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There's a diary at the top of the rec list, which recommends that you close out your 401K and invest the money locally:

The best way to protect everything you hold dear, the most patriotic act you can make for your country, is to stop contributing to your 401k and IRA. If you really do love your country you would move your life savings into a local credit union or regional bank. You would take the money out of the stock market and away from the oligarchs that have done so much damage to our nation.

The diarist is arguing that local investment through a credit union is a more socially responsible investment. It's a good argument. However, doing as the diarist suggests can expose you serious tax liabilities. There are other ways to responsibly invest your money.


NB: I'm not an accountant, tax attorney or an investment adviser. You take my advice solely at your own risk.

401K withdrawals are considered taxable income. So, if your 401K is large enough, then withdrawing all your money from it could push you into a much higher tax bracket on your 2009 taxes.

Additionally, except for exceptional circumstances, early withdrawals from a 401K are subject to a 10% penalty tax.  

For example, if you're making about 30K/ year, then you're in the 15% tax bracket. If you've got a 401K balance of about 5K or greater, then most of your withdrawal will be in the 25% tax bracket and you'll be paying the 10% penalty on top of that. This means that your tax liability on your 401K withdrawal will be more than double your usual tax rate: it will go up to 35%.

Finally, you would also lose all the advantages of tax deferred investing.

I'm going to give you some socially responsible investment alternatives, that don't hit you with a big tax increase and also let you continue to take advantage of tax deferred investing.

#1. If you want to invest your money locally through a credit union, then find a CU that can act as your IRA custodian and set up an IRA there. After you've set up an IRA at that CU, then do a qualified rollover of your 401K into that IRA.

(IRA = Individual Retirement Account)

I'd also recommend that you make sure your CU that has a good rating here: Bank, Thrift and Credit Union Ratings

#2. Investing locally through your credit union severely restricts your investment options. You will definitely be able to buy CDs (with that money being lent to local businesses). You might be able to buy locally issued municipal bonds (which are hopefully paying for local infrastructure and school improvements). It might also be possible to buy shares on local businesses. Every IRA custodian is different and they offer different investment choices, but these choices are usually very limited.

If you want more investment options, then you should consider opening an IRA at Fidelity and then doing a qualified rollover into your new Fidelity IRA. Yes, Fidelity is a major player in the 401K industry. Fidelity also offers the greatest possible flexibility for investing your money, you're not restricted to investing in the Fidelity fund families. Through Fidelity, you can invest your IRA in socially responsible mutual funds.

Before you invest in a socially responsible mutual fund, you should exercise double due diligence. Carefully read the fund's prospectus and determine if the fund's investment choices are fiscally wise and socially responsible.

Originally posted to xynz on Sun Apr 05, 2009 at 05:15 PM PDT.

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Comment Preferences

  •  I agree, I used to be (13+ / 0-)

    a financial planner and people will have to put a lot more money away to have enough money to retire on.  The average family will need between $1-$2 million to retire and live the way they are now.  You can invest in the stock market and know you aren't serving the "evil" wall street people.  The stock market despite it's faults has averaged 6-10% for decades.  One bad run not withstanding.

    I know it's easy to get pissed at Wall Street for what they did but it doesn't mean you should shoot yourself in the foot to make a point.

    •  No they don't this is a crock. This is a way to (13+ / 0-)

      suck money into the hands of financial planners and staff.  You expenses will drop at least in half if you pay off your house and all your kids are through college.  You need a $1 million to $2 million if you want to have two homes and travel 80% of the time but other than that a $1 million dollars with a 5% return gets you $50,000 before taxes and add your social security to that.  The average income in this country is $44,000.  They use these numbers to scare people and keep them investing money so the high rollers can suck it out the other side.  

      •  What if you want to live well? (3+ / 0-)
        Recommended by:
        akeitz, craiger, Rick Winrod

        Not all of us want to live "average" lifestyles.

