Now what about this problem You have a 401k and cant roll itover into an IRA

Now what about this problem you have a 401k and cant

This preview shows page 223 - 225 out of 263 pages.

Now, what about this problem: You have a 401(k) and can’t roll it over into an IRA. And your company won’t give you the option of investing in individual stocks. What then? Well, borrow $50K first. Then push harder for the option to self-direct. And then, if those two are exhausted, even though your employer is matching funds with you, I’d pull it. Get rid of it. Here’s why: The matching funds your company puts into your 401(k) are an expense to your employer and part of your compensation package. Therefore, there should be no difference to your employer whether you take that compensation as part of your salary or as a contribution to your 401(k). They write it off in either case. Seems to me you work for that money, however they pay it. If you don’t want your employer to pay you pretax by matching funds in your 401(k), then ask your employer to pay you that money as salary or bonus. Yes, you will pay tax on it. But if you’re investing at a solid rate of return, you’ll still do better managing that smaller chunk of taxed money than you would letting the fund managers mismanage your untaxed dollars.
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This graph shows the difference between putting matching funds into a 401(k) versus accepting the same money as income, paying tax on it, and then putting it into a Roth IRA. Let’s say your company gives you $3,000 matching funds every year in your 401(k). It gets invested for you, pretax, for twenty years at, best case, about 6 percent after fees. When you retire you have $120,000. Then you pay about 20 percent tax, so you have $95,000 after tax. Now let’s say that instead, you take the $3,000 as a bonus, pay 30 percent taxes on it, and put the remaining $2,100 into a Roth IRA (more about Roths below). Let’s also say you master the art of stockpiling and your money grows in the Roth at 24 percent per year on average; at the end of twenty years you have almost $800,000 after tax. The third column on the graph shows what happens if you take the $3,000, pay the taxes on it, and then invest it in a market index in the Roth IRA at 8 percent—the same rate you’re getting in the 401(k) but without the fees. You have $106,000—about 10 percent more than you would have in your 401(k). In other words, over the course of a lifetime of investing, you do better without a 401(k) in almost any scenario. If the feds would just level the playing field by making the total dollars you can put into an IRA the same as in a 401(k), no one would ever use a 401(k) again! No one with a brain. And once you learn to stockpile, the idea that you were leaving your money to the 401(k)-meisters is just a joke. How to Roll Over Your 401(k) If you leave your job before you are fifty-nine and a half, you have four choices for your 401(k): (1) Take the cash, pay the taxes due, and pay the feds 10 percent as a penalty for early withdrawal. You’ll have about half of it left. Okay. Don’t do that. (2) Leave the money in the 401(k) where it is, and continue to invest like someone who is ignorant and pay the fund managers exorbitant fees—like 25 percent of your annual gain and at least 60 percent of your retirement. No. Don’t do that. (3) Roll it
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  • Spring '20
  • Warren Buffett

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