with me then.
SAN MIGUEL: OK. That's fine. We'll do that.
Michelle from Tennessee is on the phone with a question. Michelle.
CALLER: Yes, thank you. I've worked for a company for over 20 years and took an early buyout with dollars in a 401(k) plan and subsequently to an IRA account. I'm now employed with a government that has a 457 plan, and I want to consolidate all my dollars together. Are there any concerns with rolling a 401(k) or IRA dollars into a 457 plan? You know, to have just one pool of money.
SCHOENBERGER: You currently have a 401(k) and an IRA from an old employer, and you want a new 457, and you want them all in one place?
CALLER: Correct.
SCHOENBERGER: OK. So I'm not exactly sure of the specifics of this. I know that you can roll a 401(k) into an IRA. Maybe you've already done that or you're going to do that?
CALLER: Yes, I have. I've done that.
SCHOENBERGER: So you've got the IRA now.
CALLER: Correct.
SCHOENBERGER: The 457, I'm pretty sure, although I'm not certain, that you can start contributing to a 457 under your new employer, but I don't think that you can roll the IRA that was previously the 401(k) into the 457. I think you may be stuck with two accounts. But I would definitely check on this somewhere else. This is -- 457s are not my area of expertise.
SAN MIGUEL: And there should be a financial planner or an office somewhere with your employer, who should be able to answer those questions as well. That's what they're paid to do. Ralph of Ramona writes in, "should a 401Kk) plan be included in a revocable living trust? I've heard conflicting opinions. What are the pros and cons on this?.
SHCOENBERGER: Yes. Again, trusts aren't really my area of expertise. That's something -- whenever you hear the word trust, you should think lawyer. You want to call a lawyer about that.
SAN MIGUEL: Then we go to Paul in Dayton, Ohio, "With bonds declining and stocks still iffy" -- although, you know, this is me talking here, they have shown some gains lately, "what should you direct your money nowadays in a 401(k)?
SCHOENBERGER: Well, I'm a bull. Personally, I think -- and a lot of people at "Forbes" also think -- that the stock market is coming back. This is something that we discuss a lot. I would argue that, unless you are just prior to retirement and you need that money to be absolutely safe, you should put as much money as possible into stocks.
You should consider more than half the money in your 401(k) into stock funds and even into growth funds, which are riskier investments. The nice thing about 401(k)s is that, as we mentioned, you don't have to worry so much as you would with your regular brokerage account, which you presumably are living off of, about making your mortgage payments off of this 401(k) for instance. You should think of it as a rainy day, very long term fund, and take on as many risks as you can. So that would mean stocks and not bonds right now
SAN MIGUEL: And a financial planner, or whoever's in charge of these plans for an employer, has to have seen that the stocks have done well since late spring. We've recently hit over the last week one and two year highs on the Dow and the Nasdaq here. They should be obviously watching the news and reading the financial pages as well to see where they should be moving these investments in.
SCHOENBERGER: Sure. But in terms of employees, typically, employees get to choose which funds they want to invest in. Perhaps this gentleman has invested in bond funds. So, I would vote that, if you have the option, you should probably move your money to stock funds and just leave a small percentage in bonds right now.
SAN MIGUEL: Got you. We have to leave it there.
Chana Schoenberger of "Forbes" magazine. Thank you so much for joining us today and for your advice and for shouldering the burden of the last ten minutes here. We appreciate your time. Again, we want to apologize to Dee Lee for having satellite trouble out of Boston.
"The Complete Idiot's Guide to 401(k) Plans" should help you out with some of your retirement planning.
END
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Aired October 11, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RENAY SAN MIGUEL, CNN ANCHOR: On "Dollar Signs" today, making sure your retirement dreams don't become a nightmare. With retirement options coming earlier and life expectancy growing, making sure you're getting the most out of your 401(k) is even more important.