      •  not really that's based on maintaining (1+ / 0-)
        Recommended by:
        Rick Winrod

        normal lifestyle and taking into account 3.5% inflation every year.

      •  It very much depends on where you live (2+ / 0-)
        Recommended by:
        neroden, JanL

        retiring on a million bucks is very different where I was born (Muncie, Indiana) versus where I live now (New York City).

        •  You are right, a million dollars in New York (3+ / 0-)
          Recommended by:
          Debby, neroden, Rick Winrod

          would be chump change but most of the country is not New York, San Francisco or Boston. If you had your housing paid off, how much would it take to live...it is about 50% of what you make now.  New York is a particularly expensive place to live because you tend(I did) to eat out quite a bit.  

      •  So (0+ / 0-)

        you are not disagreeing with the $1 million plus number then?

        Furthermore, how likely do you think it is that today's young people will get much of any benefit from Social Security?

        It is better to be safe than sorry...

        •  LOL (1+ / 0-)
          Recommended by:
          Debby

          Yea, when I think safety, I think Wall Street 2009!

        •  Ask the baby boomers that did all the right thing (1+ / 0-)
          Recommended by:
          anastasia p

          invested in their 401k's, saved diliegently for retirement whether they think the market is a good deal.  You are selling crap..please stop unless you can justify what has happened with all those hard earned dollars.  People have been screwed by financial types..come back and talk to us once the regulation has been put in place that will prevent the crap that we have seen over the last 25 years.

      •  You haven't through it through. (1+ / 0-)
        Recommended by:
        mvr

        Investments in an IRA or 401K are before tax investments.

        If they pay off their mortgage, then they have to use after tax dollars.

        Your average income earner is in the 25% tax bracket.

        If they're currently investing $1000/year in their 401K, but they take your advice and use that money to pay off their mortgage, then after taxes they only get $750.

        Let's say their mortgage rate is at 6%. Then that $750 extra saves them $45/year in interest. But the interest they're paying is tax deductible. So at the 25% tax bracket, every dollar that they pay in interest knocks $0.25 off their tax liability. Because of the mortgage interest tax deduction, the $45 in interest actually only costs them $31.25.

        So the $1000 diverted from their IRA/401K to their mortgage has an effective yield of 3.125%

        Now, if they had let the money go into their IRA, then that $750 becomes $1000 again and it's very easy to find a safe investment that does better than 3.125%

        This Space For Rent

        by xynz on Sun Apr 05, 2009 at 07:33:13 PM PDT

        [ Parent ]

        •  Once the house is paid for (2+ / 0-)
          Recommended by:
          slinkerwink, lakehillsliberal

          living is pretty cheap.

          People used to pay off their  mortgages.  And they were able to remain in their homes in retirement.  Sadly, those days will soon end.

          •  This is the truth..you can run all the numbers (1+ / 0-)
            Recommended by:
            neroden

            you want but in an emergency, the best strategy is to live rent free or with low overhead which is what a paid off house is.  If you have an emergency and have to tap that investment before retirement you lose all the benefits and based on how very uncertain our economic situation has been in this country over the last 25 years...between healthcare issues, unemployment issues and other emergencies, the chances that you will have to tap those retirement dollars before 59 1/2 increases every year. You pay the house off and you are in a much better position to weather those emergencies.  

            •  The only 'rent' in a paid-off house (1+ / 0-)
              Recommended by:
              slinkerwink

              Are property taxes and utility bills.  And to some extent maintenance.

              Even in a very high-property-tax state like NY, it's still a lot cheaper than renting.

              -5.63, -8.10. Learn about Duverger's Law.

              by neroden on Sun Apr 05, 2009 at 09:00:56 PM PDT

              [ Parent ]

            •  You can run all the numbers you want... (0+ / 0-)

              ..but in the end, you have to compare apples to apples.

              Using reasonable assumptions, regular contributions to an IRA will be worth more than using the after tax net from those contributions to pay the mortgage.

