S To Roll Over Your 401
Before you can roll over your 401, youll need to open an account to roll it into. Consider your options, like your new employers 401 or an IRA.
Why Doesn’t 401 Income Affect Social Security
Your Social Security benefits are determined by the amount of money you earned during your working yearsyears in which you paid into the system via Social Security taxes. Since contributions to your 401 are made with compensation received from employment by a U.S. company, you have already paid Social Security taxes on those dollars.
But waitweren’t your contributions to your 401 account made with pre-tax dollars? Yes, but this tax shelter feature only applies to federal and state income tax, not Social Security. You still pay Social Security taxes on the full amount of your compensation, up to a pre-determined annual limit established by the IRS, in the year you earned it. This limit is typically increased yearly and is currently capped at $142,800 for 2021 and will increase to $147,000 in 2022.
“Contributions to a 401 are subject to Social Security and Medicare taxes, but are not subject to income taxes unless you are making a Roth contribution,” notes , founder and president of Index Fund Advisors Inc. in Irvine, CA, and author of Index Funds: The 12-Step Recovery Program for Active Investors.
In a nutshell, this is why you owe income tax on 401 distributions when you take them, but not any Social Security tax. And the amount of your Social Security benefit is not affected by your 401 taxable income.
If You Have Already Been Laid Off
If you’ve lost your job, you’re not alone. About 6.6 million Americans filed new unemployment claims last week, the Labor Department reported Thursday. And that number is expected to grow.
But losing your job does mean you need to tighten your belt. In fact, Ginty recommends dramatically cutting your budget back to just the bare essentials because you’ll probably be dipping into any emergency savings you have. You’ll also want to file for unemployment and keep an eye out for the government stimulus check of up to $1,200 that most Americans should receive by mid-April.
This is not the time to focus on rebalancing your retirement accounts, Gorelick says. Generally, if you have more than $5,000 in your 401, you can leave your savings in your existing account.
If you have less, you may have to make some decisions now. Your employer can cash out your account if you have under $5,000 and send you a check. But typically employers will roll over your 401 balance into an individual retirement account if you have at least $1,000 unless you specify otherwise. Pay close attention to any paperwork or mail you may be receiving from your employer or your 401 plan provider.
If your 401 provider won’t do a direct rollover or employer cuts you a check for your 401 balance, you have 60 days from the date you receive it to transfer it to another 401 plan or IRA without being taxed.
You May Like: How To Collect My 401k Money
Remember That You Are Actually Only As Old As You Feel
Your age is only a number. It should not define what you do in retirement. Dont believe me? Look at these amazing accomplishments by 70, 80 and 90 year olds and more amazing accomplishments that prove that growing old is truly optional!
Furthermore, consider that Pablo Picasso was still producing art in his 90s. Thomas Edison invented the telephone at age 84. Laura Ingalls Wilder published her first book when she was 64.
Volunteer For As Long As Possible
There are diverse groups of organizations that need volunteers to help with their cause and program activities. You could select a cause that is important to you or go to one of many sites on the internet that will match your skills to organizations needing volunteers, like Volunteer Vacations for example.
Trips range from one to three weeks, and you choose where you want to go and how you want to volunteer. This is a rewarding experience that you can do anywhere in the world, so lets get out there and make a difference!
Recommended Reading: When Can You Take 401k Out
Active Hobbies For Retired People
Want to stay physically active during retirement? Heres a few ideas of what to do when youre retired and bored:
- Babysit:Spend more time with your grandchildren and give your children a break from the kids by babysitting!
- Pick Up Tennis, Softball :What sport would you like to take up, or what sport do you wish you had more time to dedicate to before retirement? Whether you take up a new sport or want to get back in to a sport you love, retirement gives you that opportunity.
- Start a Blog/Write a Book:Have you always wanted to write? Maybe you dreamed of writing the great American novel? Or you just want to put down your thoughts into an online journal.
Your 401 Savings And Where You Want To Retire
Where you plan on spending your retirement will have a major impact on how much money youll need to save in your 401. A number of different factors fall under this bucket, each with its own impact on your savings needs.
