Be Smart With Your Old 401(k)

One of the benefits that many of us have by working for a company is access to a 401(k) retirement plan. Two features make 401(k)s beneficial, as compared to a regular IRA:

• Ability to sock away more tax deferred money on a yearly basis – if you can afford it, roughly 3 times more money can be contributed to a 401(k) than an IRA each year.
• Ability to receive a company match of some sort – this is free money. Don’t pass this up IF your employer has made this available!

While these are great benefits, you no longer receive these advantages once you leave your employer. After you separate from your employer, you have several options:

• Cash out – don’t do it! A 10% penalty, plus income tax on monies withdrawn, along with the loss of tax-deferred compounding, makes this the worst option of the bunch.
• Leave it where it is – other than being easy, there are no real positives of this option. You are limited to invest in only the options granted by your former employer.
• Roll it into your new 401(k) plan – your money will again be handcuffed to the rules and investment options set forth by your new employer. 
• Roll it into an IRA – retain the same tax advantages of your 401(k), plus obtain full control over how you want to invest your nest egg.

Changing jobs presents a golden opportunity for you to take full control of your assets. The IRA rollover option becomes appealing for the funds you had previously built up within your 401(k). Going forward, if you want to maximize your savings potential, you can easily contribute to both a new employers 401(k) AND your IRA. This strategy would allow some couples to save more than $40K per year, in a tax-advantaged account. Invest well!

Want Yield...Can't Handle Volatility?

I have been talking to more and more people that simply can't stomach the recent market volatility. Being that the market's recent volatility (past quarter) has been roughly double its 10-year average, I can understand the disdain for it, particularly for people or entities that value capital preservation more than maximizing yield (interest/dividends thrown off). Many of these folks simply park their cash in a savings or money market account to avoid a potential market drop (see 2008-2009).

S&P 500 movement during last 3 months

When cash is needed in the short term (I will define as less than one year), I think a savings account is perfectly legitimate. To be more specific, an online savings like ingdirect.com or ally.com will allow you to get the most bang for your buck (offering interest rates around 1% right now), with simple and easy account setups. These banks are also FDIC insured, so $250K per person, per bank is federally protected.

For individuals or entities with cash well in excess of the $250K limit, there is another solution. The Certificate of Deposit Account Registry Service (CDARS - cdars.com) is a way to simplify the process of obtaining FDIC coverage for larger sums of money placed in CD investments. This allows one banking relationship, one negotiation of terms, and one statement, as if you had your money at one central location. CDARS participating banks will then spread your funds around to multiple banks to ensure you are covered under the proper FDIC limits and will consolidate the information for you. These CD maturities can be negotiated from durations ranging from one month to five years. 

If you are seeking to maximize your yield and have a time frame that you estimate to be around a year or longer, a bond fund portfolio might be your best bet. Why you ask? Bond funds can provide returns that put savings accounts and CDs to shame AND offer daily liquidity that will make CDs envious. According to Bankrate.com, the national average for one-year CDs is currently 0.78%, and money market/savings accounts are slightly less. In comparison, bond funds can be found right now that are providing 2.5-3% or more in upcoming monthly distributions. Plus, unlike a CD, your money is available for withdrawal on an as needed basis.

Because these are funds (provide more efficient means of trading than individual bonds), short-term fluctuations in value can occur and can negatively or positively impact short-term holdings. For this reason, we like to encourage clients to only consider this option if they have no expected needs for the cash in the next 9-12+ months. Bond funds do have the potential to suffer during periods of rapid (and particularly unexpected) interest rate rises, so they must be actively managed with care...but for many, a properly managed bond fund portfolio can effectively balance yield and volatility. Invest well!