401(k) dividend confussion

The Beating Broke blüg recently fielded a reader question asking about why they weren’t seeing dividends on their 401k statements.  The age-old high schooler debate tactic of going on a verbose diatribe without actually explicitly answering the question was employed.  BB, however, did provide some excellent information, albeit a bit jumbled.

Beating Broke did cover that a 401(k) is a tax-advantaged investment vehicle where, regardless if the money is contributed as traditional (pre-tax) or Roth (after-tax), the growth and dividends aren’t taxed until withdrawal (traditional) or never (never say never) again (Roth).  There is actually a third “category” available at an employer’s discretion, if one contributes over the annual limit the contribution is made after-tax and will be taxed again at distribution (stinky).  Since it doesn’t matter when growth and dividends occur or are made (because you get taxed at contribution or distribution or both and not anytime in between), some companies simply capture dividends in a broad “earnings” category.

For example, Mlle Rhodesian Ridgeback currently has a 401(k) plan with a simple and cheesy “statement” simply listing “contribution” in one column and “gain/loss” in another (and a few other columns which are not pertinent for this discussion). Her funds are not open to the publick and don’t carry a ticker symbol.  La Mlle used to work for a company who’s 401(k) plan was administered by Vanguard.  La Mlle liked this much better and she could actually see when and the amount of dividend distributions for each fund, but that wasn’t the main reason she liked her Vanguard plan (a whole ‘nother story).

So, to some degree, it doesn’t matter if you see the dividend distribution or not.  La Mlle knows she is getting dividends in her current 401(k) because she is invested in a S&P 500 index.  Sure it’s nice to see when dividends are paid, but if they are just added to the funds growth, it doesn’t really matter.  It’s not clear to us if “trading” between investment options is always allowed within a 401(k) plan, but if one desired to have dividend distributions sent into other investment options within the plan, they can either move funds around within the plan or change their contribution allocation.

Where the plot thickens is if you invest in an IRA.  Typically, and it is highly suggested, that people go to a reputable mutual fund company (not insurance) for their IRA needs.  Their mutual funds (with ticker symbol and all) can be invested in taxable accounts or tax-advantaged accounts.  Because taxable accounts care (well, really the IRS cares) when the dividend distribution is made and other things like when stocks are sold (turnover), the fund company tracks this for all of their customers.  And that is why you will see dividends on the IRA accounts, but may not see them in a 401(k) (although they are there).

Other things we like that Beating Broke mentioned

BB suggested to contribute to a 401(k) to maximize the company match, then an IRA, then back to top off the 401(k) if one is able.  We generally agree this is the advice most savvy investors should follow.  It’s difficult, however, to understand everyone’s situation.  BB recommended a Roth IRA, and that may not be for everyone.  And in fact, any type of IRA may not be appropriate at all depending on income and/or the goals an individual has.  There are other considerations for foregoing the IRA as well.  M. Bichon Frise has a friend who refuses to invest in an IRA because of the ERISA protections offered to a 401(k).  While not a very valid reason in most people’s mind as no one plans to be sued and we don’t know anyone who knows anyone who has been sued.  But this is what helps this individual take his dawggie naps at night.

What we didn’t like

Generally speaking, we are very conservative with our investments.  We understand that the stock market has faltered, but we also believe it will provide returns in the future.  At least that is what our tea leaves told us this morning.  BB mentioned in a comment that he recommended such things starting a business, real estate investment and lending club to increase yield over stock market returns.  We would not recommend these to any family member (even of a different dawg breed), friends or cats who simply desires to invest for long-term savings.  Our view is these are risks that don’t need to be taken for potential and a little additional yield.  Not to mention time, if that is important to you.  But, that is the philosophy in our dawghouse and it’s like arguing over Beggin’ Strips being better than Milkbones (of course, anything with bacon is much better).

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