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401K, how does it work? Should I enroll??

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Cool - thanks for all the advice guys.. I think I will probably go all stocks as far as my 401k and my company allows a max of 15% per check..

As for the Roth IRA, I've heard that in order to participate for year 2000, I need to get in a check for $2k by April.. but not sure if this is April 1 or end of April.. I probably could come up with the cash, so I will probably do that..

TRP: question regarding Roth IRA though.. so you can take the money out anytime because the money was already taxed? The only drawback then would be that you could only put back $2k a year then.. right? How about the interest made on that, how is it tax free?? Or is it only tax free if I leave the money in there? ANy sites you guys can recommend to get more info on IRA's and the different plans out there?

I am a 25 year old, single.. and looking to hopefully retire fairly young.. but want to make sure i am doing all the right things right now.. so everyone's help is totally appreciated!
 
401k is a pretty good retirement plan. I personally invest in a Variable Universal Life plan and skip the 401k. Why?

1) I have an insurance component so if I die, my wife is well taken care of, regardless if I die in 2 years or 50. So it protects her if I die young.

2) VUL is a variable product, meaning the majority of the contribution (depending on how much you submit) goes into a mutual fund type acct., just like the 401k. However, I do not have to wait until 59.5 years of age to withdraw funds, I can take up to 90% anytime I want to after the first 2 years, tax free. If you try to withdraw from your 401k early, you incur a 10% penalty tax on what you withdrawal, plus all the income tax is accelerated at the pt. you withdraw. So depending on the amt. you withdraw, you could be looking at a 50% penalty. OUCH

3) VUL's, being an insurance policy, are exempt from capital gains taxes, income taxes, and death taxes provide you follow the basic plan outlines and not make it an MEC (modified endowment contract). This means whatever you do not spend in retirement can go to your kids, skip the courts in probate, and you never pay a dime in tax. EVER(your contributions are made with after-tax dollars).

4) When you die, up to 55% of your estate can be seized by the govt., depending on your estate size. That is over half of your lifetime's efforts savings gone in one instant.

5) Also forgot to mention that in this policy, my wife gets face value of contract PLUS the separate cash value in the acct. Whole life policies are generally locked into a 4-6% cash value amount, which just keeps up with inflation, and are generally useable when the insured is alive.

6) Saving money on taxes is more important than the employer contributions of a 401k, IMO. Tax is the number one killer of wealth in America. I do not suggest not paying your taxes, I do of course. But if you can minimize them or do away with some of them, then by all means do so. People with wealth usually already know this.
 

6) Saving money on taxes is more important than the employer contributions. Tax is the number one killer of wealth in America. <---- Don't ever forget that statement. I do not suggest not paying your taxes, I do of course. But if you can minimize them or do away with some of them, then by all means do so. People with wealth usually already know this. That is why the rich get richer and the poor have to put their wives and children to work to make ends meet.

For some reason, this reminded me of Ross Perot.. he is known as one of the best &quot;tax sheltered&quot; individuals.. what does he participate in?

Also, regarding not doing 401 and opting to do the VUL.. is there a certain cap max on this fund? Are there any online resources you would recommend into doing more research on the VUL? How about risk factors on this, any downsides? The only one you mention is the fact that there is no &quot;matching&quot;, but you argue this point against the fact that you get more because of the tax savings..
 
wyvrn,

Everything you said was on target, but there are a couple drawbacks to VUL's...

If you health is not great, it is not worth while since the insurance component will be very high.
Any money you put in is not tax deductible from your income taxes as a 401K is.

Ideally, you want a 401K, VUL and Roth Ira - thats the best way to build a solid nest egg,
and will definitely give you a head start if the estate tax still exists for when you die.

BTW, I am a Licensed Insurance Agent in the state of Massachusetts.
 
You should start. The younger you start, the more money you have to retire on. You just choose your portfolio and it doesn't matter whether the financial institution actually buys the share but you will be compensated based on the increase/decrease in the market value of the portfolio.

The market is not doing too well right now so you may want to hold off a little bit. But, bear in mind, the longer you wait, the more money you are potentially losing because your company is saving on the matching. Also, if you wait longer, you have to invest more to reach the same retirement goal as when you start contributing at a younger age. Contributing to 401K also reduces the amount you pay to taxes because the money is taken out pre-tax.
 
