Friday, November 16, 2007

401k Rollover.

TSP and 401k

I had both a government TSP and a company 401k account.
401k, 403b, TSP are all basically the same things. They are tax shelters that the government gives you so that you can save for retirement.

I had the option of keeping both TSP and 401k accounts but I wanted more control over my money. 401k's made me buy company stock and Mutual Funds. I didn't want to buy either, but the company match is worth it.

To rollover your money, or in other words move it from one tax shelter to another tax shelter you need to do the following.

1) Open a "Traditional Rollover IRA" account. I chose Scottrade because of their low fees.
2) Once your account is open, contact the holders of the TSP and 401k and tell them you want to move your money. They will have paperwork to fill out. Your HR department can tell you who holds your account.
3) Make certain you do not have them send YOU the money. They must send the money directly to your new Scottrade account. If you don't do that, then the IRS believes you "cashed out" and now you have to pay almost 30% in taxes.
4) Once the money is moved to the new Scottrade account, you now get to buy something with it.

What should I buy?

Ben Stein is one of my favorite financial voices to listen to. He has always state that people have to save more money and have a plan for that money.

The simplest plan is to spread your money equally between three diversified index funds and just keep buying them and don't sell until you retire.

3 Index Funds

VTSMX - Vanguard Total Stock Market Index (You are buying America.)
EFA - Europe Far East Asia (Foreign Developed Nations.)
EEM - Emerging Market. (Small nations that have huge opportunity for growth.)


Ric Edelman

This week I went to a Hilton in Tysons Corner and listened to one of the best financial planners in the business.
He goes through the fact that Mutual Funds (non-index) are ripping people off. The average mutual fund is costing you almost 3% a year or more.
Index funds are less than 1% a year.

Here is a great write-up by Ric about the fees of Mutual Funds:
http://www.edelmanfinancial.com/galleries/default-file/EMAPtruecost.pdf

The fees for Mutual Funds are called the Expense Ratio.
(Why can't they just call them fees?)

Mutual funds have other fees that they don't even have to tell you about called SAI charges.
SAI stands for Statement of Additional Information. You have to specifically request this information from your mutual fund.

The point is, the old way of buying Mutual Funds will severely hinder the profits. As a whole, Index Funds are cheaper and long-term they beat almost all Mutual Funds.

I would recommend listening to Ric's radio programs for free.
http://www.ricedelman.com/cs/radio_show

As always, I'm more than happy to help if you have questions.
Keep Saving, Keep Learning, Keep Investing, Retire Early!

Craig

For those who wanted a soft copy of the compounding Interest worksheet:
www.geocities.com/craigfield12/IRASheet.jpg

The book that we talked about:
The Wall Street Journal Guide to Money and Investing

For those who want an example of other portfolios:
http://madmoneymachine.com/2007/07/02/lazy-portfolios-update-1st-half-2007/




The Picture is an Example of Ric Elderman's recommendation for the information that I put into his website. Buying broad based Index funds or ETFs makes you diversified because you are putting your eggs in multiple baskets. Instead of owning 1 stock, you own 1 Index fund that has hundreds of stocks.
Everyone will have their own idea of what is being properly diversified.


The other point Rick Elderman had is that many people are using Morningstar.com to choose Mutual Funds. First of all he doesn't want you to buy Mutual Funds. Secondly everyone is choosing a Fund based on how many stars it has.

A 5 star rating is telling you that this fund has done well over the last several months. Which means you are going to buy when it is high. Human natures makes you want to buy something so you can tell people you bought a 5 star instead of a two star.

When you buy a 5 start and you don't get the returns that you thought you would get, you sell the fund and buy another 5 star. Again, you are buying high and selling low. The exact opposite of what you should be doing.

I hope our group sticks to Warren Buffet's idea for small investors. Buy a good broad based index fund and just keep buying it. We don't care what stars it has. We don't care that it goes up one week and down the next. We care that there are low fees (expense ratios), low or no management fees, no SAI fees and it is widely diversified.



Why do I have to pay more taxes in Mutual Funds than in Index Funds:
http://www.fool.com/school/mutualfunds/costs/taxes.htm

1 comment:

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