Roll It Over To Your New Employer
If youve switched jobs, see if your new employer offers a 401, when you are eligible to participate, and if it allows rollovers. Many employers require new employees to put in a certain number of days of service before they can enroll in a retirement savings plan. Make sure that your new 401 account is active and ready to receive contributions before you roll over your old account.
Once you are enrolled in a plan with your new employer, its simple to roll over your old 401. You can elect to have the administrator of the old plan deposit the balance of your account directly into the new plan by simply filling out some paperwork. This is called a direct transfer, made from custodian to custodian, and it saves you any risk of owing taxes or missing a deadline.
Alternatively, you can elect to have the balance of your old account distributed to you in the form of a check, which is called an indirect rollover. You must deposit the funds into your new 401 within 60 days to avoid paying income tax on the entire balance and an additional 10% penalty for early withdrawal if youre younger than age 59½. A major drawback of an indirect rollover is that your old employer is required to withhold 20% of it for federal income tax purposesand possibly state taxes as well.
Roll It Over Into An Ira
If youre not moving to a new employer, or if your new employer doesnt offer a retirement plan, you still have a good option. You can roll your old 401 into an IRA. Youll be opening the account on your own, through the financial institution of your choice. The possibilities are pretty much limitless. That is, youre no longer restricted to the options made available by an employer.
The biggest advantage of rolling a 401 into an IRA is the freedom to invest how you want, where you want, and in what you want, says John J. Riley, AIF, founder, and chief investment strategist for Cornerstone Investment Services LLC in Providence, R.I. There are few limits on an IRA rollover.
One item you might want to consider is that in some states, such as California, if you are in the middle of a lawsuit or think there is the potential for a future claim against you, you may want to leave your money in a 401 instead of rolling it into an IRA, says financial advisor Jarrett B. Topel, CFP for Topel & DiStasi Wealth Management LLC in Berkeley, Calif. There is more creditor protection in California with 401s than there is with IRAs. In other words, it is harder for creditors/plaintiffs to get at the money in your 401 than it is to get at the money in your IRA.
If you have an outstanding loan from your 401 and leave your job, youll have to repay it within a specified time period. If you dont, the amount will be treated as a distribution for tax purposes.
Think About How Much You’ll Need In Retirement
Contributing the maximum to your 401 requires a lot of money especially as an ongoing, year-after-year commitment. It may or may not be enough to fund your retirement, or it could be even more than you need. Your 401 contribution amount should be guided by your retirement savings goal.
How much money you’ll need in retirement depends on when you plan to retire, how much of your current income youd like to replace and how much you want to rely on Social Security.
Most experts recommend saving 10% to 15% of your income, but our suggestion is to get a more detailed goal from a retirement calculator.
If you need to start at a lower contribution and work your way up, that’s fine. Aim to contribute at least enough to grab the match, then bump up the percent you contribute by 1% or 2% each year.
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Delay Mandatory Withdrawals And Limit Tax Penalties
Americans are retiring later and living longer. Secure 2.0 lifts the minimum age at which enrollees must begin withdrawing money from their accounts each year to 75 from 72. That allows for three additional years of tax-free growth on their retirement investments.
(The penalty for those who fail to withdraw the required minimum from their accountafter 75would be halved, to 25% from 50%.
Option #: Roll Over Your Old 401 Into An Ira
An Individual Retirement Account, or IRA, is a type of account which offers special advantages designed to help you save more money over the long term. Like a 401, money inside an IRA is free to grow tax-free, and any amount you contribute to it is also tax deductible . But, unlike a 401, an IRA is completely up to you to set up and manage. That means you get to decide which financial institution will house your assets, which funds to invest in, and exactly how much to contribute down to the dollar will often only allow you to select a percentage of your pay). That kind of autonomy presents an attractive value proposition for smart investors.
The pre-tax treatment of your 401 account allows you to effectively roll over your entire balance into an IRA account which enjoys the same pre-tax treatment. As far as the IRS is concerned, because youre keeping the same pre-tax money locked up inside your retirement accounts, it doesnt matter if its inside your 401 or IRA. And, 401 rollovers into an IRA dont count as IRA contributions, so the contribution limits dont apply. It doesnt matter if youre rolling over a $10,000 balance or a $500,000 balanceyoure free to do so without paying so much as a dime in taxes or penalties. Now were talking!