Here are some 401(k) basics for you. You are allowed to put in up to $12,000 a year tax defered. Your moeny, plus company matching funds grow tax deffered. If you cash out any of the savings before the age of 59 1/2 there is a 20 percent tax penalty. There are exceptions to that. Financial hardship or maybe you want to buy a new home.
How much money will you need to retire? Experts say plan on saving 70 to 80 percent of what you spend now. They suggest you save more, if you like to travel, or take on other financial obligations.
It's up to you to make yours a comfortable retirement. That's where a 401(k) comes in. Dee lee, a certified financial planner, and author of the book "Women and Money" joins us. Along with "Forbes" magazine's Chana Schoenberger. Ladies thanks so much for being here. We appreciate your time.
Ms. Lee, let me start with you. Why would you want to go ahead and make any kind of changes to your 401(k)? We're told all the time it's one of those things you put the same amount of money in every month and then forget about it. Why would you want to make the changes?
DEE LEE, AUTHOR: You do put the same amount every month. It's dollar cost averaging. You put a percent of your salary in. We are coming out of a bear market. We are turbing around. So people might have done is burrow into the cash equivalent, maybe into bond funds. So they may want to look at rebalancing their portfolio, you know, contributing to more stock funds right now.
Certainly, the younger you are, the more aggressive you can be with your 401(k) plan because you have time on your side. You may have 20 or 30 years before you actually need these dollars to pull out in retirement.
SAN MIGUEL: Ms. Schoenberger, easier or harder these days to make those kinds of changes?
CHANA SCHOENBERGER, "FORBES": Well, actually, it's always pretty easy. The nice thing about a 401(k) is that you don't really have to worry about trading. You can trade as often as you want because it's tax defered. When we talk about regular savings accounts, we always tell people to think about the tax consequences of trading in and out of funds and out of individual stocks. In this case, you don't have to stress about it.
You should definitely look at your statement every month or every quarter when it comes from your brokerage house, and you should think about where you want to be in.
SAN MIGUEL: We're already getting some phone calls here. Must be a topic people want help on. Now we're going to Gerard in North Carolina. What's your question, please?
CALLER: Hello. Glad to see this topic. I'm 35 years old. I have a 401(k) with two former employers, and I was told that I should take them out from companies that I used to work with, and somebody told me to put them all into one like 1 Roth account. And I was wondering what the course of action should be.
SAN MIGUEL: Ms. Lee, what do you think?
LEE: Well, if you have more than $5,000 in your 401(k) account, your old employer has to allow to you leave it there. But certainly for ease of paperwork, you can either roll them into a rollover IRA, and then you can convert them into a Roth, or you can roll them into your new employer's plan, both of them, and have everything into the 401(k) plan.
What this may allow you to do is borrow the dollars from your old plan. If you put them into a new IRA, the borrowing privilege goes away. Certainly, you should consolidate them and not have your accounts scattered all over the country side.
SAN MIGUEL: Thanks for the call. We go to Patty in New Jersey. What's your question?
CALLER: Hello and thank you for taking my call. My call is very similar to the previous call in that I do have a previous account that I do like to roll over to a new employer. However, my previous employer is where i've lost money. Should I leave it there until I break even before I roll it over?
SAN MIGUEL: Miss Schoenberger, why don't you tackle that one.
SCHOENBERGER: Well, as Dee was saying, for ease of paperwork, and assuming you're a long time from retirement, you have a long time horizon not to worry about here.
So losing a little bit of money would not be the end of the world. You might as well trade out of it, get into your new employer's plan, consolidate everything, and then you can start investing those dollars in growth funds or something else you think will grow a lot before you retire.
SAN MIGUEL: We have an e-mail from John Ripley from Groves Texas. And he writes in, "what do you recommend for a newcomer to the 401(k) system. I've been in it for about 4 months and have 70 percent in growth stock investments and 30 percent in bond, managed income. Is this a good move a young employee with a family?.
What about that asset allocation there, Miss Lee?
LEE: Well, certainly, he's done just that. He's got a 70-30 split. He's got 70 percent in stocks, 30 percent in bonds. But a very young individual could probably go as high as 80 percent stocks and 20 percent bonds.
