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Should you roll over your 401(k)? Do you qualify for a Roth 401(k) or Roth IRA? Learn more about your retirement plan options, tax considerations and hidden fees.



Missing the Obvious on Fees

I have a personal confession. For nearly 50 years, I’ve missed the “obvious” reality: Fees for investment management are not low. They are high; very high. When investors recognize this “new reality” — that fees are not trivial but are crucial — the beautiful “inside” world of fund management will experience a powerfully disruptive revolution. It may not be sudden, but it is inevitable. Investors are not captives of the conventional practices of “performance” investing. They have proven alternatives. The process of getting to the “Ah ha!” moment can come through a few examples of how easy it is to miss (or misinterpret) reality. Missing the obvious Sometimes it’s due to deliberate deception — as when a magician has you […]

How a Simple Estate Plan Pays for Itself

More than 50% of U.S. adults do not have even the most basic estate planning document; a Will. [1]  For adults without spouses, children or any significant assets, the lack of an estate plan may not significantly impact their surviving family, but for everyone else the costs of not having a simple estate plan are almost certainly greater than the cost of obtaining one.  In this post I’ll briefly explain what constitutes a “simple estate plan,” how much you can expect to spend on such a plan, and what fees, expenses, taxes (and headaches) you can avoid by having one. Although ancillary documents may be appropriate given the specific circumstances, a “simple estate plan” is generally understood to constitute the following […]

Does It Ever Make Sense to Stop Saving For Retirement?

This Knowledge Center post was adapted from Wealthfront COO Adam Nash’s answer to a question on Quora — Ed. The Question: Let’s say I’m 30 and have $250K in my 401k. If I stopped contributing now I would have $2.5M in my account by the time I’m 60 and am allowed to make a withdrawal. That should be enough right? Even if it isn’t, there must be some point where it makes sense not to max it out anymore. The short answer is no. What you have saved is very likely not enough. I know what you are thinking. You’re thinking that $250K is a mountain of cash to build on for the next 30 years. And it is, no […]

The Advice You Need, Not The Advice You Want

Last week’s post, You Need Equity To Live In Silicon Valley, generated quite a bit of emotion from our readers. A number of people missed the point of the post, which explains the economics of living in Silicon Valley. We pointed out that it’s hard to make the numbers work if you don’t own equity in a business that could be worth something in the future. Unfortunately a number of people misinterpreted the article as a condemnation of Silicon Valley. Real estate is expensive in the Valley because so much wealth is created here. You can waste your time making a value judgment about whether it’s good or bad that the wealth we create, combined with a low inventory, drives […]

Q&A with William Sharpe: Investing In a Turbulent Market

Nobel Prize-winning economist William Sharpe recently published an article showing retirees how much more money they could have in retirement by avoiding actively managed funds in favor of index-oriented funds. In the article, “The Arithmetic of Investment Expenses” in the Financial Analysts Journal, Sharpe showed that a person saving for retirement who chooses low-cost investments instead of higher-cost investments could have a standard of living throughout retirement that is more than 20% higher. Professor Sharpe[1] recently spoke to Bill Snyder of the Stanford GSB about retirement strategies and lessons learned (or not learned) from the financial meltdown of 2007. This Q&A was adapted from that interview and used with Professor Sharpe’s permission. What did we learn from the crash and […]

7702 Retirement Plan? There’s No Such Thing

A growing number of insurance companies and independent financial advisors have been selling “7702 Plans,” sometimes referred to as a “7702 Private Plan,” for retirement. On Google alone, a query for “7702 plan” results in almost 1.5 million pages of matches. This is fascinating, largely because there is no such thing as a 7702 plan. A vehicle for selling life insurance If you go to one of the thousands of websites, you’ll find a description of something that sounds like a 401(k) or IRA, but is based on life insurance. The page will explain that unlike traditional retirement plans like 401(k) and IRA accounts, “life insurance retirement plans” have no limit on contributions or size, and no requirements for withdrawals […]

High Income? Here’s How You Open A Roth

First made available to investors in 1998, Roth IRAs introduced a whole new structure for tax-deferred saving. Until then, investors could make tax-deductible contributions to traditional IRAs and 401(k)s. Roth accounts allowed tax-free distributions. Many of our clients want to take advantage of both ways of saving for retirement. The problem: Roth accounts have income limits. In 2013, single filers making more than $127,000 in adjusted gross income, and married couples making more than $188,000, are not allowed to contribute to Roth IRAs. The question: If I – or my spouse and I – are above the income limits for Roth IRAs this year, can I still Roth? The answer, fortunately, is yes…if you know how. Option 1: A Roth […]

The Case Against Maxing Out Your 401(k)

2012 IPOs: High Expectations, No Assurances

Most every personal finance blog I have ever read recommends maxing out your 401(k) contribution. They tell you to “just do it” – contribute as much as you can, as early as you can. I couldn’t disagree more. Forced savings I believe most bloggers (and many financial planners and low-quality investment advisors) recommend maximizing 401(k) contributions as a way to enforce a savings discipline. They believe that without automatic deductions, people won’t save at all. Our readership tends to be more disciplined and intelligent than the average personal finance blog readers, so I don’t think they need such a brute force recommendation. For our clients and readers, we emphasize transparency, rational decision-making and the use of mathematical tools. We recognize […]

When A Roth 401(k) Trumps A Traditional 401(k)

The New Year’s Day tax deal (also known as the fiscal cliff legislation) made headlines in the retirement world because it included new rules to make it easier for employees to convert existing traditional 401(k) plans to Roth 401(k) plans. Over the past six years, an increasing number of companies have begun to roll out Roth 401(k) options for their employees. Many people now have the simple question: “When does it make sense to choose a Roth 401(k)?” Before we answer that question, you should understand the key difference between a Roth 401(k) and a traditional 401(k). With a Roth, you’ll pay taxes on the money you invest now, but no taxes when you withdraw the money at retirement. In […]

Why Your 401(k) Plan Sucks

A recent study found that the average fee on a 401(k) retirement plan was an appalling .93% of assets. The fees in the most expensive 10% of plans were even more shocking: 1.72% of assets.  That’s huge in an environment where most people hope to earn annual returns of 6% before fees. The average 401(k), meanwhile, offers 15-20 choices of funds, which have higher expense ratios than those you would find if you were buying through a brokerage for your IRA. A typical lineup: Many actively managed mutual funds, a handful of passively managed index funds, and very few ETFs. If you’re an educated investor, this sounds familiar. You always suspected you were paying a lot in fees, even though […]