The tax on a 401k or IRA comes after your money has grown (withdrawal), so you are being taxed on your growth. When you calculate, this amount is almost always going to be larger than what you are missing from employer contributions and tax benefits made pre-growth.

The general guidelines on the VUL are that the face value (what is awarded at death) be 10x your combined annual income. What you can safely protect in the separate cash account (one that goes into the mutual funds) depends on this figure. In the end, there is no hard cap on contributions like in an IRA, but if you put to much, the policy is a modified endowment contract and subject to all normal taxes. In my experience, you can put more into a VUL than a 401k or and IRA. And the growth is tax free. The insurance will protect you in the short term, as roughly 16 out of 100 people die earlier than retirement age (don't quote me on that).

 
Ender,

<<Also, regarding not doing 401 and opting to do the VUL.. is there a certain cap max on this fund? Are there any online resources you would recommend into doing more research on the VUL? How about risk factors on this, any downsides? The only one you mention is the fact that there is no &quot;matching&quot;, but you argue this point against the fact that you get more because of the tax savings.. >>

1. The maximun allowed contribution into a VUL is a function of the face value of the Insurance Policy.
2. Risk's associated with VUL's are discretionary. By choosing where the money in the investment account
is allocated, YOU determine the risk.
3. Downsides(may or may not be) - it is a life insurance policy with that &quot;shelters&quot; an investment account.
As such, you pay for the life insurance component. The upside is that you create an immediate estate.
4. You get an enormous tax savings as any interest/gains accrued, are never taxed. The downside is that your
initial outlays are not tax-deductible.



 
So you can still contribute to an IRA/Roth IRA for Tax Year 2000 through April 15th?

If so, I should get on that.
 
Hi Everyone, I just got a bunch of questions answered from a friend that works at Schwabb.. here's what she has said so I figured I'll share with you guys:

---------

1. you have until tax filing deadline, 4/15, to make a roth/traditional ira contribution for year 2000.

2. you can fill out an application online for a traditional or roth ira, following these instructions:

From the home page of Schwab.com, click on:

'Getting Started'
'Open an Account'
For Schwab and Schwab One Accounts, click &quot;General Investing Accounts&quot;
For IRA, click &quot;Retirement Accounts&quot;
Then click Apply for appropriate account and then &quot;Apply Online.
you should print application, make a copy of all paperwork/check for your own records, verify all info is correct and mail it to the operations center.
Mailing Address: P.O. Box 9166, Pleasanton, CA 94566- 9166


(for Federal Express): 6200 Stoneridge Mall Road, Bldg A, 5th Floor, Pleasanton, CA 94588-3260

You will be given a pending account #, which you can access the account with, but you won't be able to do anything with your account until we receive your application and can verify your physical signature.
Once your paperwork is received, it will be approved. You should send the check at that time as well, and write on the check that it is for &quot;year 2000 contribution&quot;. If it isn't written on there, we automatically book it for 2001. it's a pain in the butt to have to call in to have the tax year changed. Check statements to make sure it is correctly posted for y2k.


3. On the application, you can set up moneylink from your checking account to your roth ira. it takes a little while to set up, so initially, I would send a check instead. Also, send the application before end of march. Reason being, a lot of people open/fund accounts right near the tax filing deadline, and sometimes it can't be processed. The only time contributions are deducted from paychecks are for small business plans like simple iras where contributions are done through payroll reductions.

your ira (for purposes of determining whether you'll be charged an annual fee) will be linked to your espp account by your social security number. If you want to do have money contributed from your espp account to your ira, you can call in and request it since the social security/address on both accounts are the same. i believe you could ask the rep to set up a recurring journal (monthly, weekly, semi annually, etc) to your ira, or just call in each time. you would have to call the espp number i gave you before (800-654-2593) because they have specifics on your companies policies regarding journals/transfers, etc.

The primary difference between traditional iras and roth iras are simple:


Comparison: Roth vs. Traditional IRA



Key Similarities

Each allows contributions of up to $2,000 of earned income each tax year. If an investor qualifies for both, a combined maximum of $2,000 can be contributed. (Can't contribute $2,000 to each.)

Assets aren't subject to income taxes while in IRA.

If investor is married and spouse has not earned income, the spouse with earned income may contribute up to $2,000 per year to the non?working spouse's Roth IRA and/or Traditional IRA.

If investor is under 59½, assets can be withdrawn from either IRA exempt from early withdrawal penalties (but not taxes) if used to pay qualifying college expenses or certain home purchases.




