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A 401(k) "Margin Call"

Question: My former employer has gone into receivership and I was informed that they will be terminating their 401k program. I would have rolled my 401k over into an IRA a year ago had it not been for a personal loan I took out against it. The outstanding balance is about $9,000.00, or about 35% of the value of the account. (A side note, last year, the loan was, in fact, outperforming most of the other elements of the plan!)

According to the letter I received from the financial services group involved, my options are:
1) Pay off the loan, which is possible, if I tap my home equity, and roll the whole thing into an IRA. or ...
2) Deduct the outstanding balance from the 401k, roll over the un-leveraged balance into an IRA, and pay taxes on the loan amount.

I do have an open line of credit with my bank against my house, with a zero balance, that I could use to avoid the tax consequences.

What would you do? It kind of feels like a margin call, and right now, I could ring my former employer's neck.

Thanks!

Answer: I don't blame you for being upset. You did get the equivalent of a "margin call." You borrowed money to invest, and now the bill is coming due quickly. By the way, I have to say that I am not a fan of borrowing money to invest. I think leveraging up a portfolio like that is too risky for most people. What's more, although I hear the "mantra" that when you borrow from your 401(k) you're borrowing from yourself, I don't find the idea persuasive. It's still an expensive loan.

That said, what do I think is your best option? I would choose to pay off the loan by borrowing on the home equity line of credit--with this critical caveat: That you can repay the loan quickly. If the answer to that is "yes," it'll allow you to roll the whole amount in your 401(k) into an IRA and avoid an income tax hit, as well as the 10% penalty to Uncle Sam.

03/05/08 by Chris Farrell

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Market Turmoil and a Retirement Portfolio

Question: My husband and I both put the maximum into our 401ks, which we now see dwindling (9% loss this year already). Money is tight; our daughter is making the decision about what college to attend; and we do not have a lot in savings ($200k in our 401ks; $50k in stocks). Should we continue to put the max into our 401ks or decrease the contribution during this economic downturn? We both turn 50 this year. Thank you so much for your help. Kary.

Answer: With the drop in the market, I'm getting many variations of your question. The feeling about retreating from the market is understandable. But here's my cautionary note: You're both still young. Taking into account your average life expectancy, you're still investing for another 30-plus years. That's why the main lesson I would take from this volatility and turmoil in the market is to review your portfolio. Are you comfortable with how much you have in stocks, bonds, and other securities? Do you need to get more conservative?

That said, you have a big expense coming up: Your daughter's college education. It's a big deal, and if you want to slightly cut your contributions to your retirement savings in order to help pay for college expenses, that's fine (with me, that is).

Nevertheless, I do believe you should take care of your retirement needs first and your daughter's college expenses second. She can always borrow. The reason for establishing this priority is that you and your husband are nearing the end of your earnings years to save for retirement, and she has a lifetime ahead of her.

03/12/08 by Chris Farrell

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Market Turmoil

Question: I have some money in 401K but it's all vanishing because of the stock market drop. Is it a good idea to ride it out,or transfer the money out of stocks (investment optons) and put it in a safe stable fund? Frank, Satellite Beach, FL

Answer: A bear is mauling the stock market, and the worst may be yet to come. The S&P 500 is down some 17% from its October high, still in so-called correction territory but not all that distant from the 20% decline that traditionally defines a bear market. The desire to get away from the carnage is understandable. (My answer to your question assumes that you're still in the "accumulation" stage of life, working and adding to your retirement portfolio.)

Still, for many investors the first rule of managing money in a downturn seems to be "do no harm." When people try to time the market, the result is usually disastrous. The average saver who sits tight with their retirement money during a bear market typically does much better than the person that gets in and out of the market.

That said, my mantra is to take advantage of this time by figuring out whether you're comfortable with your portfolio. Are you too much in stocks? Bonds? International? How do you wish your portfolio was constructed? Once you've figured that out, then I would create that portfolio over time.

03/14/08 by Chris Farrell

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Questions answered on air for June 7-8

In this edition of Getting Personal, Chris and Tess talk about private mortgage insurance, 457s vs. 403(b)s, removing a co-signer and borrowing from a 401(k).

Listen to this week's segment

Continue reading "Questions answered on air for June 7-8" »

06/07/08 by Richard Core

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