Advice on 401K

[maggieddd]

I am not sure if this is an appropriate question as it is not about ER, but I'll ask anyway.

My mom is making peanuts working at a local factory as her English is not great and she is very conscious about it. She used to be a teach but she would not attempt to be one now. Anyway, the company she is working for has this crappy 401K plan where the company only contributes once a year if they feel like it and whatever % they feel like paying. I was not really aware of it and she doesn't understand all these things. Anyway, she is contributing 10% but I am thinking it might be a complete waste, should she perhaps open an IRA instead? Or does she have any other options? Maybe she could just contribute the minimum (2%) at work and have the 8% go to to IRA?
What are your thought about it?

Thanks

 

[Spanky]

Anyway, the company she is working for has this crappy 401K plan where the company only contributes once a year if they feel like it and whatever % they feel like paying.

That's better than nothing (compared to an IRA).

Maybe she could just contribute the minimum (2%) at work and have the 8% go to to IRA?

Unless the selection of investment is limited, there is no advantage of doing this. You may consider a Roth IRA instead of a regualar IRA.

 

[maggieddd]

That's better than nothing (compared to an IRA).Unless the selection of investment is limited, there is no advantage of doing this. You may consider a Roth IRA instead of a regualar IRA.

Thank you. What's the difference between Roth and regular?

 

[FinanceDude]

I am not sure if this is an appropriate question as it is not about ER, but I'll ask anyway.

My mom is making peanuts working at a local factory as her English is not great and she is very conscious about it.  She used to be a teach but she would not attempt to be one now.  Anyway, the company she is working for has this crappy 401K plan where the company only contributes once a year if they feel like it and whatever % they feel like paying.  I was not really aware of it and she doesn't understand all these things.  Anyway, she is contributing 10% but I am thinking it might be a complete waste, should she perhaps open an IRA instead?  Or does she have any other options?  Maybe she could just contribute the minimum (2%) at work and have the 8% go to to IRA? 
What are your thought about it?
Thanks

Depends on her tax bracket.  For most, the 401K is pre-tax, so it lowers the taxes she pays.  Even in the lower tax brackets (10-15%) so it helps you out.  You mentioned it was "crappy"..........is it the lack of choices or the company match that's "crappy"?.  Many companies do what's called "discretionary matching" based on the profitability of the firm.  At least they match.............in my experience most smaller plans do not.............

I'd stick with the 401K, unless the fund choices are horrible..............

 

[astromeria]

Are there high expenses in her 401k? what are the expense ratios of the funds? Are there any index funds? (My last job had no 401k match at all and my job before that had only 1.5% if you put in at least 6%.)

Traditional IRA--you get a tax-deduction for your contributions the year you make them (more beneficial if you;re in a higher tax bracket, but good for anyone unless income is low enough toqualify for earned-income tax credit), but you're taxed later on when you withdraw the money.

Roth IRA--no tax-deduction for contributions, but later when you withdraw the money, it's tax-free

 

[maggieddd]

OK, first off excuse my lack on knowledge on 401Ks, investing, investing terms, and anything related.
By crappy I meant the company's contribution. She had some choices but she doesn't understand the choices and neither do I, so I couldn't help her deciding how she should invest that money.
What does it mean "Are there high expenses in her 401K"? What rations? I don't know what an index fund is. Sorry I do not know anything about this.

 

[REWahoo]

maggie,

Sounds as if you need to do a little reading up to learn the basics. Fidelity has a good introduction to 401k's that might be a good place to start.

http://wps.fidelity.com/401k/about/basics.htm

 

[astromeria]

Don't worry maggie, no apologies needed. We all started out knowing nothing about this stuff and no single one of us knows it all now, either--that's why we band together!

When a financial company manages a company's 401k plan, they don't do it for free--someobody has to pay them. Sometimes the employer absorbs that cost, sometimes they pass it thrugh to the employee. I've had both types. This info may be hard to find--can your mother get hold of a copy of her 401k plan paperwork? It might be downloadable if her employer has a web site with info on employee benefits.

Mutual funds, which are the choices in a 401k plan, also charge a fee called an expense ratio (we sometimes abrreviate that as ER around here). Different funds charge very different fees, and certain fund companies, such as Vanguard, tend to charge much less than others. So if you could priovide a list of your mother's fund choices, we could help you figure that out. We can also help you figure out which choices make more sense than others.

Index funds represent some defined segment of the stock market. For example, a small cap fund is made up of companies with relatively lower capitalization (think of capitalization as something like net worth for companies). Index funds are good because they usually have small expense ratios, have a large number of companies in them (so any company suffering a blow-down in the stock price will have less of an effect on the fund), and don't depend on the decisions of possibly unreliable managers to pick the stocks.

Just start where you are, keep learning a little at a time, and you'll eventually be giving advice to the rest of us

 

[maggieddd]

Don't worry maggie, no apologies needed. We all started out knowing nothing about this stuff and no single one of us knows it all now, either--that's why we band together!

When a financial company manages a company's 401k plan, they don't do it for free--someobody has to pay them. Sometimes the employer absorbs that cost, sometimes they pass it thrugh to the employee. I've had both types. This info may be hard to find--can your mother get hold of a copy of her 401k plan paperwork? It might be downloadable if her employer has a web site with info on employee benefits.

Mutual funds, which are the choices in a 401k plan, also charge a fee called an expense ratio (we sometimes abrreviate that as ER around here). Different funds charge very different fees, and certain fund companies, such as Vanguard, tend to charge much less than others. So if you could priovide a list of your mother's fund choices, we could help you figure that out. We can also help you figure out which choices make more sense than others.

Index funds represent some defined segment of the stock market. For example, a small cap fund is made up of companies with relatively lower capitalization (think of capitalization as something like net worth for companies). Index funds are good because they usually have small expense ratios, have a large number of companies in them (so any company suffering a blow-down in the stock price will have less of an effect on the fund), and don't depend on the decisions of possibly unreliable managers to pick the stocks.

Just start where you are, keep learning a little at a time, and you'll eventually be giving advice to the rest of us 

Thank you very much for you very helpful and encouraging post. I will see if I can get some papers from mom soon. And I will post the information here.

I'll be back soon as I am going to my mom's in a little while and mayeb I can get some info.

 

[Spanky]

Thank you. What's the difference between Roth and regular?

As astromeria has explained, capital gains from Roth IRA is non-taxable while the entire amount of IRA is taxable. The contribution to IRA is tax-deductable while RIRA is not.