Early Or Late Retirement
If you plan to retire early, you may benefit from keeping your money inside the 401K. Some company plans allow for penalty-free withdrawals after age 55. If your money is in an IRA, you must wait to age 59½ before you can take money out without penalties.
On the other hand, if you plan to keep working past age 72, you may be able to avoid taking Required Minimum Distributions from the 401K, whereas you cant avoid IRA RMDs, even if you delay retirement.
Next Steps To Consider
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Recently enacted legislation made a number of changes to the rules regarding defined contribution, defined benefit, and/or individual retirement plans and 529 plans. Information herein may refer to or be based on certain rules in effect prior to this legislation and current rules may differ. As always, before making any decisions about your retirement planning or withdrawals, you should consult with your personal tax advisor.
The change in the RMD age requirement from 70½ to 72 only applies to individuals who turn 70½ on or after January 1, 2020. Please speak with your tax advisor regarding the impact of this change on future RMDs.
A qualified distribution from a Roth IRA is tax-free and penalty-free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½ or older, disability, qualified first-time home purchase, or death.
Be sure to consider all your available options and the applicable fees and features of each before moving your retirement assets.
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How Do I Rollover If I Receive The Check
If you receive a distribution check from your 401 rollover to a Roth IRA, then chances are good they will hold around 20% for taxes. If you want a direct 401 rollover to a Roth IRA, you may want to send that check back to your employer 401 provider and ask to be sent all of your eligible retirement distribution directly to your new Rollover IRA account .
You have 60 days upon receiving the check to get the money into the Roth IRA- no exceptions! So dont procrastinate on this one.
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The Tax Implications Of Retirement Account Rollovers
When physicians consider rolling over retirement accounts, the tax implications should be factored into the decision. The decision as to whether you should roll over your 401k plan to an IRA, another employers 401k plan, or simply to leave it where it is, involves several different factors, including long term investment cost and the availability of investment options
Rolling Over A 401 To An Ira
If youve got a 401 with an old employer that youd like to move into your tender loving care as an IRA that youre managing instead, Capitalize is the easiest way to handle it. I have a full deep dive about the rollover process here, in case youd like to go read that first.
But lets say youve already decided youre going to roll over your 401 into an IRA if your 401 was Traditional , you may be wondering Hm, should I keep this as pre-tax money and roll it into a Traditional IRA, or should I convert it to Roth and roll it into a Roth IRA?
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Reasons You May Want To Wait To Roll Over Your 401
- Temporary ban on contributions. Some plan sponsors impose a temporary ban on further 401 contributions for employees who withdraw funds before leaving the company. You’ll want to determine if the gap in contributions will significantly impact your retirement savings.
- Early retirement. Most 401s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty.
- Increased fees. IRA investors may pay more fees than they would in employer-sponsored plans. One reason: The range of more sophisticated investment options you may choose can be more expensive than 401 investments. Your advisor can help identify what extra cost a rollover may incur and if the benefits of the rollover justify those additional costs.
- Can take loans out. Your 401 may permit you to take out a loan from the account, but this is typically only for active employees. And you may have to pay in full any outstanding loan balances when you leave the company. You cannot take loans from IRAs.
Rollover Into A New Companys 401 Plan
A rollover into your new companys 401 plan may be the easiest option for you. Youll keep all the money in one place, and you may be able to access some professional advice as part of your new plan, too. So a rollover to a new 401 is a winner for convenience. Its a winner from a tax perspective, too, because you wont incur any new taxes as long as you transfer to the same type of 401 at your new employer.
In addition, having all your money in a 401 protects you from the pro-rata rule. This rule could really trip you up and limit the effectiveness of a backdoor Roth IRA, which is a useful strategy if you earn too much to contribute directly to a Roth IRA.
One downside, however, is that your new plan may not have particularly attractive investment choices, for example, offering expensive funds. So youll want to consider your investment options, too.
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Hacking Your Rollover Decision
We are all looking for life hacks: a trick, shortcut, skill or novelty method that increases productivity and efficiency. Here are a few ideas from industry insiders on how to hack your rollover decision:
Age 59.5 withdrawals
Most people dont know you can start rolling over your account at age 59.5, even if you are still employed by the plans sponsor. So, if you find a lower-cost IRA alternative to your current plan, you can roll over your balances while continuing to contribute and receive matching contributions.