But it's that balanced portfolio that allows people's losses to be much less during the bear market. Certainly, even if you're under 35, you should be looking 80 to 90 percent tops, in my opinion, having stocks in your portfolio, in your 401(k). So as a beginner, good basic large company growth stocks. Some mid-size, and maybe a little international.
SAN MIGUEL: And always do your homework on the growth and value of the stocks and funds and that kind of thing and what kind of return you can expect with those terms.
This from Mike in Northcross, "I work for a small company out of Irvine, California. My current salary is around $110,000 annually, and I was putting in around 10 percent into my 401(k), but the company asked that I reduce that to around 4 percent stating that I made things top heavy. How can I ad more to my 401(k). Miss Schoenberger, top heavy account?
SCHOENBERGER: I don't know about that. I guess it would depend a lot on what sort of funds you're looking at here.
LEE: Can I jump in?
SCHOENBERGER: Yes, go for it.
LEE: Top heavy means that the higher paid employees are putting in a larger percentage than the lower paid employees. So the company cannot allow that. They're only allowed two percentage points differences between, on the average, of lower paid employees and higher paid employees. In higher paid employees is anyone making over about $87,000. So he can't add any more to his 401(k).
What he may be able to do is set up a Roth IRA and add another $3,000 for this year. And if he has a spouse who's at home, he can set up a spouseal IRA and put another $3,000 in for her. But you cannot put any money into that IRA because the plan will be top heavy and be disqualified by the IRS.
SAN MIGUEL: It does bring up an interesting question, Ms. Schoenberger about, should you always max out your contribution contribution? That's what has always been the maxim on this. Does that still hold?
SCHOENBERGER: Well, personally, I think you should absolutely max out because it's a tax-defered account. I'm of the opinion -- and I did this -- your very first job where you're eligible to contribute to a 401(k), especially if your employer matches for you, you should put in as much as you can afford to.
This is the power of compounding and this is what we're seeing all the time in "Forbes." The more you can put in at a young age, the more that money has the ability to grow for you tax defered.
And IRA's also, if you don't make enough money so that you've gotten yourself out of an IRA, if you make below the limit, you should contribute to an IRA as well. If you're lucky enough to make too much for an IRA, you should definitely put as much into your 401(k) as you can spend from your paycheck.
SAN MIGUEL: How many financial advisers will tell you, hey, it's free money, might as well go for it.
Frank from Baltimore has been patient on the phone waiting. Frank, thanks for your patience. What's your question?
CALLER: Yes, my employer doesn't offer a 401(k). I'm just fresh out of college. He offers a 403(b). What's the difference? Is that something I should start up now? Would that be beneficial to start up now?
LEE: 403(b) is for nonprofit. Usually, it's for hospitals or for schools. What happens is the employer will name a provider, but, certainly, it's similar to a 401(k) plan. The limit is $12,000 for this year. You want to be sure you choose mutual funds and not an annuity, especially at a young age, because some of the annuities have back end surrender charges.
Certainly, a 403(b) plan would be good to get into. You'll find a web site at 403 403by.com, which gives information about 403 plans. Your employer probably will not match, but it's a good way to put away money, tax defered, easy, comes right out of your paycheck each week.
SAN MIGUEL: We're going to take a break. But we'll take more of your calls and e-mails on "Dollar Signs." And you can send us your questions at dollarsigns@CNN.com. Or you can call in 1-800-807-2620. We'll be right back.
(COMMERCIAL BREAK)
SAN MIGUEL: Welcome back to "Dollar Signs." We're talking about how to get the most from your 401(k) savings plan, and we're answering your calls and e-mails on this topic. Let's reintroduce our financial experts. Dee Lee, certified financial planner, author of the book "Women and Money." and Chana Schoenberger from "Forbes" magazine.
This email is from Mr. Pham of Houston, Texas, "what are the pros and cons of contributing higher percentage of a pre-tax income to a 401(k), versus higher percentage of after tax income to term life, or whole life insurance, mutual funds and other investments?
