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Personal 401K plans

1,770 Views | 14 Replies | Last: 4 yr ago by h-townaggie2013
h-townaggie2013
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So a little backstory to hopefully get the best help here. I don't pretend to understand as much as I would like when it comes to investments and such but am hoping for some insight from one of you so that I can potentially avoid a simple mistake that could end up screwing me way down the line. Out of college I started working for a fairly large GC that I set up a 401K plan through. All contributions were taken out of my paycheck and pre-taxed to my understanding, which would then be taxed when I withdrew. Everything was great with but now fast forward a couple of years and I am now working for a smaller subcontractor that does not offer a company based 401K plan. I have since moved the money to a personal ML account that has in large part just been sitting there.

I am making considerably more than I was back then and have spent the last several years knocking down my student debt and other things as much as possible while largely ignoring my retirement account. I am in a position now where I can start contributing again like I should but I am concerned about the tax laws on these different account types.

My fear is that since my contributions will be in theory taxed from my paycheck right off the bat, I will essentially be getting taxed at that point and then again when I eventually withdraw for retirement? Is a Roth IRA the way to go in my situation?

Thanks in advance for any input.
SquareOne07
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AG
Rolling it over to an IRA sounds like it'll be your best course of action. The money is still pre-tax and will be taxed when you take it out in retirement, you can make contributions to it ($6k/yr), and you can control how it's invested.
permabull
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AG
h-townaggie2013
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I'm honestly not sure, I would have to look into that. My original 401K with my old company was with ML so it was my understanding that it was just moving out underneath their umbrella. Again, this kind of shines light on my ignorance to this stuff.
h-townaggie2013
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SquareOne07 said:

Rolling it over to an IRA sounds like it'll be your best course of action. The money is still pre-tax and will be taxed when you take it out in retirement, you can make contributions to it ($6k/yr), and you can control how it's invested.
What makes it pre-taxed if it's money that was taxed on my paycheck before I ever received my wages? I think that is what I'm not understanding
permabull
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AG
SquareOne07
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If you were taxed on it before you contributed it, it would be Roth money. If it was contributed before being taxed, you'd be looking at IRA money.

See if you can dig up your statement from ML and see if it's written on there. If you can't decipher it, somebody here would probably be happy to help you figure out what ya have.
The Collective
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AG
Your confusion on pre/post tax on an IRA makes sense. With an IRA, you'll use post tax money and claim it on your tax return.
Kenneth_2003
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Within the 401k family there are two types, just like an IRA. Roth and Traditional. If you didn't specify Roth, your 401k is almost certainly a traditional. If there was an employer match/contribution and you only have 1 account then it is certainly traditional. Your employer is not allowed to contribute to a Roth. All of their contributions must go into a traditional. Their contribution is not considered a wage/income and so it can't be taxed to you like your Roth contribution.

A traditional is pre-tax. It's taken off of your paycheck before the tax with held is calculated so from the IRS standpoint you didn't earn that money in that tax year. For a Roth, taxes are calculated then it's taken out of your check and put into your account. The Traditional is taxed as normal income in retirement, and the Roth is no tax due in retirement.

Same rules apply as for an IRA. Only difference is you get to take a deduction on your taxes when you file in the Spring.

Hope this clears some of this up for you.
torrid
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Tip when transferring 401k money to another plan or a self-directed IRA.

Do not have them make the check out to you personally, nor deposit it in your personal checking account. Get the new account set up first, then have the 401k institution send it directly to the new place. The check should be made out to the new institution with "for benefit of (your name)" underneath. The money never goes through your hands, and it leave no ambituity on the taxes.

It has been several years since I transferred a 401k. At the time, it was an absolute pain in the ass. I had to get paperwork filled out by both places. I would imagine it is much more seealess now.
SquareOne07
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torrid said:

Tip when transferring 401k money to another plan or a self-directed IRA.

Do not have them make the check out to you personally, nor deposit it in your personal checking account. Get the new account set up first, then have the 401k institution send it directly to the new place. The check should be made out to the new institution with "for benefit of (your name)" underneath. The money never goes through your hands, and it leave no ambituity on the taxes.

It has been several years since I transferred a 401k. At the time, it was an absolute pain in the ass. I had to get paperwork filled out by both places. I would imagine it is much more seealess now.


Yep. Never hurts to ask your advisor (if you go that route) to be on the phone when you issue those directions to the old institution.
h-townaggie2013
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torrid said:

Tip when transferring 401k money to another plan or a self-directed IRA.

Do not have them make the check out to you personally, nor deposit it in your personal checking account. Get the new account set up first, then have the 401k institution send it directly to the new place. The check should be made out to the new institution with "for benefit of (your name)" underneath. The money never goes through your hands, and it leave no ambituity on the taxes.

It has been several years since I transferred a 401k. At the time, it was an absolute pain in the ass. I had to get paperwork filled out by both places. I would imagine it is much more seealess now.
So when I log on to ML I have a Traditional IRA line item that has the bulk of my money and a Roth IRA line item that has a couple hundred dollars in it. I do not remember setting this up as it had to be years ago but it's obviously something I did not contribute to hardly at all. Would it be as simple as getting in touch with one of their advisors and transferring it over?

Thanks again for all the replies guys.

Edit: Although, I just noticed as I was looking at it, it does not appear to be affected by the market. For instance my Traditional went up like 0.5% today and the Roth reads 0.00%
permabull
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SquareOne07
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To add to the above, you can do a backdoor Roth as well if you're over the income limits.
torrid
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AG
h-townaggie2013 said:

torrid said:

Tip when transferring 401k money to another plan or a self-directed IRA.

Do not have them make the check out to you personally, nor deposit it in your personal checking account. Get the new account set up first, then have the 401k institution send it directly to the new place. The check should be made out to the new institution with "for benefit of (your name)" underneath. The money never goes through your hands, and it leave no ambituity on the taxes.

It has been several years since I transferred a 401k. At the time, it was an absolute pain in the ass. I had to get paperwork filled out by both places. I would imagine it is much more seealess now.
So when I log on to ML I have a Traditional IRA line item that has the bulk of my money and a Roth IRA line item that has a couple hundred dollars in it. I do not remember setting this up as it had to be years ago but it's obviously something I did not contribute to hardly at all. Would it be as simple as getting in touch with one of their advisors and transferring it over?

Thanks again for all the replies guys.

Edit: Although, I just noticed as I was looking at it, it does not appear to be affected by the market. For instance my Traditional went up like 0.5% today and the Roth reads 0.00%
If you have a personal, traditional IRA outside of your former employer's 401k, it sounds like it is already transitioned over. However, by all means contact ML and verify the details.

If you hadn't done a transfer to an IRA, the IRS would have been after you with a huge tax bill. I'm positive you would have remembered that.

Since you haven't looked at it for some time, this may be a good opportunity to look at what it is actually invested in. Being your own account, you can put it in anything. I would suggest an ETF or mutual fund for now. ML will undoubtedly offer you some advice, but make sure you are comfortable with the risk level and the fees.
h-townaggie2013
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Thanks again for the help fellas
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