Although the rollover process will differ based on your plan administrator and IRA provider, the below steps generally describe how this works:
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Review Your 401s Payout Policy
One key question in retirement is how youll create an income stream that is, a retirement paycheck from your savings. If your 401 lets you set up regular withdrawals or an installment payment plan, then it might make sense to keep your money in the plan.
If your 401 doesn’t allow for periodic payouts, consider rolling your savings over to an IRA.
A growing number of employers allow retiring workers to say, Pay out X dollars per month, says Steve Vernon, author of Retirement Game-Changers and a research scholar at the Stanford Center on Longevity.
But 401 plans vary widely. Some allow lump-sum disbursements only. Others might offer partial withdrawals, but the number is limited. If and when you need periodic payments, youll need an account that allows that. If your 401 doesnt, consider rolling your savings over to an individual retirement account. See this quick-start guide on 401 rollovers for more on this process.
Turn Your 401 Into This Shiny Metal
Investing in precious metals like gold is a great way to plan for retirement. This is especially important now, as many people see how good gold is compared to the dollar in terms of stability.Some 75 percent of all of the money ever printed in the United States was printed last year. This is amazing, and extremely worrying, as massive inflation could happen at an unforeseen rate. Essentially, those dollars could be worth next to nothing.However, you dont have to fall into despair since you have alternatives. Gold is a trusted historical store of value, and you can make a gold IRA out of your 401 by rolling it over. There are many advantages to doing this.For one, gold isnt connected to stocks and tends to rise when the dollar and other paper assets fall. If inflation is happening, gold can be your best friend.This isnt anything particularly radical, either. Gold has been around well before the United States was. It acts as an excellent shield for your portfolio, and you can really see the benefits as retirement approaches. The last thing you want when you are preparing for life after work, is to worry about your dollars being worth nothing and having to go back.Even if youre decades away from retirement, putting a percentage of your portfolio in gold is a good idea, according to almost every economist and financial advisor today.
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Con #: You Have No Choice In What Funds Your Former Employers Choose
Since your former company administrates the retirement plan, youll only be able to select funds from the options they provide. For example, if youve read some great information about a mutual fund that focuses on sustainable agriculture but your plan doesnt offer it, youll need to go elsewhere to invest in it. You’re losing the flexibility that you could have with a traditional or Roth IRA, adds Markwell.
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.
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Take Your 401 With You
Most people will change jobs more than half-a-dozen times over the course of a lifetime. Some of them may cash out of their 401 plans every time they move, which can be a costly strategy. If you cash out every time, you will have nothing left when you need itespecially given that you’ll pay taxes on the funds, plus a 10% early withdrawal penalty if you’re under 59½. Even if your balance is too low to keep in the plan, you can roll that money over to an IRA and let it keep growing.
If you’re moving to a new job, you may also be able to roll over the money from your old 401 to your new employer’s plan if the company permits this. Whichever choice you make, be sure to make a direct transfer from your 401 to the IRA or to the new company’s 401 to avoid risking tax penalties.
What Should I Do With My 401
Morningstar’s experts provide answers to seven of the most frequently asked 401 questions today.
|Editor’s note:Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Many guides to 401 investing–including Morningstar’s–provide sound advice. Start investing early so compounding can work its magic. Contribute at least enough to get your full company match. And auto-escalate your contributions, if possible.
But given the extraordinary market events and economic climate we’re experiencing today, the standard advice may not fit. Moreover, the CARES Act provides investors with better access to their retirement funds early.
Here are answers to several 401-related questions that investors have during these unique times.
Should I stop contributing to my 401? There might be many reasons to ask this question. Forgoing contributions for a while could provide some extra cash, for instance. Or not putting new money to work in the market may make some feel as though they have more control over their investments.
But not following your investment plan during a bear market can significantly interfere with wealth accumulation over the long term.
Wallace observes that missing the best month of return in a given year can pull otherwise positive returns into negative territory. Her recommendation: Keep investing and take on enough risk to meet your long-term goals.
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Protecting Your 401 From A Stock Market Crash
Any time you put your money in the stock market or other investments, you always run the risk of losses. While you can make largely educated decisions, things dont always go to plan. Also, because youre talking about something as important as your retirement, emotional decision-making can come into play.
Despite the above, there are many strategies, simple and complex, you can use to mitigate risk. For instance, spreading your assets across multiple types of investments and areas of the market can allow you to avoid the volatility that comes with stock-picking and concentrated investment positions.