Pham seems to be looking for some options here, Miss Schoenberger.
SCHOENBERGER: The thing about pre-tax income means it reduces the amount of your income that you pay taxes on. So, just in round numbers, if you make $10,000 a year and you contribute $3,000 to your 401(k) you're only paying taxes on $7,000.
This is really elementary, but this is sort of the whole point because that money, that $3,000, will go into your account and it will grow and the earnings will grow, and you won't have to pay taxes on them until you retire.
The whole idea is that maybe when you retire, you'll be in a lower tax bracket. If you aren't in a lower tax bracket, it means you're making money, and that's a good thing too. Not the end of the world.
Versus life insurance? It would really depend on your situation, your age, and what your needs were, who you were going to provide for. But I would vote for the 401(k) pretty much always.
SAN MIGUEL: All right. On the phone is Ron in Illinois. Ron, your question, please.
CALLER: Yes, I'm getting ready to start a second career, and I have a 457 plan with my employer, and I was wondering if there are any penalties if I take some money out of that once I terminate my employment and move on to my second career.
SAN MIGUEL: Miss Lee.
LEE: A 457 plan is similar to a 401(k) plan, but it's usually provided by state, county, or city governments. The one thing about 457 plans in that they're different from 401(k) plans, if you retire or leave your place of work, you can start drawing the monies from the 457 without the 10 percent penalty that's assessed on a 401(k) plan. So you'll be able to get at those dollars, and you'll still owe taxes on them. You'll still owe taxes, but you won't have the penalty.
But you want to be very careful. If you're 55 and start taking these dollars out, the reality is you may live to 85. So the longer they can stay growing tax defered, the better off you are.
SAN MIGUEL: This email is from Dave in Tucson, Arizona. Dave Walker, "How close to retirement should I move my 401(k) investments to a low risk choice like fixed income. I plan to retire in 10 years."
Miss Schoenberger.
SCHOENBERGER: Basically, what you want to do is, starting when you first start your 401(k) plan at the age of, say, 25, 26, you pretty much want to go mostly growth funds and then higher risk investments. And then over time, you want to allocate a larger and larger percentage of funds to something like fixed income.
So someone who's 10 years out should be thinking about a pretty high percentage of fixed income. When you get to, say, 55 or 56, you want to be almost entirely in fixed income. Now this depends on a couple of things. It depends on how long you expect to live. How long you expect to work. When you're going to start drawing down your 401(k). And also whether this 401(k) represents all of your retirement savings or whether it's just gravy for you.
SAN MIGUEL: On the phone now is Claudia from Minnesota on the phone. Your question, please.
CALLER: I've been with the company for 22 years, and I've been on the 401(k) plan. They filed bankruptcy, and now they just terminated our 401(k) plan, and the internal revenue has it. Soon we should be getting papers to fill out for that money?
SAN MIGUEL: Miss Lee, what kind of recourse does she have here?
LEE: Obviously, there's been some hanky-panky because, normally the 401(k) plan is not an asset of your employer. It is held entirely by a provider, an outside provider. So there's been in hanky-panky going on, and, obviously, the company was using the dollars in the 401(k) plan, it sounds like, to continue doing business. So I would wait for the IRS papers.
I certainly would get together with the other employee and have some sort of clout as a group. But, you know, you're probably getting letters now saying this is coming from the IRS, you can be expecting this coming, but certainly there's been a crime committed because they have have -- they are not -- those are...
SAN MIGUEL: OK. We seem to have lost our signal with miss lee there. We'll try to get that back. You know, when he was talking about hanky-panky here, Miss Schoenberger, I have the question to ask you. The mutual fund industry has now been hit by scandal in the financial world and a lot of these 401(k)s, obviously, are dealing with mutual funds as part of their investments.
As an investor and a 401(k) member, and if I'm worried about whether or not some of this has hit my particular portfolio, is there anything I should do here?