Key Differences

Contributions to Roth IRAs are never tax?deductible.

Contributions to Traditional IRAs may be deductible or non?deductible (depending on your gross income).

Roth IRAs offer tax?sheltered growth. This means that investments grow free of federal income taxes. An investor pays no federal income tax at all on qualifying withdrawals.

Traditional IRAs offer tax?deferred growth. This means that investments can grow free of federal income taxes until withdrawals are taken.

Here are some other key facts regarding roth ira distributions:


Roth Contributory IRA Distributions


Key Points

Qualified distributions are not subject to Federal income taxes.

Qualified distributions are those that meet both of the following requirements:

5-year holding period*
Qualified Reason: age 59½, death, disability, first-time home purchase
Note: The 5 year holding period for qualified distributions starts January of the year for which the first regular contribution is made to any Roth IRA, or if earlier, January 1 of the year in which the first conversion contribution is made to any Roth IRA.


All other distributions are non-qualified. Non-qualified distributions are subject to both federal income taxes and IRS penalties. See Non-Qualified Distributions.

There is no mandatory age requirement to begin withdrawal from a Roth IRA.

Clients may withdraw amounts contributed to a Roth IRA tax and penalty-free at any time for any reason.




Non-Qualified Distributions

Withdrawals are removed in the following order:

Contributions are not taxable because taxes have already been paid on these funds. They are not subject to penalties either.

Converted assets are not taxable because taxes were paid when the funds were converted into the Roth IRA. However, they may be subject to penalties.*

The earnings portion of non-qualified distributions is taxable as well as subject to penalties.

Note: To determine whether converted assets can be withdrawn penalty free, there are individual 5 year holding periods beginning January 1 of the year of each conversion. A 10% penalty applies to distributions taken within 5 years of a conversion. The penalty only applies to the portion of the conversion that was taxable at the time of the conversion.


Distributions taken prior to age 59½ are subject to a 10% early withdrawal penalty on the earnings unless a penalty exception exists. Penalty exceptions include:

Qualified higher education expenses
Substantially equal periodic payments
Medical expenses in excess of 7.5% of AGI
Health insurance if unemployed for 12 weeks
Death
Disability
First time home purchase



Tax Reporting of Distributions

Schwab reports all IRA distributions at year-end to the IRS on Form 1099-R.

Client reports IRA distributions when income taxes are filed. The client may be required to file IRS Form 5329 or 8606 with their tax return.


 
VUL are sold through agenst who are both securities and insurance licensed . A smaller percentage of insurance agents go on to get the qualifying licenses to be able to sell variable life policies (the variable means they contain mutal fund like separate accounts where your money can grow, and consequently, are monitored by the SEC). Many of the major broker dealers can sell a VUL, but since it is relatively new (I think they came out about 12 years ago), most insurance agents will not even know how to sell one, much less have a license to do so.

Just do a search for Variable Universal Life on the internet and only trust information from reputable sources (IE major broker dealer firms).

As with any investment, please do a lot of research before making a decision. There are many investment possiblilities, look for long term growth tables (10 years or more). Janus and VanKampen are some very solid mutual funds, but certainly not the only ones.

Oh I think that VUL is the fastest growing variable policy, and comprised something like 33% of all variable policy sales (but don't quote me on that).

(That sounded like a commercial. Hehe, just be careful dude!).

Luck to ya.
 
Good point. Let me point out the Rule of 72, a little known concept but a very powerful one. The rule works like this:

Take 72 and divide it by your ROR to get how many years it will take your money to double. So if you are getting 6% on a cd, that is 72/6= 12 years to double. Investing 1000 you will have 2000 in 12 years at that rate.

Now lets say you invest in a mutual find that happens to get 12%. So 72/12= 6 years for your money to double. So in 6 years, 1000 is now 2000, twice as quick as the original sample with the CD.

To explain the power of interest rates, lets say we continue our investments for 24 years.

CD:

Year 1: 1000
Year 12: 2000
Year 24: 4000

Mutual fund:

Year 1: 1000
Year 6: 2000
Year 12: 4000
Year 18: 8000
Year 24: 16000

So by doubling your ROR (rate of return) from 6% to 12%, you have effectively quadrupled your money in the same amount of time. Take this out to 45 years (typical 22 year old until retirement at 67) and you will see a VAST difference in a meager 6pts of ROR.

