IRAs Offer More Safety and Freedom Than 401ks.
Should you roll over now, even if you’re still working?
I recently had a coaching session with someone who had just retired. Prior to retirement, she had attempted to get the majority of her money safe in what seemed like the best option – a so-called “Capital Preservation” fund. However, when we looked at the performance of the fund, it was losing money on par with the S&P500. Since the safe side is where you are supposed to keep your money (not lose it), the plan was not doing what it advertised or what it should be doing. I’ll explain why that is below. However, there are plenty of questions to answer about 401ks, IRAs, HSAs and whether or not you can (or should) roll over.
Invest 10% of Your Income into Tax-Protected Retirement Accounts (Not Just Your 401k)
Your wealth plan could ideally be a combination of accounts. The sooner you start with this, the better. Consider contributing up to your employer’s match into the 401k (free money). If you’re healthy, don’t spend an arm and a leg on health insurance. Open a Health Savings Account, with a high deductible health insurance plan. Americans can save thousands annually (or more), while also developing your best long-term health care plan. Also, consider maxing out your Roth IRA contribution each year. The IRA could be where you invest in hot industries, companies or countries that are not offered in your 401k. IRAs typically offer thousands of investment choices.
Learn more about how Health Savings Accounts can save you thousands annually, and how proper diversification and regular rebalancing earns gains in recessions at our Investor Educational Retreats. The next one is Oct. 8-10, 2022.
Capital Preservation Plans are Losing Money
Capital Preservation and bond funds are losing money because there is an inverse relationship between bonds and interest rates. Normally when the economy weakens, the Federal Reserve Board cuts interest rates to boost economic growth. That makes existing bonds (that are paying a higher premium) more valuable. Unfortunately, in the current cycle, the Federal Reserve Board is rapidly increasing interest rates – something that reduces the value of existing bonds. That means that most bonds and bond funds are losing value.
Credit risk is also a problem. The yields are too low to compensate for the risk or the losses that bond investors are bearing. Currently, over half of the S&P500 is at or near junk bond status. You can learn more about why bonds, bond funds, annuities and money market funds are all vulnerable to capital losses in my blog, “What’s Safe in a Debt World.” (Click to access.)
So, how can you protect your 401k from losses?
IRAs Have Better Safety Measures
Some brokerages offer FDIC-insured cash. While you might not be earning much, capital preservation is important on the safe side of your portfolio.
IRAs Have Greater Freedom
Diversification and Target Industries
Most 401ks have very limited options. You might only have a few large caps, growth, value, international and bond funds to choose from. Getting access to industries that might perform better during a weak economy is almost impossible. Getting safe is also an issue, as I’ve already mentioned. IRAs might have a universe of industries, countries, individual stocks and size/style options, along with better strategies for capital preservation (depending upon the brokerage you choose).
Three IRA Tips
1. I like to put my hot industries and stocks in my Roth IRA. According to ProPublica, Peter Thiel has over $5 billion in his Roth IRA. That’s the power of compounding without paying capital gains, with the added benefit of not having to pay income tax when the money is withdrawn.
2. You should be able to keep contributing to your 401k even if you are doing annual rollovers from your 401k into a Roth IRA.
3. Pages and pages of holdings is often not as diversified as our simple, 10-fund pie-chart strategy. It’s important to know what you own, and how well-diversified you truly are, rather than having blind faith that hundreds of holdings are protecting and diversifying you. I’ve done a lot of 2nd opinions on these types of plans. Most consist of large caps with bonds, are missing hot industries and proper protection, and are vulnerable to losing half or more in recessions.
You may be able to do a rollover even if you’re still working. Some employers make this very easy, offering a “self-directed” option. The clickable link might be so small that you’ve overlooked it in the past.
If your 401k doesn’t offer a self-directed option, then ask your Human Resources executive if you can take an “in-service” distribution. You must make sure that you get the rollover done in a 60-day period in order to qualify for a tax-free distribution. It might take some convincing to get this done. (If you are 59 ½ or older, persistence could pay off.) Be sure to follow the IRS rules about rolling over your 401K into a self-directed IRA.
If you don’t have a self-directed option and your employer is refusing an in-service distribution, then consider taking a personal loan from your 401k. You’ll need to pay it back within 5 years in order to avoid the distribution penalty, or to use it to buy a home. However, if a loan allows you greater freedom in keeping your money safe, it might be worth crossing the t’s and dotting the i’s to do it.
Choosing the Right Brokerage
You’ll need to select a brokerage and open up your Roth IRA for the 401k rollover. In general, it’s easier to start the process at the place where you want your money to end up, rather than start with your employer. The person who is getting your money is likely to be a lot more helpful than the person who is losing it. Below are a few things to consider when selecting the brokerage that is right for you.
So What is Safe in a Debt World?
Currently, 2-year Treasury Bills are paying a higher premium than 10-year bills, at about 3.5%! There’s a 9.62% Treasury I Savings Bond. However, there are also some safe, income-producing hard assets that you can purchase for a great price that most people should be considering now. Learn more in the What’s Safe section of The ABCs of Money 5th edition and at our Financial Empowerment Retreat (online Oct. 8-10, 2022). We spend one full day at the retreat offering strategies for safety.
It’s difficult to get properly protected and diversified in a 401k. Consider setting up an HSA and Roth IRA, in addition to your 401K to have greater freedom and control over your money. Also think about rolling over your 401k into a tax-protected IRA (or taking that personal loan from it) that offers FDIC-insured cash on the safe side, and a universe of options for your at-risk allocations.
No matter what kind of accounts that you have, it’s essential to set-up a diversified plan that is properly protected. Our books outline that time-proven, 21st Century strategy, while our retreats ensure that you learn and implement the plan. Buy & Hold is a last-century strategy that has been a disaster in the 21st Century (stagflation). Over the extended secular bull market, it’s been easy to earn gains. That is unlikely to be the case in the years to come. It’s easy to win in a bull market and easy to lose (a lot) in a recession. If you’re interested in an unbiased 2nd opinion of how well protected and diversified your plan is, email info@NataliePace.com with 2nd opinion in the subject line for pricing and information.
If you're interested in learning 21st Century time-proven investing strategies for protecting your wealth and managing the bear market from a No. 1 stock picker, join us for our Oct. 8-10, 2022 Financial Freedom Retreat. Email info@NataliePace.com to learn more and to register. Click on the banner ad below to discover the 18+ strategies you'll learn and master, to get pricing information and to read testimonials Get the best price when you register with friends and family. Register now to access your free 4-part Protect Your Wealth Now webinar that will get you started immediately.
Natalie Wynne Pace is an Advocate for Sustainability, FinancialLiteracy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.