If your plan permits it, it may make sense to only roll over a portion of your account while exploiting certain 401 benefits with the remaining balance. For instance, if you want to allocate some of your portfolio to a stable value fund unavailable outside the Plan, withdraw the other assets and keep the remaining balances in that fund. Alternatively, if you are continuing repayments on a plan loan even after terminating employment, your loan may be defaulted if you request a lump sum distribution. But you can roll over a portion of your account while continuing repayments.
State Income Tax Exclusion
Many states exclude some, and in a few cases all, of any retirement account distribution from state income tax. But not all states treat distributions from 401 plans and IRAs equally. For example, both Maryland and Rhode Island only apply their state income tax exclusion to 401 distributions but not rollover IRA withdrawals.
When A 401 Loan Makes Sense
When you mustfind the cash for a serious short-term liquidity need, a loan from your 401 plan probably is one of the first places you should look. Let’s define short-term as being roughly a year or less. Let’s define “serious liquidity need” as a serious one-time demand for funds or a lump-sum cash payment.
Kathryn B. Hauer, MBA, CFP®, a financial planner with Wilson David Investment Advisors and author of Financial Advice for Blue Collar America put it this way: “Lets face it, in the real world, sometimes people need money. Borrowing from your 401 can be financially smarter than taking out a cripplingly high-interest title loan, pawn, or payday loanor even a more reasonable personal loan. It will cost you less in the long run.”
Why is your 401 an attractive source for short-term loans? Because it can be the quickest, simplest, lowest-cost way to get the cash you need. Receiving a loan from your 401 is not a taxable event unless the loan limits and repayment rules are violated, and it has no impact on your .
Assuming you pay back a short-term loan on schedule, it usually will have little effect on your retirement savings progress. In fact, in some cases, it can even have a positive impact. Let’s dig a little deeper to explain why.
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Gold Ira Transfer Rules
When you are working with a Gold IRA Transfer, there are some other rules and regulations that you must be aware of.First, if you have an existing IRA, you cannot transfer the funds from that account. You must close out the present IRA and then open a new one to transfer the funds.Second, you cannot combine IRAs when you make the transfer. For example, if you have a Traditional IRA and your spouse has a Roth IRA, the transfer cannot be made from both accounts into a joint account.Third, the amount that can be transferred is limited. You cannot transfer more than you currently have in any given IRA. For example, if you have $20,000 in your IRA, you cannot make a transfer of $50,000 just because both are invested in gold IRAs.Fourth, the minimum amount that can be transferred is based on the age of the account holder. If you are under the age of 70 1/2, you can make a transfer for at least $1. If you are 70 1/2 or older, you can make a transfer for at least $6,000.Finally, there is a minimum holding period that applies to all transfers.
When To Roll Over Your 401 To An Ira
Rolling over your 401 to an IRA is possible only if you’re leaving your current employer or your employer is discontinuing your 401 plan. It is an alternative to:
- Leave your money invested in your existing 401
- Rollover to your new employer’s 401
- Withdrawal from your 401, which would trigger a 10% penalty if you aren’t 59 1/2 or older
A rollover or IRA) does not have tax consequences. This would not be the case if you do a rollover to a Roth IRA.
Rolling over a 401 to an IRA provides you with the opportunity to choose which brokerage you want to hold your retirement funds. It may be the right choice if:
- Your new employer doesn’t offer a 401 plan
- You cannot keep your money invested in your current workplace plan because your plan is being discontinued or your 401 administration won’t allow you to stay invested for some other reason
- Your new employer’s 401 plan charges high fees, offers limited investments, or has other drawbacks
- You’d prefer a wider choice of investment options
However, there are some downsides to consider:
- While 401 loans allow you to borrow against your retirement funds, no such option exists with an IRA.
- Transferring company stock can be complicated account, read up on an “NUA strategy” that could save you a lot of money.)
If these downsides aren’t deal breakers for you, the next step is figuring out how to roll over your 401 to an IRA.
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A Person With A $26000 401 To Rollover And A $75000/year Income
Heres what I did:
Plug $75,000 into the SmartAsset tax calculator .
Write down the amount of income tax owed.
Now, add $26,000 ) to the income for a total of $101,000. The government will look at your total income for the year and your Roth-converted 401 balance together when assessing how much you owe in taxes.
