■ Laid off with 401(k)
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Q&A with Suze Orman
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By Suze Orman
I am a 53-year-old single woman with no children. I just looked into a long-term healthcare
insurance plan. The plan that I [am planning
to] choose is to be paid off by the age of 63
instead of lifetime pay. My question is, should
I look for a plan that will give me cash back
if I do not need the insurance in my lifetime?
I do understand it will cost more, but is it
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LONG;TERM;CARE insurance (LTCI) is vitally
important, given the expense of quality care and the
fact that people are, on average, living a lot longer.
I checked in with my go-to expert, LTCI
consumer advocate Phyllis Shelton, for her take on
what you’re considering.
The limited-pay option that will have your premiums polished off in 10 years can be a terrific way
to go. By paying off your premium costs in 10 years
you will avoid the nasty surprise many current
LTCI policyholders with ongoing payments are
encountering: Their premiums can rise—and rise
sharply. A 10-year plan insulates you from that risk.
The one important caveat is that you (and
everyone else) should buy a policy that includes an
annual inflation adjustment, for the simple reason
that costs rise over time, and you are buying something today that you may not use for 20 or 30 years.
A limited-pay plan is going to be more expensive
than a longer premium schedule, and adding inflation coverage will increase it even more. If you can
afford both limited-pay and the inflation option,
you will be in great shape.
One way to save money is to skip the cash-back option. There is no cash back in your life. The
“return of premium” would be paid to your heirs
after your death. And, as you note, it’s an expensive
option. Better to use any extra money to make sure
your policy includes an inflation rider.
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lying fees for the investments offered in their plan.
What qualifies as low-cost? Well, plenty of ex-change-traded funds (ETFs) have annual expense
ratios below 0.30 percent, and some ETFs cost just
half that much. Meanwhile, the average annual
expense ratio for actively managed mutual funds is
around 1 percent, and some charge 1. 5 percent or
more. If you could tell me you got better performance for that extra fee, I might be swayed. But
study after study shows that the majority of actively
managed funds on average fail to beat their benchmark index. And even those that do outperform in
one year have a very hard time consistently outperforming. Cheaper is better. I think you may find
you can get cheaper options by moving your
401(k) into an IRA and then investing the IRA in
If you do decide to move your money, please
make sure you do what is called a “direct rollover.”
The direct part means the money never touches your
fingers: It is transferred from your existing 401(k) to
the discount brokerage or fund firm you open your
IRA with. Taking the direct route ensures you will not
run into any tax bill when you make this move.
I was recently laid off and I had a 401(k) loan.
The balance [still owing] is $16,500. What is
the best way to handle this balance? I don’t
have cash to pay it off right now, and the
payoff date is December 31, 2012.
I was recently laid off from my job.
Should I move my 401(k) with a balance of
$200,000 to an individual IRA? I currently
do not have any retirement account other
than my 401(k).
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IT DEPENDS. If you are absolutely sure that your
current 401(k) plan has a solid lineup of low-cost
mutual funds—including index funds—staying
put is fine. But you need to take the time to make
sure you’re not paying a lot to be in those funds.
The good news is that, as of August 2012, all plans
must give participants a breakdown of the under-
NOVEMBER 2012 ;e Costco Connection 19
IF YOU DO NOT repay the loan it will be treated as
a withdrawal. That means you will owe ordinary
income tax on the entire amount, assuming you have
a traditional 401(k), not a Roth 401(k). Withdrawals
made before the age of 59½ are also subject to a 10
percent early-withdrawal penalty, though that penalty is waived if you are at least 55 when you leave an
employer and make a withdrawal.
Add it all up and you could end up owing at
least $3,000 in taxes and fees (it all depends on what
your effective tax rate will be this year).
Your situation is exactly why I caution everyone
to never take a loan from their 401(k). In the event
you are laid off (or take another job), you are typically required to repay the loan within three months
or so to avoid any tax bill (and the 10 percent early-withdrawal penalty when applicable). Moreover,
raiding your retirement savings should always be an
extreme last resort. You will need that money in
retirement, after all. And it’s important to know that,
even if you were to ever declare bankruptcy, the
money in your 401(k) is protected. Just another reason to always leave your 401(k) money untouched
until retirement. C