Cost of living is the most basic factor here. For example, retiring in Hawaii may seem like a tropical dream, but the cost of living in Hawaii is exceptionally high. If hitting the beach to surf in Oahu everyday is something you really want, youll have to make sure you have enough money in your 401 to cover the cost of living.
Big cities like New York and Los Angeles also have predictably high costs of living. However, more remote places like Montana and New Hampshire have much lower costs of living though, so youd need less in your coffers if you opt to settle in places like that.
Another location-based retirement savings factor to keep in mind is taxes. Each state has its own tax codes, and some dont have any income tax at all. Make sure you understand the tax policies of the state where you plan to retire so you have a sense of how much taxes will eat into your 401 savings over time.
For example, Texas does not charge any income taxes. That means when you withdraw funds from your 401 as a resident of Texas, you wont have any state taxes taken out. On the flip side, though, Texas has exceptionally high property taxes. So if you plan on buying a sprawling ranch in the Lone Star State, you property tax bill could be quite high.
Read Also: Can I Rollover From 401k To Roth Ira
What Should You Do With Your Dormant 401 When You Retire
LEXINGTON, Ky. – Youve been saving and saving in your companys 401 and taking advantage of that company match. Its now finally your time to retire! But what should you do with that dormant 401 as you leave? Fiduciary financial planner Josh Smith of Strategic Wealth Designers joined the newscast to discuss what you should do with your account when your retirement rolls around.
It sounds convenient to just leave it, Smith says. But the disadvantages often outweigh the convenience. You can no longer contribute to the plan and usually have less control if the money is in a 401. Most of the time, it makes sense to roll the money out of your 401 upon retirement.
After retiring, you may want to consider moving the money from your dormant 401 into an IRA or Roth IRA. Direct rollovers from a 401 to IRA are penalty and tax-free transactions. If you roll the funds into an IRA, you will have to wait until age 59 ½ to begin withdrawing money to avoid the 10% early withdrawal penalty.
Youll want to take into consideration the fees on your account, Smith says. You might be paying unnecessary fees inside of your 401. Additionally, you want to consider the investment options. Especially when transitioning into retirement, you want to move your portfolio to more safe options.
Most Read
Calculate Your Income Need
Before you jump in and begin picking from the assorted list of investments that you found on the internet or that a broker recommended, you should understand that this is the very last step in the process. You would be well advised to set all of that aside for now and begin with your income needs. You cannot sidestep this, because you have to know this figure before you can do anything else.
To do this right, sort through and total up all your bank payments, then your insurance payments, then your tax payments, then your monthly living expenses, and dont forget the irregular expenses throughout the year, like gifts and travel. You want to know how much money you spend over the course of a year.
Another point to make here, realize that this spending amount will be for when you are retired not while youre working. Things are going to look different for you in retirement, so be sure to think about how you will be spending your time in retirement. Youll have a lot of time to fill!
Read Also: How Do You Roll A 401k Into An Ira
What Is A 401
A 401 is a defined contribution retirement plan that many companies offer their employees. You put a portion of your paycheck into the plan, before taxes, and invest it in various mutual funds and other investments. The money then earns returns throughout your working life, growing your retirement savings. Then when you retire, you can start making withdrawals, though youll owe taxes on them then. For reference, the 401 contribution limit for 2021 is $19,500.
Some companies offer 401 matching as well. This means you get extra money from your employer, based on how much you contribute. This is free money, so be sure to take full advantage if your company offers it. Matches are typically limited to a certain percentage of your annual salary, like 3%.
You Have Options But Some May Be Better Than Others
After you leave your job, there are several options for your 401. You may be able to leave your account where it is. Alternatively, you may roll over the money from the old 401 into either your new employers plan or an individual retirement account . You can also take out some or all of the money, but there can be serious tax consequences.
Make sure to understand the particulars of the options available to you before deciding which route to take.
Read Also: How To Find Missing 401k Accounts
Put The Money In A Roth Ira
A Roth IRA makes a nice complement to traditional, tax-deferred retirement savings accounts such as the 401. With your standard 401, you get a tax break on the contributions you make to the account, but once you retire and start taking money out, you’ll have to finally pay the IRS the taxes on that money.
