The 101 on 401(k)s

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Navigating the financial and economic repercussions of the times that we're living in means we need good advice and guidance on the best financial practices. Ana Flores, founder and CEO of #WeAllGrowLatinas, sat down with Ramona Ortega, Esq., founder of the personal-finance platform My Money, My Future, to get some quality financial advice.

Ana Flores: Ramona, you shared something on the My Money, My Future Instagram page that really stood out to me. It was a financial survival guide for COVID-19 and four money tips. The No. 1 tip was: “Don’t touch your 401(k).” That's what I was thinking about doing — cashing in my 401(k)! Ramona, put us straight: Why should we leave our 401(k)s alone?

Ramona Ortega: We're getting a lot of questions about 401(k)s and investing. Do not touch your money right now if you are in a 401(k). You do not want to touch it because if you do, you're going to be selling low. If you've been in a 401(k) for a year, you've been buying stocks and they've been high, you've been making money, things have been going up. We had been in what we call a bull market, which means that the stock market is going up. But now we are in what they call a bear market, which means stocks are going down. So you don't want to be selling low — that's the worst thing that you could be doing. Hold, don't touch it, do what you've always been doing. It is going to go up over time.

There have been a couple of major financial crises; the last one was in 2008. People who stayed in the market did well — they recovered. That is what you want to do. If you have a steady job and you're going to continue working, make sure you are maxing out your 401(k) and getting the match from your employer, because that's free money. Right now, you are, in essence, buying stocks at a discount. And that's exactly what you want to be doing. So do not touch your 401(k); now is not the time to make any decisions around it.

What you do want to do, though, is make sure you're looking at your portfolio. I suggest that you download your statements and look over them. Ask yourself: "Okay, where should I be? Am I really in the right mix of portfolios? Where's my money being invested?” Take a look at that and talk to your 401(k) manager.

Most 401(k)s are managed by Fidelity or one of the big money managers. You can get on a call with one of them and talk about where your portfolio is invested. And if you need to make any decisions, you can do that in the future. I would say three to six months out.

"If you want to invest outside of your 401(k), make sure you have enough cash on hand."

If you want to invest outside of your 401(k), make sure you have enough cash on hand. I know people have been like, "I have money; should I be investing it?" Well, that money should first be put toward your emergency savings. Make sure you have at least three to six months of expenses saved, especially if you are a freelancer or have your own business. My concern is that big companies are going to be pulling back on any kind of contract. So if you are a consultant or a freelancer, be careful. You don't want to spend your cash or put it into the market right now, because the market could go really low. It could go lower than it is now; we don't know.

AF: If you don't have that 401(k) yet, should you get one?

RO: Absolutely. I want to differentiate between a 401(k) and a Roth IRA. They're all investment accounts. A 401(k) or 403(b), for example, are accounts that are offered by an employer. That's pretty much the main difference, whether you are employed by a company. And, by the way, the company has to offer a 401(k). Not all companies do, especially small business owners. But if you are employed, you should be able to access a 401(k) program, or, if you're at a nonprofit, a 403(b).

So, yes, if you have not started investing, you should do that. It's tax-deferred, which means it comes out of your check automatically before you are taxed. You do have to pay taxes when you withdraw it in retirement, but you don't pay taxes on it now. You want to be maxing that out, especially if you get a match from your work. Match means that your employer will also put some money into your account, generally up to about 3 percent. Be sure to ask your HR person.

If your employer doesn't offer a 401(k) or if you don't have a full-time job or a regular job that offers one, then you want to open up an IRA. An IRA comes in two flavors: One is the Roth and one is a general IRA. I prefer Roth, especially for younger people.

I like them for two reasons. One is, with a Roth IRA, you are able to withdraw money without penalty. You cannot do that with a 401(k). That money is locked up until retirement, unless you pay additional penalty fees. A Roth is your money, it is after-tax, so it is going to grow tax-free, and you are able to withdraw the balance without a penalty. Again, you shouldn't withdraw. The whole point is to let it grow. But people have emergency situations and need to access that money, which you can do with a Roth IRA.

401(k) Explained

AF: If you leave a job that offered a 401(k), what are the steps to follow to ensure financial growth as the 401(k) follows you to the next job?

RO: This is a general question that we get a lot. This is about rollovers. Especially for those of you who are young or millennials, you're going to have many jobs over time, and most jobs are going to offer a 401(k), and you should take advantage of that.

And actually, this is a negotiation tip: When you are in negotiations with a new employer, you should always ask if they do a match. And that should be one of your considerations, because you want that free money. When you leave a job, you're not going to be able to contribute any more to that 401(k) — you can usually leave it where it is or you can roll it over.

We like rollovers because you want to make sure that all of your money is essentially in one place. Almost all of the digital advisers, what we call the robo advisers, offer a rollover. You would start the process and get the paperwork going, and you essentially move that money into your new account. You do have to put it somewhere, and you have to make a decision. Do I put it in an index fund? Do I put it in an ETF? That's something you need to be aware of.

AF: Can you roll over a 401(k) from a previous job to a Roth?

RO: Yes, you can. Remember, though, there are going to be some tax implications when you do that, because what you're doing is taking money that has not been taxed in your 401(k) and rolling it over to an account that's going to grow tax-free. The IRS is smarter than that. They're not going to give you all that money tax-free. You're going to have to pay some taxes on that money when it rolls over.

AF: Thank you, Ramona. I've learned so much. This is useful. I have my huge to-do list now. Information brings you so much peace, knowing that there are things that you can actually do. For me, it's how can I take action, how can I keep moving and get things done. And that makes me feel good and that keeps me at peace.

Ana Flores, Founder, and CEO of #WeAllGrow Latina Network, is an accomplished producer and passionate advocate for portraying Latina women in a positive light. #WeAllGrow Latina Network is the first and largest community of Latina digital influencers, hyperlocal events, and annual summit that boldly propels growth through brand partnerships and community development.

#WeAllGrow believes in the power of this community to be a channel for healing through connection — now more than ever. Through #WeAllGrow AMIGAS MENTOR sessions, Latina creators, entrepreneurs, healers, and experts, who are at the top of their game and have deep expertise, share insights on a specific topic.

Tags: Navigating the Pandemic, Tips from Women Executives, Personal Finance

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Faye Williams

Faye Williams is a cat lover based in New Jersey who enjoys traveling and spending time in nature whenever possible.  See Full Bio

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