The Gold Watch, and other money tips

Should I continue contributing to my 401(k) even if my company jilted its contribution to the plan?

Unfortunately this is becoming a question being asked more often. Over 250 companies have jilted their contribution to their 401(k) plans since the first of the year. Most articles on this subject suggest you should continue to contribute to the plan.

The answer is not that simple.

Money changes everything

The answer depends on your individual circumstances. In most situations the recommendation is to contribute as much as you can to a tax deferred plan like a Roth, IRA and/or 401(k). Visit the IRS Retirement Plan page to see what options you have based on your age, income and filing status. Or ask your financial professional.

Keep in mind a 401(k) is considered a retirement plan even if the employer does not make a contribution and you elect not to contribute. This limits your options.

There are key issues to consider once you know your options before deciding to continue to contribute to the 401(k).

One is how your decision will affect the taxes you pay now and in the future.

Money squeeze

If you qualify and are in a lower tax bracket it may make sense to put your funds in a Roth or if offered in a 401(k) Roth. If you contribute to a Roth you will not receive a tax deduction for the contribution. You will not be taxed on the earnings or on withdrawals. Also, you do not need to take withdrawals in a Roth. Funds put in a 401(k) or IRA are tax deductible. But withdrawals will be taxed as ordinary income. You must start taking withdrawals at age 70½ (If your 70th birthday is July 1, 2019, or later, you do not have to take withdrawals until you reach age 72.)

Another key consideration before contributing to the 401(k) is the quality of the investments offered and the diversity in choices. If the 401(k) does not meet your requirements in these areas consider putting your funds in a tax-efficient mutual fund, a diversified stock portfolio or broad-based ETF. Hopefully over the long term the assets will grow. You will pay a long term capital gains tax on the gains when selling the investments rather than pay ordinary income taxes on withdrawals as you would in a 401(k) or IRA.

Take the time to educate yourself or ask a financial professional before making a decision on where to put your retirement funds. The decision is one of the most important financial decisions you will make.

 What should I know about hiring a financial planner when my newspaper leaves me jilted? 

Here's what to consider:

How will you be charged for the services provided? 

Will you be charged an hourly fee, a percentage of the funds managed? Or will the adviser receive a commission from a third party such as a mutual fund? Some mutual funds charge 5% when you put money in the fund, some charge money when you withdraw funds, and all charge yearly fees from .0025% to 2+% and more per year. Some of these fees are paid to the financial planner. It is important to understand all fees and commissions. Get it in writing how the services will be paid for.

Generally, if you are charged an hourly or flat rate it costs less than a commission-based charge and can avoid a conflict of interest.

More considerations:

• Does the adviser take a top down approach?
• Are your goals, risk tolerance, knowledge and other concerns taken into consideration?
• Who will control the assets?
• Will you make your own purchases based on recommendations with occasional consolation or will someone else control the assets?
• Will the plan be simple to understand?
• Will it be transparent?
• What return can you expect?
• After all fees will your investments outperform the indexes they are to be compared to without taking unusually high risk?
• Are you comfortable?
• Do you understand the adviser you are considering and your knowledge about investing?
• Will you include your entire financial situation when working with a financial adviser? It would be difficult for an adviser to design the best plan for you without having all the facts.

It is important for you to understand how your money will be invested and you are confident the plan makes sense and has a good chance of meeting your goals without taking unusually high risk.

Should I leave my 401(k) with the company when I leave?

In most situations the advice would be to take your 401(k) with you when you leave.

401(k)s have limited investment choices. Unfortunately many plans have choices that have mediocre returns and in some cases the fees are excessive. Leaving your 401(k) with the company leaves you with fewer choices and exposes you to changes the company may make that you do not approve of. One reason to keep the funds with an employer you left would be the plan offers an investment you want and could not purchase in a self-directed individual retirement account (IRA).

An alternative to keeping your 401(k) with the company would be to open a self-directed rollover IRA with a broker or in a brokerage account at a mutual fund family such as Fidelity or Vanguard. Another alternative promoted by some companies and financial planners is to put the funds in an annuity. One of the advantages of an annuity is its tax deferred status. IRAs are tax deferred. Generally speaking, tax deferred investments do not belong in tax deferred accounts. Annuities tend to pay high commissions to financial planners and sales representatives. Be sure they are looking out for you when they recommend annuities.

The advantage of opening an IRA in a brokerage account or the brokerage side of a mutual fund family instead of in the mutual fund family itself is it puts you in full control of your retirement funds. You can invest in mutual funds, stocks, bonds and other investments of your choice. If you are not comfortable making your own investment decisions, you may want to seek help from a financial planner or the firm you have your IRA with.

Two key things to keep in mind are you should be able to sleep at night with your investment decisions and you should understand what you are invested in.