Ask Liz Weston

Get smart with your money

retirement savings

Q&A: This forgotten account shouldn’t turn into a spending spree

By

Dear Liz: I just got a message about thousands of dollars I have in a 401(k) account from a job I had over 10 years ago. They are asking me what I want to do with the money, roll it over into an IRA or cash it out. What should I do?

Answer: Don’t cash it out.

Unexpected money can feel like a windfall, and it’s natural to dream about potential splurges you could afford. But this cash didn’t fall out of the sky. This is money you earned and that could grow substantially if you make the right moves now. If you cashed it out, you’d lose a substantial chunk to taxes and penalties, plus you’d lose all the future tax-deferred growth that money could earn.

Your best option probably would be to transfer the money directly into your current employer’s retirement plan, if you have one and it allows such transfers. Employer plans may offer lower-cost access to investments than you’d get with an IRA, plus consolidating the old plan into the new means one less account to monitor. Also, employer plans may offer more protection from creditors, depending on where you live.

Rolling the money directly into an IRA is another good option. You’ll need to open an account, preferably at a discount brokerage that keeps costs low. An IRA would give you access to more investment options, but beginning investors might just want to opt for a target date retirement fund or a robo-advisory service that invests using computer algorithms. With either option, the mix of investments and the risk over time would be professionally managed.

Whichever you choose, make sure the old plan sends the money directly to your chosen option, rather than sending you a check. If a check is sent to you, 20% of the money would be withheld for taxes and you’d have to come up with that amount out of your own pocket within 60 days or that portion would be considered a withdrawal that’s taxed and penalized.

Friday’s need-to-know money news

By

Today’s top story: 5 ways to take command of military discounts. Also in the news: The best credit cards to use when buying airfare, Black Friday strategies that actually work, and how to spend your retirement savings without triggering a tax penalty.

5 Ways to Take Command of Military Discounts
Thank you for your service.

Buying Airfare? Use These Cards to Maximize Your Points
Getting the most for your purchase.

Shoppers Share Black Friday Strategies That Actually Work
Tackling your holiday shopping.

How to spend your retirement savings without triggering a tax penalty
Draw down your money at the right time.

Friday’s need-to-know money news

By

Today’s top story: AmEx makes it easier for immigrants to access credit. Also in the news: Retirement savings mistakes financial advisors see too often, big changes could be in store for student loan borrowers, and why you shouldn’t tell the person you just started dating about how much money you have.

AmEx Makes It Easier for Immigrants to Access Credit
How the new feature works.

7 Retirement Savings Mistakes Financial Advisors See Too Often
How to avoid them.

Big changes could be in store for student loan borrowers
Rewriting the rules.

Don’t Tell the Person You Just Started Dating How Much Money You Have
Keep it to yourself for now.

Q&A: Should you pay off student loans or save for retirement? Both, and here’s why

By

Dear Liz: What are your recommendations for a recent dental school graduate, now practicing in California, who has about $250,000 of dental school loans to pay off but who also knows the importance of starting to save for retirement?

Answer: If you’re the graduate, congratulations. Your debt load is obviously significant, but so is your earning potential. The Bureau of Labor Statistics reports that the median pay for dentists nationwide is more than $150,000 a year. The range in California is typically $154,712 to $202,602, according to Salary.com.

Ideally, you wouldn’t have borrowed more in total than you expected to earn your first year on the job. That would have made it possible to pay off the debt within 10 years without stinting on other goals. A more realistic plan now is to repay your loans over 20 years or so. That will lower your monthly payment to a more manageable level, although it will increase the total interest you pay. If you can’t afford to make the payments right now on a 20-year plan, investigate income-based repayment plans, such as Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE), for your federal student loans.

Like other graduates, you’d be wise to start saving for retirement now rather than waiting until your debt is gone. The longer you wait to start, the harder it is to catch up, and you’ll have missed all the tax breaks, company matches and tax-deferred compounding you could have earned.

Also be sure to buy long-term disability insurance, even though it may be expensive. Losing your livelihood would be catastrophic, since you would still owe the education debt, which typically can’t be erased in bankruptcy.

Tuesday’s need-to-know money news

By

Today’s top story: How to make living in a new place a reality. Also in the news: How one couple paid off $300k of debt in three years, what workers can learn from retirees’ regrets, and the average FICO score hits an all-time high.

Dreaming of Living in a New Place? Here’s How to Make It a Reality
One step at a time.

How I Ditched Debt: Small Wins Help Achieve a Big Dream
How one couple paid off over $300K in three years.

What Workers Can Learn From Retirees’ Regrets: Save More Now
The sooner, the better.

Average FICO score hits all-time high
The nation’s average score is now 706.

Q&A: Avoid this big mistake when paying off debt

By

Dear Liz: I am 49, single, with no kids. Until about three years ago, I wasn’t even sure how much credit card debt I had. I had less than $200 in savings and I was just plugging along making minimum payments. It turns out I had over $14,000 in credit card debt and $12,000 in student loan debt. The credit card debt was accumulated not from extravagant purchases but rather from living in an expensive city and trying to pursue a dream career. (I worked only three days a week in my “day job” for about 12 years.)

My living expenses have always been modest, but I made a budget, lived even more frugally, and made large monthly payments. In the process I also cashed out my small 401(k), as I have done a couple of times previously. Fast-forward to now — my credit card debt is paid off, my student loan is paid off, I have about five months of living expenses in savings and a reasonable annual income of $60,000. I have no retirement savings, though. What is my next best step to get money accumulating for my old age?

Answer: You’re to be congratulated for taking charge of your financial life, but it’s unfortunate you sacrificed your 401(k) to do so. It rarely makes sense to cash out retirement funds to pay debt. The interest you saved is typically far outweighed by the taxes, penalties and lost future tax-deferred returns you incurred by tapping your 401(k) prematurely.

Fortunately, the budgeting skills you learned will come in handy now that you’re focused on saving for retirement. Continue to make large monthly payments, but direct the money into your 401(k) if you still have one or an IRA if you don’t. If you max out your tax-deductible options, you can continue to put money into a taxable brokerage account.

You should plan to continue working as long as possible and to delay starting Social Security, preferably until your benefit maxes out at age 70. Social Security is likely to be your largest source of income, so the bigger your check, the more comfortable your ultimate retirement will be.

Also, take steps to protect and enhance your biggest current asset — your ability to earn money. Many people are derailed financially in their 50s by unexpected layoffs and health problems. You can improve your chances of being able to earn well into your 60s by taking good care of yourself, investing in new skills and trying to be a top performer at work.