SCHOENBERGER: Well, there were only a few of the mutual fund companies that were actually hit by the scandal, and the scandal involved certain trading practices. Hedge funds were trading in and out of them and getting better prices for their shares than ordinary investors were.
In terms of a 401(k), generally, 401(k) plans are held with a very big, very safe providers, like a Vanguard or a Fidelity. Those are the big ones, and there's a number of others as well. But you probably don't have to worry so much about these things.
What you have to worry about, when choosing mutual funds -- and first of all, your menu of choices is determined by your employer and by the plan that you're in. So, you may only have five or six funds to choose from, depending on what kind of plan you have. But of those, depending on what you want to do and what you should be most concerned about is expense ratios. You want to be sure you're not paying a lot of expenses to the people who manage these funds for you. As we were saying before, the more money that remains in your 401(k) plan, the less money that is being paid to these fund managers to fix it for you, the money you're going to have in retirement because those dollars can grow.
SAN MIGUEL: We're going to stick with you miss schoenberger, until we get Miss Lee back.
Mel Nutter of San Diego, California writes in, "I have noticed a lot of tergeted retirement funds lately. It seems like a good idea, because they automatically reallocate and diversify your money based on your retirement date. What's your opinion regarding these investment vehicles?"
SCHOENBERGER: Well, in general, what we preach at "Forbes" is we're all about index funds, because they're very cheap and because it gives you exposure to the entire market. But if you are looking for something more actively managed and you don't feel that you have the wherewithal or the desire to rebalance yourself -- some of the callers today have said that they're going to be rebalancing their assets based on how close they are to retirement -- if you feel you can't do this, then yes, one of these funds might be for you. You want to look at expense ratios, and you also want to look at what they're investing in. That's pretty important.
SAN MIGUEL: Just to clarify here and to give "Forbes" a plug, index funds are those that mirror the performance of a certain, like the S&P 500 or things like that, correct?
SCHOENBERGER: That's right . And these days, you can get those right on the exchange. Or can actually buy shares in something like the spiders. I love these. I have them. And these are shares that track the performance of the S&P 500.
SAN MIGUEL: We go to a phone call from Sam in Chicago. Your question, please.
CALLER: Yes. My question is I was working out in California for a firm that went bankrupt. Last tax year, I received a letter from the -- my 401(k) plan holder that the plan was terminated although it was over $5,000, and they sent me a check for the amount less the 20 percent penalty.
I was not employed for -- I was out of being employed for 18 months although now I am working for -- as a contractor in Chicago. And I'd like to know whether I should write to the IRS and ask for the 20 percent penalty back due to hardship, or whether I should request that it gets reinstated.
I'm not sure which is the best for me. And my other question is 401(k) plan versus life insurance. I have a non-term life, $250,000 and I'm not currently contributing to a 401(k) and would like to know should I start doing that as opposed to doing my -- contributing to life insurance?
SCHOENBERGER: In terms of your first question, I am not a tax expert, and you would definitely want to ask a tax expert that sort of question. But my guess is that, if you took the money out because the plan was terminated, the 20 percent probably had to go directly to taxes, and you probably won't see it again. I'm sorry. You should definitely ask someone that and not me.
As to your second question, I'm not really sure what to tell you about life insurance, but in terms of a 401(k), if you're now employed and you have the ability to contribute to a 401(k) plan, you should. You definitely ought to. And the insurance concerns would be based, again, on who the beneficiaries are and what you you want to do with that life insurance plan.
SAN MIGUEL: We're going to give Miss Schoenberger a chance to catch her breath and try to get Miss Lee back on the satellite. We're going to have more of your calls and emails after the break. So stay right there.
(COMMERCIAL BREAK)
SAN MIGUEL: Turning retirement dreams into reality takes plenty of planning and money. Today's "Dollar Signs" is showing you how to get the most out of your 401(k) retirlt savings. We're taking your phone calls and e-mails on that. Chana Schoenberger with "Forbes" magazine. She's helping us answer these questions. We want to apologize to Dee Lee, certified financial planner and author of the book "Women and Money." She was joining us from Boston, we started having satellite trouble from there, and she won't be able to rejoin us. We do apologize to her and our viewers. We will try to get her back on for a future show.
