Disclaimers: Don’t consider any of this as certified legal or financial advice. We are not tax attorneys, financial advisors, or retirement planners. Consider this as one of the inputs in your planning process.
Discussion items
1. Company Match 401K.
Make sure you utilize all the company contribution. For example, if the company is matching contribution 100% for the first 1% and 50% for 5% of your contribution, choose your contribution to be 6% at the very least. If conditions favor, choose maximum contribution allowed by IRS, 15,500 for 2007. This will increase by $500 for the next few years as per a law passed in the congress.
2. Penalty.
Money that is withdrawn prior to 59 ½ typically incurs a 10% penalty tax unless a further exception applies. This penalty is of course on top of the "ordinary income" tax that has to be paid on such a withdrawal. The exceptions to the 10% penalty include: the employee's death, the employee's total and permanent disability, separation from service in or after the year the employee reached age 55, substantially equal periodic payments under section 72(t), a qualified domestic relations order, and for deductible medical expenses (exceeding the 7.5% floor. Further state and local income taxes also are applied.
3. Going back to
See above section on penalty. See the attached email chain below (Source: http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=30650). The link http://www.r2iclub.com/060210/r2i-finance-general.htm is a good link in general for anyone planning to go back to
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See http://www.thehindubusinessline.com/bline/2003/03/11/stories/2003031102610800.htm for details on RNOR (Non-resident, Resident and Resident but Not Ordinarily Resident
4. How much %
See item 1 above. If the company does not provide any match at all, it is still a good way for retirement saving. Some companies do not provide any match but do provide a plan that is administered by a third party so that employees can invest.
5. Kind of investments.
There are different ways of doing investments. Depending on the age and risk appetite a mixture of mutual funds, bonds, company stock funds, etc is suggested. Let us talk in detail about these choices.
6. Balancing with Current expenditure.
Not sure what this is supposed to mean. Lets talk tomorrow
7. Loans on 401 K.
Recommend not doing it unless there is no other option available. See following snippet below from http://articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/7MostCommon401kBlunders.aspx
Taking out loans
What seems like a great idea -- Borrow your own money! Pay yourself interest! -- has plenty of traps for the unwary:
- The biggest pitfall is the risk you take should you lose your job. Your loan would become due, and, if you couldn't pay it back at once, you would owe income taxes and penalties on the unpaid balance.
- The interest rate you pay yourself may be lower than what you would pay most other creditors, but paying yourself interest is no substitute for the real return you would be earning if you had invested those payments instead.
- Borrowing from your retirement funds is often a sign that you're overspending -- particularly if you're using the proceeds to pay off credit card debt. People who use "easy outs" like 401(k) and home equity loans to pay off their cards often don't change the underlying behavior that put them in the hole. They just run up their balances again -- winding up another day older and deeper in debt.
8. Is it really worth it?
It is for you to decide after we have the discussion
9. How can you convert to IRA ?
Need to do more research…have no clue.
10.
11. 401 Transfer.
By transfer, if you are referring to a rollover, it is typically allowed when you change employers. You have 3 options:
- Keep existing amounts at the old employer and start a new one at new employer
- Roll over old employer account to an IRA and start a new one at new employer
- Roll over old employer account to new employer account
WE can discuss pros and cons tomorrow.
12. Age Factors.
For discussion tomorrow. The earlier you start the better it is :>)
Additional Notes
Some Background information (Source: Wikipedia -http://en.wikipedia.org/wiki/401k)
The 401(k) plan is a type of employer-sponsored retirement plan in the United States and some other countries, named after a section of the U.S. Internal Revenue Code. A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or "deferred", into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested .
All assets in 401(k) plans are tax deferred. Before the January 1, 2006 effective date of the designated Roth account provisions, all 401(k) contributions were on a pre-tax basis (i.e., no income tax is withheld on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn. With the enactment of the Roth provisions, participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separate designated Roth account, commonly known as a Roth 401(k). Qualified distributions from a designated Roth account are tax free, while contributions to them are on an after tax basis (i.e., income tax is paid or withheld on the income in the year contributed). In addition to Roth and pre-tax contributions, some participants may have after-tax contributions in their 401(k) accounts. The after-tax contributions are treated as basis and may be withdrawn without tax. The growth on after-tax amounts not in a designated Roth account are taxed as ordinary income.
Articles of interest
7 common 401k blunders
7 ways to boost return
http://moneycentral.msn.com/content/P108575.asp
Also refer http://www.fidelity.com/, http://www.vanguard.com/ and browse around for good information about investing, 401k, returns on various stock funds, etc. You can also look at msn.com money section, money magazine and other financial magazines for useful tidbits.