              When you say:

              If you have an emergency and have to tap that investment before retirement you lose all the benefits

              It shows that you don't even know what the benefits are.

              Firstly, if you have an emergency, you can withdraw the money without the 10% penalty.

              Secondly, the benefit of deferred taxation on retirement investments means that the money you would have had to pay in taxes has been earning you additional interest, dividends or capital appreciation that you would not otherwise have. When you tap the account, those benefits don't magically disappear.

              Additionally, if you have an emergency, then having most of your money locked up in home equity is a serious handicap. The only way to get that money is to either get a home equity loan (which you can't get if the emergency is a lost job or some other emergency that would prevent you from making payments on a new loan) or a distressed sale. A distressed sale is going to result in a serious loss.

              But, if you have money in your IRA, then you can use that.

              Finally, your argument is predicated on the assumption that the after tax payments on the mortgage would be enough to pay off the mortgage. If that is the case, then if that same money had been invested into the IRA on a before tax basis, then the IRA is going to be worth more than the outstanding balance of the mortgage.

              This Space For Rent

              by xynz on Sun Apr 05, 2009 at 10:34:20 PM PDT

              [ Parent ]

          •  Well, there's property taxes (1+ / 0-)
            Recommended by:
            PsychoSavannah

            That's what worries me. I bought my condo to live in for the rest of my life,and my mortgage is minimal and has only five more years to go — but the way property taxes have skyrocketed in eight years, I just don't know. The more the Bush administration cut taxes for rich people, the more all the state and local taxes went up, especially property taxes as schools increasingly struggled. We're paying for the generous Bush giveaways to rich people on the local level.

            Rob Portman: He sent your job to China.

            by anastasia p on Sun Apr 05, 2009 at 09:42:55 PM PDT

            [ Parent ]

        •  Actually it's not very easy (0+ / 0-)

          to find a safe investment which does better than 3.125% these days.

          -5.63, -8.10. Learn about Duverger's Law.

          by neroden on Sun Apr 05, 2009 at 09:02:10 PM PDT

          [ Parent ]

          •  & your math is wrong (0+ / 0-)

            The $1000 is still $750 when you take it out of the IRA.

            If you run the numbers, assuming equivalent tax rates at contribution date and removal date for the IRA, IRAs are precisely economically equivalent to Roth IRAs.  In a Roth, the initial income is taxed and the interest isn't.

            This means that the true comparison is between:
            (1) $750 earning tax-exempt interest
            (2) $750 paying off a loan for which interest is tax-deductible

            Assuming a 6% mortgage, in case (2) you get $31.25 / $250 rate of return: 5hat's 4 1/6 % (after tax).

            So you have to find something safe returning better than 4 1/6%.  That's possible but nontrivial.

            -5.63, -8.10. Learn about Duverger's Law.

            by neroden on Sun Apr 05, 2009 at 09:07:39 PM PDT

            [ Parent ]

            •  No, you're still not thinking it through. (0+ / 0-)

              #1 First of all, assuming equivalent tax rates at the contribution date and the removal date is a faulty assumption. That is assuming that the tax brackets don't move over time, when they do.

              #2 But even if tax rates did remain fixed and the $1000 was still worth $750 when it was withdrawn, you still come out ahead with an IRA. Because up until the moment that extra $250 is withdrawn and paid as taxes, it has been appreciating, earning interest or dividends. These are gains that could not have otherwise been realized.

              It is precisely because of #2 that Roth IRAs and regular IRAs are not precisely equivalent. So your entire argument collapses.

              Finally, it is highly likely that you would pay less tax on a dollar withdrawn from an IRA in the future than if you had paid tax on that dollar when you earned it.

              It works like this:

              The average 44K earner puts the 1K into their IRA, thusly shielding it from the 25% tax bracket. When they retire, they withdraw the 1K from their IRA and pay taxes on it. But since they're earning less than 30K/year, they only pay 15% tax on it and get $850 instead of $750.