Everyone has short-term expenses that periodically arise. For example, you might need to repair your car, replace a broken household appliance or pay for a medical procedure. Long-term expenses are even more prevalent, including student loans and mortgages. However, the best thing you can do is treat your retirement savings just as importantly as all of your other needs. This will ensure your pool of retirement funds will continue to grow over time.
Below are some of the most influential strategies you can use to minimize losses in your portfolio, even if a stock market crash comes around. Just remember that you can never fully avoid risk, though.
It’s Sometimes Possible To Get A Tax Deduction But That May Not Be Worth It
The government allows you to claim a tax deduction if your 401 or other retirement plan has lost value, but there are rules you must follow. First, you must have basis. In this case, basis refers to nondeductible contributions you’ve made. Deductible contributions — those that reduce your taxable income for the year — do not count. You haven’t paid any taxes on that money so far, so the government is not going to give you a tax deduction on the amount you lost.
You also must close all retirement accounts of the same type in order to calculate the loss. So if you’re trying to claim a loss on your 401, you must close all of your 401s. Then you total your nondeductible contributions and the current value of the accounts, and you can write off the difference if the current value of the accounts is lower.
But this is inconvenient for two reasons. First, if you withdraw money from your 401 before age 59 1/2, you pay a 10% early-withdrawal penalty. This may negate some of the benefit you get from writing off the loss. Second, if you take the money out of your 401, you’re giving up the tax advantages it offers and your money will no longer grow as quickly unless you invest it in something else.
For these reasons, it’s not wise to claim a tax deduction on a 401 loss unless you’re older than 59 1/2 and plan to use the money to cover your retirement expenses in the near future anyway. Otherwise, try one of the suggestions above.
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Examine Benefit End Dates
Some benefits may stop the day youre done with work, but others may extend by a set number of days. However, those benefits arent as common as they used to be, says Winston.
This list can help in the retiring transition:
- Upcoming checkups: If you have dental or vision insurance now but wont when you retire, schedule appointments before your last day while those expenses may still be covered.
- Life insurance extension: To convert a voluntary life insurance policy , contact your benefits administrator to get the paperwork started. The difference: Youll pay the premium directly to the insurance company, rather than having it payroll deducted.
- Health insurance and retirement: More on those topics below.
Tip: Enter your employee benefits or human resources department into the contacts on your phone in case you have questions once youre retired.
Avoid Choosing Funds With High Fees
It costs money to run a 401 plan. The fees generally come out of your investment returns. Consider the following example posted by the Department of Labor.
Say you start with a 401 balance of $25,000 that generates a 7% average annual return over the next 35 years. If you pay 0.5% in annual fees and expenses, your account will grow to $227,000. However, increase the fees and expenses to 1.5%, and you’ll end up with only $163,000effectively handing over an additional $64,000 to pay administrators and investment companies.
You can’t avoid all of the fees and costs associated with your 401 plan. They are determined by the deal your employer made with the financial services company that manages the plan. The Department of Labor has rules that require workers to be given information on fees and charges to make informed investment decisions.
The business of running your 401 generates two sets of billsplan expenses, which you cannot avoid, and fund fees, which hinge on the investments you choose. The former pays for the administrative work of tending to the retirement plan itself, including keeping track of contributions and participants. The latter includes everything from trading commissions to paying portfolio managers’ salaries to pull the levers and make decisions.
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When You Don’t Roll Over
Cashing out your account is a simple but costly option. You can ask your plan administrator for a checkbut your employer will withhold 20 percent of your account balance to prepay the tax youll owe. Plus, the IRS will consider your payout an early distribution, meaning you could owe the 10 percent early withdrawal penalty on top of combined federal, state and local taxes. That could total more than 50 percent of your account value.
Think TwiceThe repercussions of taking money out now could be enormous: If you took $10,000 out of your 401 instead of rolling it over into an account earning 8 percent tax-deferred earnings, your retirement fund could end up more than $100,000 short after 30 years.
If your former employers plan has provided strong returns with reasonable fees, you might consider leaving your account behind. You dont give up the right to move your account to your new 401 or an IRA at any time. While your money remains in your former employers 401 plan, you wont be able to make additional contributions to the account, and you may not be able to take a loan from the plan. In addition, some employers might charge higher fees if youre not an active employee.
Further, you might not qualify to stay in your old 401 account: Your employer has the option of cashing out your account if the balance is less than $1,000 though it must provide for the automatic rolling over of your assets out of the plan and into an IRA if your plan balance is more than$1,000.