A Roth account works the other way around: There’s no tax break on your contributions, but the money you take out of the Roth account is tax-free.
If you have both a tax-deferred and a Roth account, then once you retire, you can choose how much to take out from each account every year in a way that minimizes your tax bill.
As an added bonus, Roth accounts are not subject to required minimum distributions , so you have more control over your withdrawals if at least some of your money is in a Roth IRA.
Assuming that you haven’t set up a Roth IRA in your working years, you can still do a Roth conversion and roll some or all of the money from your 401 into a brand-new Roth account. However, there’s one big catch to a Roth conversion: The year you convert your retirement savings from a tax-deferred account to a Roth account, you have to pay taxes on all the money you converted. With a big balance to convert, this can lead to quite a horrendous tax bill, so your best bet is to decide how much money you want to move into the Roth account altogether and then split the conversion out over several years.
What’s The Best Choice For You
The best action for your 401 depends on you, and there isn’t just one right answer. I generally advise against taking a lump sum distribution unless you have a small amount of money in the plan. Meanwhile, putting all of your money into an annuity is usually not a good idea, but going this route with some of your 401 may not be the worst idea.
Finally, the best move for you might be a combination of a few of these options. For example, maybe you could take some of the money out right away to cover expenses and treat yourself, use some to buy a deferred-income annuity, and roll the rest into an IRA. The point is that there isn’t a one-size-fits-all answer to the question of what to do with your 401, so it’s important to weigh the pros and cons of each option and make the best decision for you.
Read Also: How To Cash Out 401k While Still Employed
Convert To An Ira And Keep Contributing
You cannot contribute to a 401 after you leave your job, so if you want to continue adding money to your retirement funds, youll need to roll over your account into an IRA. Previously, you could contribute to a Roth IRA indefinitely but could not contribute to a traditional IRA after age 70½. However, under the new Setting Every Community Up for Retirement Enhancement Act, you can now contribute to a traditional IRA for as long as you like.
Keep in mind that you can only contribute earned income, not gross income, to either type of IRA, so this strategy will only work if you have not retired completely and still earn taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment, as the IRS puts it. You cant contribute money earned from either investments or your Social Security check, though certain types of alimony payments may qualify.
To execute a rollover of your 401, you can ask your plan administrator to distribute your savings directly to a new or existing IRA. Alternatively, you can elect to take the distribution yourself. However, in this case, you must deposit the funds into your IRA within 60 days to avoid paying taxes on the income.
Traditional 401 accounts can be rolled over into either a traditional IRA or a Roth IRA, whereas designated Roth 401 accounts must be rolled over into a Roth IRA.
S To Take Now To Improve Your Retirement Readiness
While the average 401k balance at pre-retirement age is around $600K, that balance still falls far below even the no growth column of the savings potential chart for the same age. And while $600,000 is no chump change, its also probably not enough to retire comfortably for most people.
Needless to say, many people are falling way below their savings potential. But the good news is, its not too late to turn things around.
Recommended Reading: How Often Can I Change My 401k Investments Fidelity
The Tax Impact Of 401 Savings
Once you begin taking distributions from your 401, or other retirement savings plan, such as an IRA, you won’t owe Social Security tax on the distribution for the reason described above you paid your dues during your working years. But you may have to pay income taxes on some of your benefits if your combined annual income exceeds a certain amount.
The income thresholds are based on your “combined income,” which is equal to the sum of your adjusted gross income , which includes earned wages, withdrawals from any retirement savings accounts s, any non-taxed interest earned, and one-half of your Social Security benefits). If you take large distributions from your traditional 401 in any given year that you receive benefitsand remember, you’re required to start taking them from all 401s once you turn 72you are more likely to exceed the income threshold and increase your tax liability for the year.
According to the Social Security Administration, for 2020, if your total income for the year is less than $25,000 and you file as an individual, you won’t be required to pay taxes on any portion of your Social Security benefits. If you file jointly as a married couple, this limit is raised to $32,000.