              This Space For Rent

              by xynz on Sun Apr 05, 2009 at 10:09:23 PM PDT

              [ Parent ]

      •  A 5% return is hard to get these days (0+ / 0-)

        I'm afraid you need to invest in stocks or risky bonds to get that kind of return right now.

        -5.63, -8.10. Learn about Duverger's Law.

        by neroden on Sun Apr 05, 2009 at 08:56:51 PM PDT

        [ Parent ]

      •  You need 1-2 million.... (2+ / 0-)
        Recommended by:
        slinkerwink, HeadnHeart

        ...if you expect to live more than five years after retirement.  If you expect to retire and then die shortly later, hey, knock yourself out.

    •  The Last "Bad Run" (3+ / 0-)
      Recommended by:
      paradox, neroden, haruki

      Lasted about two decades and didn't end until the economies of every industrial power in the world other than the United States had been largely destroyed by World War II.

      •  yet it did end (0+ / 0-)

        and the averages held

        •  Well (1+ / 0-)
          Recommended by:
          Debby

          If you live to be a 150, sure.

          Fact is if someone had their retirement savings in the stock market in 1928 and was 40 years old, they were probably dead by the time they got back to where they had started, factoring in inflation, sometime in the 1950s.

          And I wouldn't bet that the rest of the world will implode again and leave the U.S. as the only global economic power in the capitalist world for several decades (which, by and large, is what Wall Street gains were built on from 1945 into the 1960s).

          Then there's peak oil and global warming.

          Past performance is not necessarily indicative of future results.

          •  Past Performance (0+ / 0-)

            You can't have it both ways.

            This is not the 1930s--we don't know how all this will shake out.  This could be a very scary recession from which we recover in the next couple years.  Ot this could be a deeper depression than the one 80 years ago.  We don't know yet.  But one thing I do know, the 1930s really provide very little guidance in  analyzing what happens next.

    •  Well, except (1+ / 0-)
      Recommended by:
      slinkerwink

      it crashed and took away half my money in 2001, thanks to some hideously horrendous advice from my Fidelty broker, who basically ridiculed me for doing what in my gut i know I should have. I was investing extremely conservatively at the time, donig all that blah blah blah diversifying that financial "planners' always recommend. I accepted it would never come back in my lifetime and invested even more conservatiely - and lost 255 of that. The stock market is nothing but a casino, and no, it won't come back in our lifetimes. Stay out. Also avoid Fidelity.

      Rob Portman: He sent your job to China.

      by anastasia p on Sun Apr 05, 2009 at 09:38:13 PM PDT

      [ Parent ]

  •  Isn't there a recent law that allows you (2+ / 0-)
    Recommended by:
    paradox, Rick Winrod

    to withdraw money from your 401K without a tax penalty?

  •  Heh. (2+ / 0-)
    Recommended by:
    bigchin, Rick Winrod

    10% penalty on what's left in the 401K, plus higher taxes?

    I think I might risk it.

  •  Thanks for correcting an irresponsible diary. (5+ / 0-)

    You may have saved somebody some cash.

    "30-plus Republicans have irrevocably tethered their wagons to the Bachmann crazy train. Excellent." -- Bob Cesca

    by Inland on Sun Apr 05, 2009 at 05:41:30 PM PDT

  •  Recommending Fidelity? (3+ / 0-)
    Recommended by:
    pletzs, craiger, Roger Fox

    A mutual fund? They might as well stay in the 401K. Same pooled investments; some even use Fidelity.

    You are right about the tax consequences. And, I don't think you can roll your 401K over if you are still working at the same place. (But I'm not positive about that.) But if you aren't, there are no tax consequences to take control of your money.

    One thing I am sure of, however, is that 401Ks are vulnerable because they are forced allocation into the mediocrity of mutual funds run by hopeless managers.

    If you can roll a 401K into an IRA, that's a great thing. IRAs are a personal tax-free savings account. I wouldn't open one at a bank, however. I'd use a custodian for a self-directed IRA. I did that and just took it a step further.  I turned my IRA into a corporation and I invest by writing checks to buy whatever I think is a good deal. Even a taco stand, if I want to.