Miss schoenberger, I'm sorry you are it. You're going to have to carry the burden. But we appreciate you sticking around
SCHOENBERGER: You're stuck with me then.
SAN MIGUEL: OK. That's fine. We'll do that.
Michelle from Tennessee is on the phone with a question. Michelle.
CALLER: Yes, thank you. I've worked for a company for over 20 years and took an early buyout with dollars in a 401(k) plan and subsequently to an IRA account. I'm now employed with a government that has a 457 plan, and I want to consolidate all my dollars together. Are there any concerns with rolling a 401(k) or IRA dollars into a 457 plan? You know, to have just one pool of money.
SCHOENBERGER: You currently have a 401(k) and an IRA from an old employer, and you want a new 457, and you want them all in one place?
CALLER: Correct.
SCHOENBERGER: OK. So I'm not exactly sure of the specifics of this. I know that you can roll a 401(k) into an IRA. Maybe you've already done that or you're going to do that?
CALLER: Yes, I have. I've done that.
SCHOENBERGER: So you've got the IRA now.
CALLER: Correct.
SCHOENBERGER: The 457, I'm pretty sure, although I'm not certain, that you can start contributing to a 457 under your new employer, but I don't think that you can roll the IRA that was previously the 401(k) into the 457. I think you may be stuck with two accounts. But I would definitely check on this somewhere else. This is -- 457s are not my area of expertise.
SAN MIGUEL: And there should be a financial planner or an office somewhere with your employer, who should be able to answer those questions as well. That's what they're paid to do. Ralph of Ramona writes in, "should a 401Kk) plan be included in a revocable living trust? I've heard conflicting opinions. What are the pros and cons on this?.
SHCOENBERGER: Yes. Again, trusts aren't really my area of expertise. That's something -- whenever you hear the word trust, you should think lawyer. You want to call a lawyer about that.
SAN MIGUEL: Then we go to Paul in Dayton, Ohio, "With bonds declining and stocks still iffy" -- although, you know, this is me talking here, they have shown some gains lately, "what should you direct your money nowadays in a 401(k)?
SCHOENBERGER: Well, I'm a bull. Personally, I think -- and a lot of people at "Forbes" also think -- that the stock market is coming back. This is something that we discuss a lot. I would argue that, unless you are just prior to retirement and you need that money to be absolutely safe, you should put as much money as possible into stocks.
You should consider more than half the money in your 401(k) into stock funds and even into growth funds, which are riskier investments. The nice thing about 401(k)s is that, as we mentioned, you don't have to worry so much as you would with your regular brokerage account, which you presumably are living off of, about making your mortgage payments off of this 401(k) for instance. You should think of it as a rainy day, very long term fund, and take on as many risks as you can. So that would mean stocks and not bonds right now
SAN MIGUEL: And a financial planner, or whoever's in charge of these plans for an employer, has to have seen that the stocks have done well since late spring. We've recently hit over the last week one and two year highs on the Dow and the Nasdaq here. They should be obviously watching the news and reading the financial pages as well to see where they should be moving these investments in.
SCHOENBERGER: Sure. But in terms of employees, typically, employees get to choose which funds they want to invest in. Perhaps this gentleman has invested in bond funds. So, I would vote that, if you have the option, you should probably move your money to stock funds and just leave a small percentage in bonds right now.
SAN MIGUEL: Got you. We have to leave it there.
Chana Schoenberger of "Forbes" magazine. Thank you so much for joining us today and for your advice and for shouldering the burden of the last ten minutes here. We appreciate your time. Again, we want to apologize to Dee Lee for having satellite trouble out of Boston.
"The Complete Idiot's Guide to 401(k) Plans" should help you out with some of your retirement planning.
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