My Journey 401K to IRA Investment

💰 Everyday Islamic Finance Savings & Investing
#1

I work in IT, live in U S A. I did lot of contract work with different companies. I was doing 401K in my previous job to get tax benefits plus to get the company match (Free money). In years the money grows.

At the end of the year when you do your tax return you can open & contribute $6000 towards Traditional IRA depends on your income. There are tax refund benefits to it. Do your tax return without 6K contribution & see what your tax refund $$ is then add 6K for IRA & see how much more you are getting in Tax refund if it make sense for U do it.

Tip: You can contribute in Traditional IRA up to the tax deadline April 15th for previous year

E.G: For 2020 tax year, you can contribute 6K in IRA up to April 15th 2021 tax deadline.

Rule: The 6K need to be deposited in IRA by 15th April to avoid IRS headache, you can’t take out money until you turn 59.5 years because it’s tax free money the same rule applies to 401K at work. If you take out money there will be penalty.

Note: I am not a tax advisor but over the years learn a lot to take advantages

Let me come to my point the reason I explain all above b/c I want to contribute & want to help out

At Present: I transfer all my previous years 401K job money to my existing Traditional IRA. In 401K the company only gives you limited option to invest in 10/20 mutual funds. In traditional IRA I have 8700+ stock option to invest I can buy & sell stocks what I prefer, when I want, Intraday stock trading etc.

Alhamdulillah I am happy & doing great with my Investment by myself. I am glad I did it.

I would only re-commend this option if you know what you are doing & you are confident in investing. If you believe your 401K is doing better and don’t have experience don’t worry but not to forget the overall market is great that’s why 401K is going up too there is no guarantee you can lose money in 401K too. I lost 30% in my 401K in March/April 2020 due to Covid & then back up.

401K: you can always take out 50% loan from your current job 401K not previous 401K. The maximum amount is $50K just another way to utilize the money

I want to share my experience with good intention so someone can benefit out of it.

Allah say’s do your part & leave the rest up to him & he will reward you. Giving good advice to others is also a Sadaqah. May Allah make it easy for all of us don’t forget when you make money Donate for good help out others the money will have Barakah & it always grow.

It’s your call, your money your decision.

8 Likes
Starting off 401k
#2

salam Umar I also live in the USA and have the desire to work in IT and Business Intelligence, The IRA give your more autonomy and power but what about company match , arent you losing out?
and which is better Roth or Traditional?

Sincerely,
osama Jaffery

#3

I think he is saying he moved his previous 401K to IRA. He is likely contributing to 401K at current employer and get the potential match.

Here is what I did when i started my career

  1. contributed to 401k atleast till the match. 6%.
  2. contributed to Roth IRA (max)
  3. contributed to wife’s Roth IRA (max)
  4. taxable investment account ( but i should have maxed out 401K first)

Roth IRA is very powerful.

There are more advanced topics such as Backdoor roth ira (where you can contribute to roth ira despite exceeding the roth ira limit) and mega backdoor… topics for another day.

5 Likes
#4

Yes I moved my previous job 401K to IRA. I am contributing max at my company 401K & get my company full match. don’t want to leave the money on the table.

I am working full time so I contribute at work in 401K. My wife stay home so I do every year max: $6000 in IRA for her.

IRS 401K Contribution limit:

  • Employees can contribute up to $19,500 to their 401(k) plan for 2021
  • Anyone age 50 or over is eligible for an additional catch-up contribution of $6,500 in 2021.

Total annual contributions to your traditional and Roth IRAs combined cannot exceed:
$6,000 in 2021 (under age 50)
$7,000 in 2021(age 50 or older)

I hope this clarifies & explain

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#5

@umar1 Do look into the concept of Backdoor Roth and mega backdoor roth. Also, you may be able to contribute more than the $19.5K limit on 401K. It depends on the employer. Call the HR /401K provider if that is possible. The extra contribution is not pre-tax but on an after-tax basis.

#6

Salam Umar, what you have done is great. Save as much as you can early in your career can pay off big in the long term. My 15K of personal investment in early 2000s plus 8k company match are now worth 100K alhamdulilah. I had a non halal 401K then but then rolled over to Amana funds inside Fidelity Brokeragelink which my current job has (otherwise I’d roll it over to an IRA that has access to halal funds). I paid out of non retirement savings to purify on behalf of gains made until the rollover (over estimated for peace of mind).

However, about this comment:

“would only re-commend this option if you know what you are doing & you are confident in investing. If you believe your 401K is doing better”

You still can do this if you can decide on an allocation of halal mutual funds and ETFs and just stick with that. You don’t need any expertise, just patience in sticking through the market roller coaster ride. That is until and unless there is a halal target date fund option in your 401K :blush:

#7

Comment was about investing the 401k funds into stocks. The caution was its retirement funds and unless you have the skills / expertise / knowledge to invest in individual stocks and manage a portfolio ( and the stomach ) , passive funds or ETFs is a better route.

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#8

Okay I may have misunderstood, but yes that makes sense.

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#9

Update New bill passed shuts down this backdoor:

Starting Jan. 1, 2022, the legislation would prohibit use of a type of Roth conversion known as the mega-backdoor Roth conversion. Regular Roth conversions would still be allowed, although starting in 2032, they would be off-limits for people with higher incomes.

Source: A Popular Tax Trick for Savers, the Mega ‘Back Door’ Roth IRA, Is Eliminated in House Bill - WSJ

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#10

this legislation is proposed but still not approved.

1 Like