    With a self-directed retirement account you can make profitable investments, such as cheap rental property that provides a cash flow.

    Money is supposed to work for you.  

    Take it back.

    •  It very much depends on your situation (7+ / 0-)
      Recommended by:
      paradox, akeitz, mvr, Lying eyes, neroden, Pluto, BYw

      where I work, I get 100% match for the first 4% of my salary I contribute to my 401K each year; it would therefore be foolish not to contribute at a minimum that 4%.

    •  I am actually thinking about doing this. I (3+ / 0-)
      Recommended by:
      akeitz, xynz, Pluto

      rolled my money out of a 401k at Fidelity and put it into a CU IRA temporarily but I am planning to look at Guidant for a self directed IRA and maybe buying investment property. Two pieces of completely paid for rental property will provide as much monthly income as $500.000 investments at 5%.  

    •  Just because they're using Fidelity... (2+ / 0-)
      Recommended by:
      neroden, Pluto

      ...as their custodian, doesn't mean they have to invest in Fidelity funds.

      I rolled a 401K over into a Fidelity IRA and I have complete freedom to invest in almost anything. In this IRA, I bought shares in a NZ electrical utility that generates about 60% of their power with hyrdro and geothermal.

      This Space For Rent

      by xynz on Sun Apr 05, 2009 at 07:07:16 PM PDT

      [ Parent ]

      •  That's Good to Know (1+ / 0-)
        Recommended by:
        neroden

        Many folks with 401ks are told they can only invest in funds or money market (funds).

        •  I disapprove of funds.... (1+ / 0-)
          Recommended by:
          Pluto

          You pay a fee to the fund manager as well as to the brokers and the company managers.  That's why I buy stocks and bonds directly.

          If you don't have time to investigate individual companies directly, buy index funds (very low fees).  I don't think there are bond index funds though....

          -5.63, -8.10. Learn about Duverger's Law.

          by neroden on Sun Apr 05, 2009 at 08:59:16 PM PDT

          [ Parent ]

    •  some definitions of terms (2+ / 0-)
      Recommended by:
      xynz, Pluto

      "IRA" - a type of tax-deferred investment account.

      "401k" - another type of tax-deferred invesment account, offered through an employer. Almost identical to an IRA, except with different contribution limits. When you leave an employer you can choose to "rollover" your balance to your own "Rollover IRA" account.

      "IRA (or 401k) Account" - an account at a brokerage (on your own or via an employer). You generally invest in mutual funds, but some might restrict you to a few choices. Some might give you more control.

      "Brokerage" - a company that offers investment services to customers. Fidelity is one. There are many others. Fidelity is also such a large company that they offer their own family of funds.

      "Mutual Funds" - things you can choose to direct your investments within your IRA or 401k. Mutual funds can be actively or passively (computerized and super-cheaply) managed; they invest in stocks, bonds, or "money market" (super-short term bonds that are pretty much the same as cash).

      ---

      Switching from an employer's 401k to a individual Rollover IRA at Fidelity (or any other number of brokerages) might give you more control and/or better investment options, but may cost you a small annual amount in fees that your employer subsidizes. But if you're concerned about who your money is going toward, AND you feel like taking the time to research, you may well be a lot happier in charge of your own Rollover 401k.

      Everyone chill out -- we got your back, PRESIDENT BARACK OBAMA

      by Lurtz on Sun Apr 05, 2009 at 08:09:43 PM PDT

      [ Parent ]

  •  Your logic and facts (11+ / 0-)

    are no match for my populism and demagoguery!!

  •  Unless they changed it the last year or so, the (1+ / 0-)
    Recommended by:
    akeitz

    fee for early withdrawal is for money taken out before 59 and 1/2 years of age.

    No matter when you take your money out you will pay ordinary federal and state taxes on every penny you take out.