For this example
Total tax liability on the $75,000 income alone was $15,300, assuming no other pre-tax contributions or deductions
Tax liability if you convert the entire amount to Roth? $23,070.
That means the tax bill for your Roth conversion is:
Yikes. So why is that potentially problematic?
Well, that money has to come from somewhere. And heres where shit gets interesting.
You Enjoy More Tax Advantages With An Ira If You Care About Charitable Giving
The new tax code makes charitable giving less tax advantageous for many donors. However, if you are over 70½, you can give to charity tax-free from your IRA via a qualified charitable distribution . Employer plans dont allow QCDs. Starting to consolidate everything into IRAs today allows you to take advantage of QCDs in the future.
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How Much Does It Cost To Roll Over A 401 To An Ira
If you do the process correctly, there should be few or no costs associated with rolling over a 401 to an IRA. Some 401 administrators may charge a transfer fee or an account closure fee, which is usually under $100.
Because moving your money from a 401 to an IRA allows you to avoid the 10% early withdrawal penalty that results if you withdraw money from a 401 before 59 1/2, its a far better option if you cant keep your money invested in an old employers plan or move it to a 401 at your new company.
You should consider whether rolling over a 401 to an IRA is a better option than either leaving it invested when you leave your job or moving the money to your new employers retirement plan. If you can avoid 401 management fees and gain access to investments with lower expense ratios, an IRA may be a cheaper account option.
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When Does A Reverse Retirement Rollover Make Sense
Many of you are familiar with rolling over a former employer 401 to an IRA. This is very common. But does it ever make sense to do the opposite, i.e., roll over/ transfer an IRA to a 401? This is sometimes called a reverse rollover, and the answer is YES. Here are a few circumstances when it can make sense to transfer your IRA to a 401:
To Avoid/Delay Required Minimum Distributions
I realize for those of you who are in their 20s and 30s could care less right now about required minimum distributions from a retirement account, but we have many clients who are in their 60s for whom this is a soon-to-be reality. For many of our clients, being forced to take a distribution and pay taxes is the last thing they want to do. And although it was a small victory thanks to the Secure Act which pushed the age back to 72 , in todays 2020 job market, more and more Americans are working into their 70s. So this added 18 month extension is somewhat helpful, but if youre working in your 70s, and youre still in a higher income tax bracket than maybe your retired friends, having to pay tax on RMDs while youre still working can be difficult. The solution?
As a side note, although you could transfer/rollover your IRA to a Roth IRA and avoid RMDs indefinitely, you have to pay tax on the amount transferred/rolled over to a Roth IRA
To Avoid Tax on a Backdoor Roth IRA Contribution
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A Closer Look At Your Available Options
The good news is whatever money thats in your 401 is yours to do with as you like. But when you no longer work for a company, any retirement accounts you have through your former company might need to be moved to your new employer. Or you may need to roll it over or into a brokerage account that you own completely.
There Are A Lot Of Reasons Why Rolling A 401 Over Into Your Own Ira Is The Best Choice For Most People But For Some There Are A Couple Of Cons That Could Outweigh The Pros
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Most of us have worked for a company that offered 401 plans to their employees. In fact, you and I have likely worked for multiple companies that provide this benefit. And as a result, you might have a number of 401 plans to your name if you opened an account with each employer.
Thats not necessarily a bad thing. After all, most people should always use a 401 if their employer offers one even if the employer doesnt match. 401s are powerful tax-advantaged accounts that you should take advantage of, whether or not your company chips in, too.
So lets say youve been diligently pumping money into your 401 at every company that offered one. But then you changed jobs. You started a new 401 at that new company and then got busy and left the old accounts behind . What happens to all those old accounts? Should you do anything about them?
Maybe. Its important to understand what you can do with old 401s from previous employers and then know the right choice to make for managing those accounts. Heres what you should know.
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Can You Be Required To Roll Over Your 401
Sometimes you have no choice in the matter. You might be required to roll over your 401 if:
â¢ You donât meet a minimum balance requirement. For example, if you have less than $5,000 in your 401, your employer can require you to roll your 401 into a different account.
â¢ Your old employer changes 401 providers. Depending on your company, your account may not be rolled over and your existing provider may not continue service. If your account is rolled over, the new provider might have requirements you canât meet, or they might not provide the services you want.