This is a purely hypothetical example by the way. But it illustrates how starting early is always a great idea. Waiting even only 6 years can cause you to miss out on doubling your money! Imagine doubling 100,000 in six years!

Cool huh?


I will take the aforementioned examples out to 48 years, as an example only.

CD:

Year 24: 4000
Year 36: 8000
Year 48: 16000

Mutual fund:

Year 24: 16000
Year 30: 32000
Year 36: 64000
Year 42: 128000
Year 48: 256,000

So, if you had a choice of 6 or 12%. which would you take? And why would you wait even 6 years to invest? It could cost you 128K!

🙂

Albert Einstein called compounding interest the 8th wonder of the world, and speculated that if everyone know about it, no one would put their money into banks!
 
The VUL plan sounds very interesting.. just to give you guys an update on what I've done recently..

Last week, I just opened a Schwab account for a ROTH IRA. I plan on signing up for the ROTH IRA beginning in July with the 15% taken out of my paycheck. This is my second year at the company I am with, and they match 25% starting from year 2. The reason why I am starting a bit later is because I have been busy paying off student loans and credit card debt for the past year.

Also, the ROTH IRA I just started, the $2k deposited was for Year 2000. Does anyone else have an account with Schwab? Is $40/year a steep fee? I found banks offering $15/year and some internet brokerages offering IRAs for free.. although once you hit $10k with Schwab, then it becomes free or if you have direct deposit every month (with a min. of $250). So, this is something I want to think about..

Are there any funds you guys would recommend I go with for the Schwab ROTH IRA? I am 25 and single.. so I am looking for something aggressive - any particular mutual fund? I don't want to play the stock buy/sell game however with this IRA.. I just want it to grow.

Also, I am curious as to how the VUL works. If there is no minimum, and the only minimum is the amount of the life insurance, what approx. fees am I looking at? I also heard you can roll your 401K into this later as well.. how does this work?

I look forward to any responses.. and thanks in advance!
 
I commend the posters who have contributed such detailed information on a very important topic.

But I respectfully disagree strongly with the recommendation to get a VUL. You are single, I assume? What do you need life insurance for? Insurance is to protect your family who depend on your income in the event of your premature death. Otherwise, you are wasting your money. Later on, when you have a family, look into a term policy. But mixing your investments with your insurance is only benefitting the insurance company.

First, you are restricted to investing in the options the insurance company offers. Those options are probably owned and run by the insurance company or their affiliate. You will needlessly restrict yourself to a very few investment options.

Second, it is extremely complicated to understand. In my experience, financial instruments that are incomprehensible tend to serve the seller, not the buyer. I want simple term life insurance so if I'm dissatisfied I can change insurers easily. I want to control my investments for the same reasons. I don't want them tied together so I can't do what I want.

Here's a couple of links about VUL:
Explanation of VUL
Why insurance is a bad investment

If I didn't have dependents, I wouldn't waste one cent on life insurance.
 
Definitely get started in a 401k right NOW.....the younger you start so much the better. Try putting away the max (15%) if at all possible.
 
EMOS: The only reason why I haven't started yet is because I already have 10% out of my paycheck going to ESPP. If I have another 15%, then I am only left with 75% of my check minus taxes of course. I still have TONS of credit card bills and student loans I had to pay off.. that was the reason why i didn't sign up for it in the first place.

However, now I am in the position where I can consider the 401K as a realistic vehicle and plan on going this route in August or so actually.. because by then, majority of my loans and bills will be gone. Thus at that point, I will be throwing 25% of my check automatically towards later retirement funds, and using the rest to help pay off some of my parents' loans..
 
From a 401K company plans info.

If you invest $2000 a year from age 20 to 30 and then stop investing you will have more money at age 65 then someone who started at age 30 and put $2000 a year in until age 65.

assuming 8% return.

That should help you want to get started as early as you can.


Even 5% is a good start, with the plan to increase the percentage each year until you max it out.
 
etech makes a great point. That is indeed a true statistic. Start early!

I wanted to ask - what is an &quot;ESPP&quot;? Is that a plan where you buy stock in the company you work for?
 
The company my Wife and I both work for (Boeing) has a great 401K plan. They match 50% (up to 8%) of your contribution but you can put in 15%. And you can borrow agaist it. We both borrowed some money from our 401 to buy our first house and as we paid back the debt we were actually paying ourselves back.
 
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