    Another alternative is to buy stocks you think will do best from a brokerage and get a certificate in your name for each stock you buy.  

  •  Much better diary, I'll rec this one (6+ / 0-)

    I didnt think much of the other diary, so much for the rec list.

    Suggesting that folks should pull their money out of stocks and 401ks is alarmist and very likely counter productive, and the idea that pulling your money out will inflict pain on those who caused your pain, is just infantile.

    On a large scale a contraction in capital will cause more problems than we have now. Possibly in tune with the "Obama is going to take my guns away" people, many seem to be concerned...

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Sun Apr 05, 2009 at 05:55:29 PM PDT

  •  I don't know if this is craziness but I was (1+ / 0-)
    Recommended by:
    freesia

    thinking of investing in my property by doing some much needed home improvements.  My yard is bringing down my neighbors housing values (my conjecture) and the ceiling in the basement was destroyed by my cat.  Plus, I am looking at a new air conditioner and furnace pretty soon.

    Oh, in case you are wondering about the cat, she was locked in the next room and climbed up to the ceiling and tried to escape that way.  She found herself trapped and broke in the ceiling, destroying about ten blocks.

    But, as for my property, I felt that that would increase my house's value and spend some money at the same time.

    •  Ceiling cat (4+ / 0-)

      lives in your house???
      -See the pootie and woozle diaries...

      •  Really wish alliedoc had video'd this! (2+ / 0-)
        Recommended by:
        JanL, freesia

        OK, I admit that as soon as we get into these discussions about personal finance and financial security I briefly recall the pin money they call my salary and my "piquant" 401 k (which is balanced, thank goodness, by my having no wish to retire and also having a fair amount of experience and skill at poverty--I mean, "involuntary simplicity" and I can't help it--my mind goes back to the pooties.

        We work in the dark. We do what we can. We give what we have. Our doubt is our passion. Our passion is our task. The rest is the madness of art.

        by cultural worker on Sun Apr 05, 2009 at 07:45:36 PM PDT

        [ Parent ]

  •  I moved everything to a Credit Union (1+ / 0-)
    Recommended by:
    slinkerwink

    I took my money out of Wells Fargo and paid off all my non-credit union credit cards.  My mortgages, savings, etc are with my credit union.  I was fed up with countrywide years ago.

  •  You can roll everything into (2+ / 0-)
    Recommended by:
    slinkerwink, neroden

    a "self-directed" IRA and use it to buy investment Real Estate.  With prices where they are at and interest rates where they are at, it is a great time to buy a piece of investment property AND help clear up the foreclosure backlog, thus improving the economy.

    Isn't it nice to have a President who is smarter than most of us?

    by Former Chicagoan Now Angeleno on Sun Apr 05, 2009 at 08:31:42 PM PDT

  •  This feels like a Fidelity infomercial... (0+ / 0-)

    just sayin'.

    Wouldn't a Charles Schwab account be even better, with no management fees and such?

    As for me, I'm out of the casino, focusing on building my business and shopping for oversold commercial property.  Screw Wall Street, generations before us got rich without them.

  •  Dumb idea, don't liquidate your retirement (0+ / 0-)

    now.

    Look, the market ALWAYS returns after a big fall like this.

    Wait till prices go up further, then take the money out.

    troll rated for football!!!

    by superHappyInDC on Sun Apr 05, 2009 at 09:11:55 PM PDT

  •  Money market funds are a safe option (0+ / 0-)

    If you're really paranoid try something that's made up of Treasury notes like FDRXX. These days any money market will do because the US Treasury and Fed will backstop anything and everything related to money market funds. As has been stated don't liquidate or withdraw your 401k until you are retired and need the money. You can always reinvest later without the tax hit.

    •  oops (0+ / 0-)

      That should be FDLXX :-) or VMPXX. I think both are closed to investors but no matter any decent mutual fund works. Disclosure: I presonally moved my entire 401k to FDLXX at the end of August.

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