A 401(k) Rollover Question October 3, 1996February 6, 2017 Lately, we’ve been talking about how to allocate your 401(k) assets, and you’ve taught me a thing or two. Now comes this question from a couple switching jobs: “We plan to roll over our 401(k) to an IRA account at [a well known $18-a-trade deep discount broker named after the Roman goddess of grain from which comes the word “cereal” (and also the name of the first asteroid to be discovered), but I don’t want to name it, lest I appear to be plugging that firm, toward which I have warm feelings, but from which I wish to maintain my editorial independence — A.T.]. “We called and talked to the fund manager of our previous employer and were told that if we rolled over to an IRA account, no tax will be withheld and no penalty will be applied. Is this true? Is there any limitation such as gross income or $ amount that can be rolled over in one year? Is there anything that we need to watch out for? “Our concern is that if our combined income is about 100K, can each of us roll over about 30K this year without getting any type of penalty? Please do not include my name or email address in your reply.” The information you got is correct. The IRS places no limit on the size of a retirement account that can be rolled over from a company plan, once you leave your employer, to your own personal IRA rollover account. (Your other good option would be to roll the money over to your new employer’s plan, if you have a new employer, and if its plan accepts rollovers.) Incidentally, you are wise to be rolling this money straight from your retirement fund to the IRA, rather than having it paid to you first and then passing it on. If you did that, 20% would be withheld for taxes (which you would not recoup until tax-refund time) and you would also run the risk of somehow missing the 60-day deadline to complete the rollover. Then you’d have to pay taxes and (if under 59-1/2) a 10% nondeductible penalty. There are just a few arcane exceptions to what you can rollover, but these don’t apply to you, as best I can tell. The only one remotely worth mentioning is that voluntary after-tax contributions you may have made to your 401(k) cannot be rolled over. Very few people make these extra contributions, but many retirement plans do allow them. For anyone who did make these extra contributions, that money comes back to you free of tax (because you already paid tax on it). But the money those after-tax contributions earned remains happily under the shelter of the IRA rollover. Tomorrow: The Last Word (for Now) on 401(k) Strategies
More on 401(k) Allocation October 2, 1996February 6, 2017 Recently, I suggested that putting all, or even many, of your 401(k) eggs in the your-own-company-stock basket — as an alarming number of participants seem to do — is dumb. (Would you advise a friend to put his or her entire retirement nest egg in your company’s stock? Then why do it yourself?) According to a survey cited by The Wall Street Journal, that’s where 42% of all 401(k) assets sit. “Regarding your comments on 401(k) allocations,” writes Dennis Faucher of Hewlett-Packard, “did you consider that the percentage in company stock could be high because of aggressive company matching or discounts on stock purchase? This is no excuse for not being diversified, but may be one of the reasons that the percentage is so high.” Well, no, I hadn’t considered this. See how self-employment can limit one’s experience? Dennis and others of you who were kind enough to point this out are certainly right: this twist must certainly skew the percentages somewhat. As John McInnis explained: “Your column on 401(k)’s is right on the money — people do have too much invested in their company stock. But you and The Wall Street Journal missed an important point. Sometimes we have no choice. Take my own 401(k) as an example. I invest my contributions 100% in an equity fund. Yet when I got my latest statement, I found that roughly one-third of my retirement stash is invested in company stock. How can this be? Simple. My company (Sanders, a unit of Lockheed Martin) matches contributions 60% on the dollar to the first 8% of salary. A great deal! But there is one catch. The match is made entirely in company stock. We have no choice in this, nor can we reallocate it later on. This, coupled with the fact that the stock has done quite well lately, means that I (and probably most other employees here) are overweighted in company stock. Short of leaving the company, I can see no way out of this situation. I suspect that a lot of other big company 401(k) plans are similarly run.” Tomorrow:v A 401(k) Rollover Question
More Buffett October 1, 1996February 6, 2017 “What I don’t understand is why more investors of the long term and hold type don’t just put a majority of their holdings (particularly Keogh and IRA) into BRK and go to sleep for ten years. You have the best money manager money can buy for free. Does anyone really doubt that he will do better than the historical average of 10% growth long term in equities? Are there really more than a handful of money managers who have done as well? The stock has always sold at a premium and always will, so accept the fact and buy it. To me it’s simple: if you think that (1) you can pick stocks better than Buffett, (2) you know he will die soon, or (3) you have found someone better than him to advise you than stay away from BRK. Otherwise load up and wait.” Well, that one’s a lot harder to answer than the question from a couple of weeks ago about shorting BRK. In the first place, if you do this at all, I disagree it’s “particularly” for a Keogh or IRA account — quite the opposite. Because BRK pays no taxable dividends, whatever benefit you get from buying and holding will come in the form of long-term capital gains — sheltered from tax until you sell, and then taxed at what’s likely to be a favorable rate. Whereas the same gain within a Keogh or IRA will be taxed as ordinary income, at the full rate, as you withdraw it. I’d use the tax-sheltering power of my Keogh or IRA to shelter the kinds of investments that generate taxable income (including capital gains you actually take every so often, as opposed to those that just mount untouched for decades), and hold investments like BRK in my regular account. But what of the broader question? I certainly wouldn’t dispute Warren Buffett’s superior skill. But by this logic, NO price is to high to pay for BRK. It may be instructive that Buffett himself was selling the stock, in effect, earlier this year — not his own, $100 million of new stock . . . but since he controls half the existing stock, it’s at least half like selling shares of his own. He had a lot of good reasons — for example, at $32,000 a share, giving a child even one share exceeds the annual gift tax exemption — and so he wanted to issue a new class of shares in piddly little $1,000 chunks, 30 of which would equal a “real” share. It was only a tiny amount of stock being sold (the overall company was being valued at $30-odd billion, so $100 million was spare change). Still, the smartest investor in the world was selling Berkshire Hathaway stock. So what did the market do? It immediately bid the price of BRK up another $2,000 a share. If Buffett was selling, the market figured, it must be yet another brilliant move for Berkshire Hathaway, and so yet another reason to buy. After hitting $38,000 a share, the stock is back down to around where it was when he issued the baby shares at $1,000 each (and they, too, are selling around the same price). Can we assume it’s always a good buy and will “always” sell at a premium? Two events that could shrink that premium are Buffett’s eventual retirement and, perhaps more imminent, a cut in the capital gains tax. If you owned $5 million worth of BRK, almost all of it profit, might you not be tempted to take part of your profit if the tax bite shrank? At least for a while, eager sellers might outnumber eager buyers, damping down the premium. In sum, if I did this at all, I wouldn’t put “a majority” of my holdings in BRK as my correspondent suggests. But maybe that’s because I feel like such an idiot for never having put ANY of my holdings there. Had I invested $10,000 in the stock when I first wrote about Warren’s brilliant annual reports, in a sort of “book review” for Fortune, I would have a cool million now. A hundredfold gain. Oh, woe! But for that same result to hold for the next couple of decades or so, my missed million would have to turn into a missed $100 million — and the total market value of BRK would have to grow to $5 trillion. Somehow I don’t see this happening. I know, I know: you’d settle for a tenfold gain over 20 years. And do you know what? BRK just might produce it. That kind of appreciation works out to an impressive but not other-worldly 12.2% a year compounded. But I wouldn’t put all my eggs into even the Buffett basket, and the eggs I did put there would come from outside my Keogh or IRA. Tomorrow: More on 401(k) Allocation